Stimulating Domestic Entrepreneurship at Microgeographic Levels…siteresources.worldbank.org/DEC/Resources/84797... · 2010-10-25 · Stimulating Domestic Entrepreneurship at Microgeographic

Stimulating Domestic Entrepreneurship atMicrogeographic Levels: The Role of Multinational

Corporations

Laura AlfaroHarvard Business School and NBER

Maggie X. ChenGeorge Washington University

Pre-conference on Structural Transformation and Economic Growth

October 2010

Alfaro and Chen () Multinationals and Domestic Entrepreneurship October 2010 1 / 32

Introduction

The role of foreign direct investment in stimulating domesticentrepreneurship and economic growth is at the center of academicand policy debates on economic development.

Many countries, in particular, developing nations, have long o¤eredlucrative incentives to multinational corporations (MNCs) in the hopeof building and sustaining industrial clusters.Investment promotion agencies often sought after "star" multinationalsby o¤ering preferential incentives.


Introduction

Figure 1: Multinational activities and new domestic entrepreneurship in SIC 367(electronic components and accessories)


Introduction

Figure 2: Multinational activities and new domestic entrepreneurship in SIC 367(electronic components and accessories): China


Introduction

Figure 3: Multinational activities and new domestic entrepreneurship in SIC 367(electronic components and accessories): Eastern Europe


Literature

FDI and Economic Growth

At the macro level, the literature �nds only weak support for anexogenous positive e¤ect of FDI on economic growth:

Borensztein, De Gregorio and Lee (1998): FDI contributes to growthonly when the host country has a minimum threshold stock of humancapital;

Alfaro, Chanda, Kalemli-Ozcan, and Sayek (2004): FDI alone plays anambiguous role in contributing to economic growth, but countries withwell-developed �nancial markets gain signi�cantly from FDI;

Carkovic and Levine (2005): The exogenous component of FDI doesnot exert a robust, independent in�uence on growth.


Literature

FDI and Productivity Growth

At the micro level, a growing literature examines the e¤ect of FDI onproductivity spillovers to domestic industries, and �nds evidence ofpositive productivity spillovers through horizontal, backward, andforward linkages (see, e.g., Javorcik, 2004; Haskel, Pereira, andSlaughter, 2007; Keller and Yeaple, 2009; Greenstone, Hornbeck, andMoretti, 2010).


Objective

The objective of this project is to evaluate the role of multinational�rms in stimulating domestic entrepreneurship and industrial activitiesaround the world.


How We Plan to Address the Question

1. We investigate the e¤ect of multinational activities on domesticentrepreneurship at microgeographic levels;

By exploring microgeographic patterns and drawing counterfactualsfrom same subnational regions, we seek to control for the e¤ect ofunobserved macro factors on domestic entrepreneurship;



2. We explore the role of agglomeration economies both within andbetween industries as the potential channels through whichmultinationals can a¤ect domestic entrepreneurship, and evaluate therelative importance of each channel:

1 Vertical production linkages

2 External scale economies in labor markets

3 External scale economies in capital-good markets

4 Knowledge spillovers



3. We also investigate how the e¤ect of agglomeration economies variesacross:

1 countries;

2 individual �rms.


Agglomeration Economies

A number of studies in urban economics including, for example,Rosenthal and Strange (2001), Rosenthal and Strange (2003), andEllison, Glaeser and Kerr (2009), assess the importance ofagglomeration economies in the industrial localization of the U.S. andU.K.

The evidence suggests input-output linkages and labor-market poolingto have a strong impact on industry agglomeration.



Multinational-�rm agglomeration and vertical production linkages:e.g., Head, Ries and Swenson (1995), Head and Mayer (2004),Crozet, Mayer and Mucchielli (2004), Blonigen, Ellis and Fausten(2005), Blonigen et al. (2007), Bobonis and Shatz (2007), and Amitiand Javorcik (2008)



In our earlier study, Alfaro and Chen (2010), we examine theworldwide patterns of agglomeration among multinational �rms.

We construct a spatially continuous index of industryco-agglomeration and examine how "�rst-nature" economicfundamentals and "second-nature" agglomeration economies jointlyexplain the clustering of multinationals.



Main Findings in Alfaro and Chen (2010):

Multinationals�agglomeration goes above and beyond �rst-naturedriven geographic concentration. Second-nature forces includingknowledge spillovers, capital-market externalities, and verticalproduction linkages play a signi�cant role in the clustering ofmultinationals.

In comparison to domestic plants, knowledge spillover and capitalmarket externalities exert a stronger e¤ect on the clustering ofmultinational �rms while labor market pooling has a weaker impact.



This Project

In this project, we investigate how multinational activities a¤ectdomestic entrepreneurship through agglomeration economies atmicrogeographic levels.


Data

The WorldBase database

A worldwide plant-level dataset that provides detailed location,industry, and operation information for plants in over 100 countries;

The dataset includes close to the population of MNC plants and over40 million domestic plants;

We will focus on new entrepreneurship activities in 2001-2005 inmanufacturing industries


Data


Incumbent plants

All existing MNC plants (about 28,000)Randomly sampled domestic counterfactuals in the same sub-nationalregions, same industries, or both

All new plants established in 2001-2005


Data


Four categories of information are used for each plant:

Industry information including the 4-digit SIC codes of the primary andsecondary industries;

Ownership information including the establishment�s domestic and globalparents;

Operational information including sales, employment, age and export status;

Physical location information

We obtain the latitude and longitude of each plant using a geocodingsoftware (Yahoo! Geocoding API) and compute the distance between eachpair of incumbent and new plants.


Measuring Entrepreneurship Growth at MicrogeographicLevels

We will construct a microgeographic entrepreneurship growth index tomeasure the extent of new domestic entrepreneurship centering eachincumbent plant at �ne geographic levels;

The index is developed based on the industry-level localization indexintroduced by Duranton and Overman (2005) and employed in Alfaroand Chen (2010).



The index exhibits three important properties:

Comparable across plants;

Treating space as a continuous metric and unbiased with respect to thescale and aggregation of geographic regions;

Controlling for the e¤ect of macro and policy factors



Figure 4: Multinational and new domestic entrepreneurships in SIC 366(communications equipment) and 367 (electronic components and accessories):Districts of Guangzhou, China



Step 1: Multinationals

For each incumbent MNC plant i and industry ek, we compute thedistance between plant i and each new plant j in industry ek, denotedas τij ;

We then obtain the kernel estimator of the distance of new plants:

fiek (τ) = 1nekh

nek∑j=1K�

τ � τijh

�. (1)

Alternatively, we can weigh each new plant using the size of theiremployment or sales:

f wiek (τ) = 1

h∑nekj=1 rj

∑nekj=1 rjK

�τ � τijh

�. (2)



Step 2: Counterfactuals

For each incumbent MNC plant i , we draw domestic counterfactualsin the same sub-national regions, industries, or both;

We then obtain the kernel estimator of new-plant distance for eachcounterfactual and industry, and compute the mean at each distancelevel τ.



Step 3: Microgeographic entrepreneurship growth index

Finally, we obtain, for each incumbent MNC plant i and industry ek,MEGiek (T ) � ∑T

τ=0

�fiek (τ)� f iek (τ)� (3)

or employment-weighted

MEGwiek (T ) � ∑T

τ=0

hfiek (τ)� f wiek (τ)

i. (4)

The index measures the extent to which new entrepreneurship occurswithin a threshold distance T of plant i , where T = 1km, 5km,10km, 20km, 50km, and 100km.


Measuring Agglomeration Economies

1. Vertical production linkages

Inter-industry input-output linkage (BEA Benchmark I-O Accounts)



2. External scale economies in labor markets

Industry-pair similarity (correlation) in occupational labor requirements (BLSIndustry-Occupation Employment Matrix)

Inter-industry labor mobility



3. External scale economies in capital-good markets

Industry-pair similarity (correlation) in capital-good demand (BEA capital�ow data)



4. Knowledge spillovers

Industry-pair patent citation intensity (NBER Patent Database)

Inter-industry skilled labor mobility


Empirical Framework

The baseline empirical speci�cation is:

MEGiek (T ) = α+ β1AggEconomieskek + β2Xi + β3AggEconomieskek �Xi + εiek(5)

MEGiek (T ) measures the extent to which new entrepreneurship inindustry ek occurs within a threshold distance T of plant i

AggEconomieskek represents proxies of four agglomeration economiesbetween industry ek and plant i�s primary industry kXi represents MNC characteristics including �rm attributes and hostcountry factors that can a¤ect the importance of each agglomerationeconomy such as infrastructure, labor market rigidity, capital-goodstock, and human capital level.


Preliminary Evidence

Preliminary evidence suggests that multinationals are far from equalin their ability to stimulate domestic entrepreneurship.

First, multinationals in industries that exhibit stronger agglomerationeconomies, such as vertical production linkages and knowledgespillovers, play a more important role in stimulating domestic entry;

Second, there is a clear hub-and-spoke structure in the expansion ofindustrial activities. Larger and more productive multinationals arecentered with more microgeographic entrepreneurship growth thantheir smaller, less productive counterparts.


Policy Implications

Our analysis will o¤er implications for industrial policies aimed atattracting foreign investment and building industrial zones.

The results will help identify industries and �rms that generategreater agglomeration economies and have a stronger potential instimulating domestic entrepreneurship;

They will also help evaluate the relative importance of eachagglomeration economy across countries and how industrial policiesmight e¤ectively enhance the positive role of FDI.


Documents

Stimulating Domestic Entrepreneurship at Microgeographic Levels…siteresources.worldbank.org/DEC/Resources/84797... · 2010-10-25 · Stimulating Domestic Entrepreneurship at Microgeographic