Published online by Cambridge University Press: 30 May 2018
This paper develops an endogenous growth model with industrial transformation and a stylized foreign expert-based internalization advantage framework to determine the composition of heterogeneous foreign multinationals in a developing host economy. A key feature of the model is the introduction of a dichotomous relationship between domestic and foreign firms, where the latter perceives heterogeneity among the productivity of domestic workers. This results in the skills acquisition decision and foreign subsidiaries' operational mode choice to be determined along the same ability distribution of the host economy. This subsequently determines the shares of the different types of multinationals in a host economy. Parameterized for Malaysia, policy experiments are conducted. A balanced investment liberalization measure for all foreign firms is found to outperform measure targeting only selected types, though there is a threshold doing-business cost value below which such a standalone Foreign Direct Investment (FDI)-promoting policy does not generate positive growth effect. This then calls for composite program that maximizes the policy complementarities between human capital and FDI-promoting policies.
I thank Pierre-Richard Agénor for his dedicated supervision and helpful feedback. I am also grateful to Christoph Himmels, Kyriakos Neanidis, Timo Trimborn, the editors, and reviewers for their invaluable feedback, which have contributed to the improvement of this article. I bear sole responsibility for the views expressed in this paper. Appendices are made available upon request.