Factory Asia: The Determinants of

Multinational Activity in the Context of

Global Value Chains

Natalia Ramondo

UCSD and NBER

June 2016

Motivation: GVC and MNCs

• Increasing complexity of—and countries’ engagement in—the GVC

• MNCs: Main coordinators of the GVC

I 80% of global trade, UNCTAD 13

• GVC Foreign Direct Investment (FDI) = MNC trade Activities

I particularly important for ”factory Asia”

This Paper: Determinants of GVC FDI in Asia

• Unique plant-level data from D&B (large business registry)

I crucial: plant exposure to international trade

I plus: industries of parent & affiliates, revenues, location

I plus: foreign and domestic plants

• Detailed and comprehensive analysis of MNCs activities

I till now, analysis only possible for a handful of countries

• Host market- vs export-oriented activities of MNCs

I traditional factors

– comparative advantage, trade costs, economies of scale

I two twists

– country’s engagement in the GVC: domestic content of exports,

upstreamness of exports, ...

– degree of production fragmentation:I-O links within the MNC

Why do We Care?

• Level—and type—of attachment to the GVC seems to matter for

growth (UNCTAD, 13)

• (Rigid) GVCs seem to be the main channel through which shocks

get transmitted internationally (Boehm et al, 15)

• GVC changes the incentives for trade policy and lobbying, even

within an industry (Blanchard et al, 16)

Firm, location, and industry determinants of MNCs’ trade

activities are key for understanding the factors influencing the

participation of countries in the GVC and the attraction of MNCs

MNC Data: WorldBase

• Cross section of establishments for 2015

• Information on establishment and global ultimate HQ (GUH)I 4-digit SIC code of primary industry of operation

– establishments in manufacturing, mining, and business services

– ... belonging to GUH in any sector

I location of operation / origin

– establishments operating in Asian countries

– ... belonging to GUH in ”any” country

I Revenues and/or employment of establishment

– use both variables to impute missing revenues

I 3 indicators: establishment only exports, only imports, or both

I foreign MNC affiliate: country of GUH 6= country of establishment

• 230,130 establishments belonging to 176,054 GUH

MNC Data: Descriptive Statistics, by sector

1 Exporters are the minority of plants

2 Foreign plants are even a smaller set

3 ... but are more export-oriented than domestic plants

Exporters as % of Foreign as % of

all plants foreign plants all plants

All sectors 19 63 9

Manufacturing 24 74 10

Mining 12 38 7

Services 7 28 7

MNC Data: Descriptive Statistics, by country

• Countries with data on foreign and domestic plants

Host country Foreign as % of Exporters as % of

all plants all plants foreign plants

Malaysia 63 67 71

Indonesia 50 44 52

Singapore 41 42 52

Hong Kong 41 48 48

Thailand 31 52 72

China 23 48 82

Taiwan 22 81 77

Korea 14 45 44

Australia 13 14 23

New Zealand 11 18 0.0

India 2 16 47

Japan 1 3.4 20

MNC Data: Descriptive Statistics, by country

• Countries with data on foreign plants only

Host country Foreign exporters, as % of foreign plants

Viet Nam 76

Philippines 66

Georgia 42

Cambodia 41

Sri Lanka 36

Uzbekistan 29

Brunei 17

Bangladesh 10

Zero MNC exporters: Afghanistan; Armenia; Azerbaijan; Kyrgyzstan; Nepal; and Pak-

istan. Kazakhstan has only one observation which is an exporter.

MNC Data: Outward FDI, Selected Countries

Australia  4%   Cambodia  

0%  

China  48%  

Hong  Kong  1%  

India  2%  

Indonesia  7%  

Korea  3%  

Malaysia  4%  

New  Zealand  0%  

Pakistan  0%  

Philippines  4%  

Singapore  5%  

Taiwan  5%  

Thailand  7%  

Viet  Nam  7%  

Japan  

Australia  20%  

Cambodia  0%  

China  26%  

Hong  Kong  3%  

India  13%  

Indonesia  2%  

Japan  10%  

Korea  4%  

Malaysia  2%  

Pakistan  0%  

Philippines  3%   Singapore  

12%  

Sri  Lanka  0%  

Taiwan  2%  

Thailand  2%   Viet  Nam  

1%  United  States  

Australia  28%  

Cambodia  1%  

Hong  Kong  29%  

India  4%  Indonesia  

2%  

Japan  7%  

Korea  1%  

Malaysia  2%  

Pakistan  0%  

Philippines  2%  

Singapore  14%  

Taiwan  1%  

Thailand  1%  

Viet  Nam  8%  

China  

Quality Check: ”Stylized” Facts Hold in WorldBase

1 Exporters are larger than non-exporters

2 Foreign plants are larger than domestic plants

3 Export-oriented are larger than host-market oriented foreign plants

Where do we observe GVC FDI? Country Pairs

Country of plant Country of parent Number of plants w/ imports & exports

15. Singapore Japan 164

14. Philippines Japan 171

13. Malaysia Japan 175

12. China France 177

11. Taiwan Japan 212

10. Indonesia Japan 214

9. Thailand Japan 258

8. Viet Nam Japan 306

7. China Singapore 337

6. China Korea 358

5. China Taiwan 401

4. China Germany 625

3. China United States 646

2. China Hong Kong 1314

1. China Japan 2260

Where do we observe GVC FDI? Industries

Affiliate Industry Number of plants

w/imports & exports

15. Computer Systems Design Services 391

14. Other Engine Equipment 395

13. All Other Miscellaneous General Purpose Machinery 433

12. All Other Petroleum and Coal Products 434

11. Plastics Material and Resin 465

10. Ethyl Alcohol 477

9. Farm Machinery and Equipment 490

8. Telemarketing Bureaus 532

7. Custom Computer Programming Services 542

6. Semiconductor and Related Device 694

5. Paint and Coating 710

4. Pharmaceutical Preparation 859

3. Plastics Pipe and Pipe Fitting 980

2. Other Electronic Component 1,358

1. Motor Vehicle Brake System 1,925

Data on GVC Trade and Other Data

• Domestic value-added of exports, as a share of gross exports

I Wang, Wei, and Zhu, 2014

• Index of exports upstreamness of a country

I Antras, Chor, Fally, and Hillberry, 2014

• Direct requirement coefficients, U.S. input-ouput matrix, 2002

• Other country controls: usual sources (PWT, WB, ...)

More GVC Trade, More GVC FDI

• GVC FDI = fraction of exporter plants in country n belonging to parents in i

• GVC Trade = (L) DVA of exports from country n to i ; (R) ratio of upstreamness

of exports, country n to i

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-.4 -.2 0 .2 .4Export upstreamness (host relative to source country), country-pair level

OLS coefficients: (L) -1.23*** (s.e. 0.18); (R) -0.16* (s.e. 0.08).

Larger Difference in Income, More GVC FDI

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-4 -2 0 2 4log rgdpl (host relative to source country), country-pair level

OLS coefficient: -0.025** (s.e. 0.11).

Stronger Engagement in GVC, More Growth

Low High Observations

GVC-Trade 2.1% 3.3% 8

GVC-FDI 2.8% 3.6% 27

FDI Intensity 2.5% 3.4% 12

Annual average growth rate of real GDP per capita, for 2000-2010, median among countries in each

group. Low/High FDI intensity refers to countries with sales of foreign plants, as a share of total

sales, below/above the median share across countries. Low/High GVC-FDI refers to countries with

a fraction of foreign plants that export below/above the median share across countries. Low/high

GVC-trade refers to countries with DVA shares above/below the median across countries.

Country Determinants of GVC FDI — OLS

Dep var D(exports>0)

log of affiliate sales 0.044** 0.044** 0.044**

log rgdp -0.108** -0.067** -0.088**

× D(foreign>0) 0.072** 0.060** 0.022*

log rgdpl 1.015** 1.292** 1.342**

× D(foreign>0) -0.163+ -0.494** -0.462**

log K/L -0.688** -1.225** -1.360**

× D(foreign>0) 0.011 0.393* 0.403**

log yr. sch. -0.008 0.031* 0.047**

× D(foreign>0) 0.000 -0.042** -0.016*

rule of law -2.167**

× D(foreign>0) 0.787**

entry costs 0.006

× D(foreign>0) -0.005**

Export upstreamness -0.343**

× D(foreign>0) -0.101+

Observations 159,390 157,323 159,390

R-squared 0.480 0.465 0.480

Parent-affiliate industry and origin country fixed effects included. S.E. clustered at the parent level.

Levels of significance: ** p<0.01, * p<0.05, + p<0.1.

Industry Determinants of GVC FDI — OLS

Dep Var D(export > 0)

log affiliate sales 0.057**

(0.001)

R&D 0.521**

(0.01)

× D(foreign > 0) 0.003*

(0.235)

log kl 0.002

(0.003)

× D(foreign > 0) -0.034**

(0.008)

log sl 0.025**

(0.007)

× D(foreign > 0) -0.089**

(0.02)

Observations 96,554

R-squared 0.465

Parent industry and origin-destination country fixed effects included. S.E. clustered at the parent

level. Levels of significance: ** p<0.01, * p<0.05, + p<0.1.

Vertical Links within the MNC

• Direct requirement coefficient between the industries of parent and

affiliate

I drap: affiliate is upstream; drpa: affiliate is downstream

I strong I-O link = drap > 0 or/and drpa > 0

Where do We Observe Strong I-O Links?

Ctry of Affiliate Ctry of Parent Ind of Affiliate Ind of parent

15. China Japan Other Electrical eq ... Semiconductors ...

14. China Japan Motor Vehicle parts Plastic Products

13. China Japan Motor Vehicle parts Semiconductors ...

12. China Japan Semiconductors ... Other Electrical eq ...

11. China Taiwan Communications Eq Semiconductors ...

10. China Taiwan Computer and peripheral eq Semiconductors ...

9. China Korea Semiconductors... Communications eq

8. China Japan Semiconductors ... Motor Vehicle parts

7. China Japan Semiconductors ... Communications eq

6. China Japan Metal Working Machinery Plastic Products

5. China Japan Oth. Fabricated Metal Products Motor Vehicle parts

4. China Germany Electrical eq Navigational, Measuring, ...

3. China Taiwan Semiconductors ... Computer and peripheral eq

2. China USA Basic Chemical Oth. Gral. Purpose Machinery

1. China Japan Semiconductors ... Electrical Eq

Industry pairs in manufacturing only, at four-digit NAICS.

Facts on Vertical Links and GVC FDI

1 Plant-level

I Plants with stronger I-O links with the parent are larger

2 Country-industry of affiliates × country-industry of parent -level

I More exporter are associated with stronger I-O links

I More MNC activity is associated with stronger I-O links

– Alfaro & Charlton (09); Atalay et al. (14); Ramondo et al (15)

In The Paper

• Gravity analysis of bilateral activity of MNC affiliates

• Analysis of determinants of GVC trade, country and bilateral level

• Analysis for the U.S. using detailed aggregates extracted from the

BEA confidential data

Conclusions

• GVC FDI is done by large plants with strong I-O links with their

parents

• GVC FDI has stronger presence in countries that

I are easier to access

I comparative advantage motives are stronger

I are more engaged in GVC trade at later stages of the production

process

• GVC FDI appears to be correlated with more growth