Foreign direct investment and multinational firms in the 21st century - a European perspective

This thesis provides an extensive discussion on how multinational firms impact the world and economies in the 21st century. The thesis consists of three empirical chapters, with each of them examining one particular aspect on how multinational enterprises (MNEs) are affected by certain aspects. Chapter 1 provides an introduction outlining the motivation, general background theories behind MNEs and FDI. Chapter 2 analyses ORBIS data from the Czech Republic and Poland between 2009 and 2014. Its purpose is to answer the question of whether host nations benefit from the presence of foreign firms depending on the origin of the foreign firm. It raises the question whether investment coming from developing countries might have a positive effect on the economy in particular as spillovers might be more likely to occur. This is based on the believe that domestic firms have to overcome a technology gap in order to absorb new technology. This is believed to be smaller to foreign firms which are coming from developing countries. After estimating spillover effects for both countries using a simple model as a baseline, the study extends its approach following Javorcik and Spatareanu (2011) distinguishing the origin of FDI not by continent but by separating between developed and developing/merging economies. It is demonstrated that domestic suppliers in the Czech Republic benefit from backward spillovers coming from foreign investment from developing countries, an effect which is not revealed when the origin of FDI is not considered. This provides novel and deeper insight into the occurrence of spillovers in CEECs and shows evidence that the origin of a multinational might play a significant role for an economy’s indigenous firms to benefit from productivity externalities. Chapter 3 examines firm-level data retrieved from the ORBIS database for a selection of countries which are member of the euro zone for the years 2009 to 2018. Its purpose is to shed light on how firms are affected by financial pressure. With foreign firms being endowed with more capabilities to access new finances, domestic firms are potentially more exposed to financial shocks as they do not find various alternatives to finance themselves or seek new capital. After obtaining estimates of a firms TFP following the approach of Levinsohn and Petrin (2003), firms are separated by classifying them based on their global ultimate ownership. Additionally, firms are separated based on their regional location as either operating in a periphery or non-periphery country. This study examines whether the Capital Enhancement Exercise by the European Banking Authority impacted the productivity of domestic firms in a negative way. The empirical results suggest that the EBA Exercise amplified the negative effect occurring through financial pressure occurring overall. When turning to both domestic and also foreign MNE, an increase in TFP can be observed, which is rather surprising and might be the result of down-sizing effects. For the geographic areas, it can be observed that firms operating in periphery countries are stronger affected by financial pressure than their non-periphery counterparts. Chapter 4 reverts to firm-level data retrieved from the AMADEUS database comprising all member countries of the European Union for the years 2011 to 2020. Its purpose is to answer the question whether tax incentives and changes in the corporate tax rate are an effective instrument on attracting MNEs and increasing innovation within firms. It measures innovation in two different ways, which are applying a firm’s intangible assets and measuring innovation with using the patents filed in a particular year by each company. This study does not only account for changes in the CIT for each country individually, but also manually constructs a measure for changes in the tax base by exploiting reports by the European Commission. The empirical results indicate that a change in the corporate tax rate is impacting the intangible assets of firms in a negative and statistically significant way overall. When examining different sub-samples, it can be seen that no effects occur for both domestic MNE and foreign MNE. When considering the presence of a patent box regime, the results indicate that this affects innovation in a positive and significant way. Surprisingly, a tax change under such regime is perceived more negatively, even by MNEs. Regarding the analysis with filed patents as a dependent variable, no robust results can be established, confirming the flaws which can occur when patents are used as a measure for innovation. Chapter 5 presents the main findings of all three main Chapters and provides concluding remarks on how MNEs might be perceived in a globalized economy