1. Investment abroad and adjustment at home: evidence from UK multinational firms Helen Simpson CMPO, IFS and Nuffield College, Oxford This work contains statistical data from ONS, which is Crown copyright and reproduced with the permission of the controller of HMSO and Queen's Printer for Scotland. The use of the ONS statistical data in this work does not imply the endorsement of the ONS in relation to the interpretation or analysis of the statistical data. This work uses research datasets which may not exactly reproduce National Statistics aggregates. All errors are my responsibility.

2. Research question The broad question: How does investment in low-wage economies affect firms home-country operations? My approach: –Focus on changes in within-firm industrial structure driven by plant closures –Is outward investment in relatively low-wage economies associated with plant closures at home in low-skill, labour-intensive industries? Outline of talk Motivation Theoretical background and related literature –On home country effects of investment abroad –On plant exit Estimation approach Data –On outward FDI –On firm demographics Results Conclusions and discussion

3. Motivation The news headlines: plant closures and re-locations to lower cost locations Multinationals account for a significant proportion of employment –US MNEs 26% manufacturing employment in the US –UK MNEs 20% manufacturing employment in UK, foreign-owned MNEs a further 25% Increased FDI into low-wage economies –Chinas accession to WTO lifted constraints on inward FDI –EU accession countries become more attractive location for FDI within Europe Contribution to the literature: bring together two strands of the literature on multinational activity –On effects of vertical FDI on skill-intensity of employment –On exit and mobility of plants owned by multinationals

4. Theoretical background Horizontal versus vertical outward FDI Horizontal FDI (Markusen, 1984, Brainard,1997)) –FDI a substitute for exports to serve overseas markets –Replication of all stages of production or downstream production abroad in proximity to consumers –Could lead to increase in the skill-intensity of the firms activities at home –But should occur irrespective of characteristics of countries in which outward investment occurs Vertical FDI (Helpman 1984, 1985) –Locating stages of production, or products, within the firm according to countries comparative advantage – skill-intensive industries being located in skill-abundant economies –Investment in a low-wage economy associated with increase in skill- intensity of activities at home through the relocation of low-skill activities abroad –For vertical FDI, changes in the skill-intensity of production should vary systematically with the characteristics of the host economy

5. Examples of existing empirical literature On vertical FDI –Head and Ries (2002) look at effects of investment in low-wage economies using data on Japanese MNEs –Find it is associated with increased skill-intensity of production in firms Japanese operations & increased purchases of imported goods –But dont look at how the increase in skill-intensity of home production comes about –Brainard and Riker (1997) and Riker and Brainard (1997) find evidence consistent with vertical FDI –Labour in affiliates in high-income countries substitutes, and a complement to labour in low-income countries; labour in low-wage economies competes to carry out activities most sensitive to labour costs On plant exit and multinationals –Bernard and Jensen (2007) show that plants owned by multinationals are more likely to exit than other types –Exit important adjustment margin for MNEs –But doesnt link exit to any specific driving factor

6. Empirical approach If investment in low-wage economies is vertical FDI, and if exit is important adjustment margin, expect such investment to be associated with firms closing down plants in low-skill industries Use within-firm information on plant closures. Combine data on exits at the plant level and data on overseas investment at the firm level Carry out an analysis that compares plant exit propensities –Across different types of firms, and –Across different types of industries Akin to a difference-in-differences specification at a particular point in time

7. Probability of exit: by ownership type, and industry skill intensity Source: authors calculations using ARD plant population and AFDI data (source: ONS)

8. Estimation approach Probit model of plant death UKmneL it is an indicator for a firm investing in a low-wage economy Skill j is a measure of industry skill intensity For plants that are part of firms investing in low-wage economies, the propensity to exit is expected to be decreasing in the skill intensity of the industry in which the plant is operating

9. Estimation approach For vertical FDI behaviour: - For firms investing in low-wage economies should see higher propensity to exit among plants operating in low-skill industries compared to high-skill industries that is not mirrored in other types of firm - Difference across firm types should be driven by a higher propensity to exit in low skill-intensity industries rather than a lower propensity to exit in high skill-intensity industries where the effects of vertical FDI are not expected to be felt - Replace interactions with Skill j with interactions with dummy variables for third of skill-intensity distribution in which an industry lies

10. Data 1: Overseas investment Office for National Statistics (ONS) Annual Inquiry into Foreign Direct Investment (AFDI) Annual information at the firm level, 1998-2001 on location of overseas subsidiaries, associates and branches Identify low-wage economies using information on per capita GDP relative to UK. Main indicator: dummy variable equal to one if a firm has an affiliate in any country with per capita GDP < 10% of UK –E.g. Ghana, Angola, Togo, Ivory Coast, China, Vietnam, India, Indonesia, Philippines, Romania, Bulgaria In doing so exclude FDI to tax havens –E.g. Antigua, Bahamas, Barbados, Macao, Belize

11. Data 2: Plants and organisational structure Plant population data from the British Annual Respondents Database (ARD) Manufacturing plants 1997 to 2002 Information on employment, age, industry (5-digit), ownership, firm structure AFDI can be linked to ARD at firm level Exit –Closure (year last observed in data) –Estimate pooling two two-year cross sections 1998-1999, 2000- 2001 Multi-plant indicators –Multi_ind = part of a firm with more than one plant in same 5-digit industry –Multi_man = part of firm with plants in other manufacturing industries –Multi_bus = part of firm with plants in business services (accountancy, financial management, legal services)

12. Data 2: Plants and organisational structure Additional characteristics ARD establishment-level sample –Total factor productivity (Cobb-Douglas index measure) –Capital intensity (log capital stock per employee) Problems –Exit understated for multi-plant establishments –Sample biased towards growing (surviving) plants –Only use as a robustness check

13. Data 3: Industry characteristics Skill intensity Main measure - proportion of employees who report having no qualifications, 4-digit industry level (average over 1995-2003) UK LFS

14. Descriptive statistics: plant population mean Note: cohorts of plants present in 1998 and 2000. Age truncated at 21 years Source: authors calculations using ARD plant population and AFDI data (source: ONS) and LFS

15. Results: exit probits, all plants Source: authors calculations using ARD plant population and AFDI data (source: ONS) and LFS

16. Results: exit probits, all plants Source: authors calculations using ARD plant population and AFDI data (source: ONS) and LFS

17. Results: exit probits, all plants Source: authors calculations using ARD plant population and AFDI data (source: ONS) and LFS

18. Results: exit probits, UKMNEs Source: authors calculations using ARD plant population and AFDI data (source: ONS) and LFS

19. Predicted probability of exit by industry skill-intensity and firm ownership type Source: authors calculations using ARD plant population and AFDI data (source: ONS) and LFS

20. Results: exit probits, UKMNEs Source: authors calculations using ARD plant population and AFDI data (source: ONS) and LFS

21. Results Older plants less likely to exit Larger plants less likely to exit Plants that are part of multi-plant firms more likely to exit Plants owned by MNEs more likely to exit Plants in low-skill intensity industries owned by UKMNEs investing in low-wage economies are more likely to close down compared to those owned by UKMNEs that are not Using specification with interactions with industry skill-intensity dummies –Plants in the lowest skill-intensity sectors owned by UKMNEs investing in low-wage economies are nearly 8ppts more likely to exit that those owned by other UKMNEs –This is not the case in other parts of the industry skill intensity distribution

22. Robustness I: alternative definitions of investment in low-wage economies Source: authors calculations using ARD plant population and AFDI data (source: ONS) and LFS

23. Robustness I: alternative definitions of investment in low-wage economies Source: authors calculations using ARD plant population and AFDI data (source: ONS) and LFS

24. Robustness II: alternative measures of skill intensity Source: authors calculations using ARD plant population, establishment sample and AFDI data (source: ONS), LFS, ASHE

25. Robustness III: controlling for TFP, capital intensity, establishment sample Source: authors calculations using ARD establishment sample and AFDI data (source: ONS) and LFS

26. Robustness III: controlling for TFP, capital intensity, establishment sample Source: authors calculations using ARD establishment sample and AFDI data (source: ONS) and LFS

27. Robustness III: controlling for TFP, capital intensity, establishment sample Source: authors calculations using ARD establishment sample and AFDI data (source: ONS) and LFS

28. Conclusions and discussion Evidence that behaviour accompanying investment in low-wage economies is in line with vertical FDI Investment in relatively low-wage economies associated with closure of plants in relatively low-skill industries at home Provide some explanation for higher propensity of plants owned by MNEs to exit Extensions to wider range of home country outcomes – employment, investment in physical capital, industrial structure of whole firm Extension to tradeable services

29. Additional slides

30. Data 3: Industry characteristics Skill, labour intensity Robustness 5-digit industry level measures derived from ARD establishment-level sample, 1995 –Capital stock per worker –Share of wage bill accounted for by skilled workers (administrative, technical and clerical) as opposed to unskilled workers (operatives) –Average annual wage 4-digit industry level, average hourly wage, UK Annual Survey of Hours and Earnings (ASHE), 1997 4-digit industry level, proportion of employees who are qualified to degree level equivalent and above, LFS

31. Results: Sample split by industry skill intensity, UKMNEs Source: authors calculations using ARD plant population and AFDI data (source: ONS) and LFS

32. Descriptive statistics at the firm level What is happening to the overall skill-intensity of employment in these firms? What is happening to net entry?

33. Distribution of plants and employment across industries by firm type, 1998 cohort Note: cohorts of firms present in 1998 Source: authors calculations using ARD plant population and AFDI data (source: ONS) and LFS

34. Distribution of plants and employment across industries by firm type, 1998 cohort Note: cohorts of firms present in 1998 Source: authors calculations using ARD plant population and AFDI data (source: ONS) and LFS

35. Distribution of plants and employment across industries by firm type, 1998 cohort Note: cohorts of firms present in 1998 Source: authors calculations using ARD plant population and AFDI data (source: ONS) and LFS

36. Distribution of plants and employment across industries by firm type, 1998 cohort of firms Note: cohorts of firms present in 1998 Source: authors calculations using ARD plant population and AFDI data (source: ONS) and LFS

37. Net entry by firm type and industry, 1998 cohort of firms Mean number of plants owned by different types of firm in a 5-digit industry Net entry rate – for every one plant in 1998 the increase or decrease 5 years later Note: cohorts of firms present in 1998. Source: authors calculations using ARD plant population and AFDI data (source: ONS) and LFS

38. Net entry by firm type and industry, 1998 cohort of firms Mean number of plants owned by different types of firm in a 5-digit industry Net entry rate – for every one plant in 1998 the increase or decrease 5 years later Note: cohorts of firms present in 1998. Source: authors calculations using ARD plant population and AFDI data (source: ONS) and LFS