Reversing the Perspective: Multinational Activity from Middle-Income Countries

The organization of production within the multinational corporation (MNC) depends on the relative factor abundance of the home country and the destination country. This proposition is at the heart of the theory of the multinational corporation (MNCs) that Helpman (1984, 1985) and Helpman and Krugman (1985) developed and that is primarily conceived from the perspective of the advanced, developed countries. It rationalizes one-way, North-South MNC activity; MNCs from capital-abundant nations break up domestic production and relocate the labor-intensive parts to low-wage countries. I show how two-way MNC activities are implied by the theory that Helpman and Krugman develop and how these are essential to understand MNCs from middle-income countries: these MNCs relocate labor-intensive activities to more labor-abundant countries, they also move capital-intensive components to more capital-abundant countries. I use unique South Korean firm-level data to investigate this hypothesis. I provide evidence from the affiliates of South Korea�s MNCs that bears out this prediction. I also formally test the implications of the hypothesis for the parents� capital-intensity with a panel of South Korean MNC parents (1980-1996). Relocating to more capital-abundant countries indeed decreases the parent�s capital-labor ratio, whereas relocating to more labor-abundant countries increase this ratio.