In the model MNCs have to choose between the expatriate who is better at

In the model mncs have to choose between the

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choice of their subsidiaries CEOs and entry decisions. In the model, MNCs have to choose between the expatriate, who is better at transmitting the value of the project, and the local manager who can deal better with local conditions uncertainty. We find that MNCs employing expatriates engage in more technological transfer, and more so in technology intensive industries because expatriates can use their own effort to signal the value of this technology (lead by example), whose value increases with technological intensity. We also find that MNCs rely less on expatriates when local uncertainty is high due to the expatriate’s lack of local knowledge. In terms of entry, we find that the attractiveness for FDI will be lower for locations with high local uncertainty that lack a supply of local managers. Yet, the composition of FDI for these areas will be biased towards multinationals in technology intensive sectors because only firms in those sectors find it profitable to enter. Additional empirical analysis finds a set of robust correlations that are not only consistent with our theory but are difficult to explain with the hypothesis that productivity is the only key factor driving both the use of expatriates and the performance of the firm. The theory thus provides a foundation to understand the nature and the barriers of technology transfer within MNCs and its implications for economic development. —————————— Department of Economics at ESSEC Business School and THEMA, [email protected] Centro de Investigaci´ on Econ´omica at ITAM, [email protected] All analysis of confidential data was carried out in accordance with Mexican confidentiality laws. We would like to thank Arturo Blancas, Jorge Reyes, Adriana Ram´ ırez and Gabriel Romero of INEGI for assistance with the establishment survey. We are grateful to Gordon Hanson, Benjamin Hermalin, Yoichi Sugita, Catherine Thomas and Eric Verhoogen for helpful conversations. We are also grateful to the participants and organizers of the CAGE summer school 2010 at Warwick University, the NEUDC at MIT 2010 and the THEMA lunch seminar for useful comments.
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1 Introduction Economists and policy makers have increased attention to Multinational companies (MNCs) as key in the spread of technological, managerial and organizational advances across countries. The economics literature has documented that MNCs are more productive, pay higher wages, and are more export oriented than domestic firms (Markusen, 2004, and Harrison and Rodriguez- Claire, 2009). Furthermore, their presence is likely to be associated with inter-industry positive spillovers (Blalock, 2002 and Jacorcik, 2004). Policy makers, in particular those from develop- ing countries, have recently tried to attract MNCs expecting them to be bringing technological advances (UNCTAD, 1994). Given the perceived importance of MNCs as a driver to technology transfer, the following question arises naturally: How do multinational firms transmit the technology and other useful information to their subsidiaries? The management literature has argued that expatriates are
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