Industry restructuring in transition after the arrival of multinationals: a general equilibrium analysis with firm-type costs differences

Abstract

The arrival of multinationals (MNEs) in transition economies brings about a process of restructuring across their different industries. This process is illustrated by data on the rapid entry of MNEs into the motor vehicles sector of the Czech Republic, which occurred before the recent crisis. This article analyses the behaviour and interactions of two types of companies: national firms and MNEs, which operate in all sectors of the economy. We aim to understand the performance of each type by conducting a detailed analysis of firms' costs and how they are affected by the arrival of MNEs. A computable general equilibrium model is used to calibrate the contrasting cost structures of both national firms and MNEs across the different sectors (based on real data from the OECD and the Czech National Bank). Thus a general equilibrium perspective is used to provide quantitative estimates of the evolution of factor costs (i.e. the cost of labour and capital), intermediate costs (i.e. the cost of both imported and domestic products used for further processing in production), production and prices for both types of firms. Interestingly, we obtain evidence on different patterns of adjustment related to firms' ownership (i.e. between national firms and MNEs). In addition, our methodology allows us to assess the impact on GDP and welfare resulting from the process of industry restructuring at the microeconomic level.