Multinational firms and the diffusion of skills and technology.

• Author: Blomstrom, Magnus

Over the past decade we have been engaged in a series of studies of the operations of multinational firms (MNCs). These have included examinations of the causes of their existence and growth, their roles in world trade and production, and the effects of their expansion on their home countries and on the economies of the foreign countries in which they produce and sell. In this report, we summarize one part of this work: studies of the role that MNCs have played in the diffusion of skills and technology to and within the host countries in which they operate.

While MNCs probably account for 20 to 25 percent of the world's total output, most of their production takes place in their home countries. The chief agency for diffusion is their much smaller internationalized output: production outside their home countries. That has risen from about 4.5 percent of world output in 1970 to around 7 percent now, concentrated in what might be described roughly as the industrial sector and hardly represented in the much larger service sector.(1) The studies we describe reflect mostly the consequences from that small fraction of world output.

Theoretical analyses have suggested that host countries are not simply passive recipients of skills and technology that flow automatically from MNCs. Their ability to absorb knowledge and technology can be expected to vary with the extent of their technological and other investment "effort" outside the MNCs' operations.(2) With Mario Zejan, we find support at the macroeconomic level for the observation that the positive effect on economic growth of inflows of foreign direct investment (FDI) is confined to the upper half of developing countries (by per capita income), presumably those with the local resources needed for absorbing technology from the MNCs.(3) In a later extension of that work, we confirm that while there is some bidirectional causality from growth to direct investment as well as from direct investment to growth, the latter influence is predominant.(4)

A study of technology imports by foreign affiliates of U.S. MNCs provides some evidence for the importance of host country policies on the degree of technology transfer. The higher the levels of fixed investment in the country, and the higher the educational level of the labor force, the greater is the extent of technology imports by the U.S. firms' affiliates. On the other hand, the imposition of performance requirements by a host country, a traditional...