Multinational Companies and Technology Spillovers

Abstract

Governments provide a variety of incentives such as lower in-come taxes, tax holidays, import duty exemptions, and subsidies to attract foreign firms into their country based on the belief that multinational companies (MNCs) bring benefits to the host country. Among the benefits, technology transfer and the productivity growth of domestic firms are the most anticipated by policy-makers. For example, Mauritius and Bangladesh experienced a sharp increase in exports in their respective textile sectors upon the entry of multinational firms. Considering that export companies are more productive than non-export companies, the presence of MNCs within the territory may contribute to the productive growth of domestic firms. Multinational firms - enterprises that manage production establishments which span two or more countries - are well known to be larger and more productive than domestically-owned firms. Since they own their superior assets and modern technology, they can cope with high fixed costs when establishing foreign affiliates and pioneering new markets. The entry of foreign firms with modern technology into the host country may incur intended and unintended technology spillovers to the host country's domestic firms, and hence, reduce their average cost of production and increase productive efficiency.