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 Policy Blog

Multinational firms more “footloose” than domestic firms

Date: 27/03/2012 15:02:00

In a working paper published on March 26, 2012, entitled “(Not so) easy come, (still) easy go? Footloose multinationals revisited”, the National Bank of Belgium re-examines the “footloose” nature of multinational firms hypothesis by looking into the detriments of firm exit, and more specifically the differences in exit behavior between multinational and domestic firms.

For a small country such as Belgium – where the number of foreign multinationals is around 2.5 times larger that the number of Belgian multinationals – the footloose nature of multinationals is a particularly relevant topic. The research found that foreign multinationals in Belgium have a lower survival probability and a higher tendency to relocate their activities when faced with economic challenges.

With increasing globalization, multinationals’ behavior has become more reactive under adverse economic conditions, often grasping the opportunities offered by foreign markets. The large and widespread scale of a multinational’s operations enables it to relocate its production more easily from one country to another than firms operating solely on the domestic market. Moreover, they tend to safeguard employment in home-country headquarters rather than in plants located abroad.

After testing for three explanatory variables, i.e. productivity, sunk costs (after entry into a foreign market via a foreign affiliate) and size, and a set of control variables, such as the firm’s age, market structure, etc., the research of the National Bank of Belgium confirmed these distinguishing characteristics. Not only do foreign multinationals tend to exit the local market more frequently than domestic firms comparable in terms of size, productive performance, age, and sector of activity, but they are also less sensitive to the effects of sunk costs as barriers to exit. What appears to matter the most, however, is the productivity trend of their Belgian affiliates relative to that of the other entities of the multinational.

The National Bank of Belgium’s research shows that foreign multinationals operating in Belgium do not deem the financial consequences of relocation insurmountable when faced with an economic or monetary crisis. When governments attract foreign direct investment, they have to take into account this “footloose” characteristic, mostly because the closing down of a multinational is often accompanied by a considerable loss of employment. As previous research showed, among the 87,000 jobs lost due to firms leaving the Belgian market over the period of 1998-2005, 25,000 were attributable to multinationals, 12,000 of which due to foreign multinationals. With Belgium’s economy very much dependent on foreign investment, it is clear that the government should put everything in place to retain these multinationals in Belgium.

AmCham Belgium’s position
As was recently shown through AmCham’s US Top 50 Companies in Belgium listing, multinationals are major employment providers, with the top 50 US companies providing a share of almost 3% of private sector employment in Belgium. Their presence in Belgium thus leads to the creation of high value added jobs and stimulates competition and innovation within the sectors where they are active. The exit of a foreign multinational is therefore not only socially costly, but also devastating for the productivity of the Belgian markets. Although Belgium has all the right characteristics to attract US and other foreign businesses, such as a perfect geographical location, outstanding logistic conditions and a highly educated workforce, the threat of companies leaving urges the government to revisit not only its FDI attractiveness policies, but also to address issues which have impeded the consolidation of economic growth and stability. To see AmCham Belgium’s recommendations for economic growth and stability, check our 2011 Priorities for a Prosperous Belgium.


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