Scale of operations of MNCs and heterogeneity: a multi-country analysis

Abstract

ABSTRACT This paper examines the relationship between the productivity of parent firms and the scale of their subsidiaries in foreign markets. The empirical exam is based on a large sample of firms from 32 different countries. The average elasticity estimated for the baseline sample is 0.34; i.e. a 1% increase in labour productivity increases the scale of subsidiaries by 0.34%. For TFP, the elasticity is slightly lower, 0.23. The relationship is much stronger for manufacturing firms than for firms in the service sector. The paper also analyzes the degree of heterogeneity of elasticities estimated across countries. We find differences in the magnitude of elasticities but confirm the positive relationship between scale and parent firm productivities for a large fraction of countries. It also addresses the issue of potential endogeneity of productivity. The positive relationship between scale and productivity is confirmed when controlling for this.