Discussion Paper

No. 2013-45 | August 26, 2013
When Multinationals Leave: A CGE Analysis of the Impact of Divestments

Abstract

Most studies on Multinational Enterprises (MNEs) focus on the impact of their expansion through inward or outward foreign direct investment (FDI) flows. However, divestments are quite common among the operations of MNEs. In order to derive their effects, we have built a computable general equilibrium (CGE) model that includes two non-standard characteristics: the presence of MNEs, further extended to include unemployment. The model is applied to the Spanish economy, where FDI inflows have surpassed divestments at the aggregate level in the period 2005-2009. However, in ten sectors divestments are sizeable. Therefore, we analyse two different scenarios: 1) Divestments that imply the closure of plants of foreign affiliates; and 2) Divestments in which national firms buy the plant of the foreign affiliate. The model allows estimating the overall impact of the divestments occurring simultaneously in the ten sectors. We further, analyse the contrasting impact of divestments depending on the particular sector in which they take place. Results not only show that national acquisitions are less harmful than closures, but quantify those effects, and provide information on the divested-sector role. In any case, some adjustment costs arise in all scenarios.

JEL Classification

C68 F21 F23

Cite As

Antonio G. Gómez-Plana and María C. Latorre (2013). When Multinationals Leave: A CGE Analysis of the Impact of Divestments. Economics Discussion Papers, No 2013-45, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2013-45

Assessment



Comments and Questions


Anonymous - Referee report 1
September 06, 2013 - 09:20

The paper overall seems well-motivated in terms of the current post-crisis climate, and in terms of the literature. It is fairly well-written, although an equation listing should be provided in the Appendix, and there are a few Spanish-isms (for example ‘MNEs’ become ‘EMNs’ during the draft – please re-check the ...[more]

... English.
The choice of the model is appropriate, and, in particular, the authors seem to have done good work in developing a database and model in which MNEs are differentiated from local firms. The elasticity and sensitivity choices are broadly sensible, although the Armington trade elasticities are probably below the modern consensus values (see Anderson and van Wincoop, Journal of Eonomic Literature, 2003), and the authors should include at least one higher elasticity sensitivity (say sigma=7.5).

Recommendation: acceptable with revisions


Latorre María C. - Answer to Referee 1
September 30, 2013 - 12:59

Please look at the attached pdf.


Anonymous - Referee report 2
September 23, 2013 - 21:22

Comment to "When Multinationals Leave: A CGE Analysis of the Impact of Divestments"


Latorre María C. - Answer to Referee 2
September 30, 2013 - 13:00

Please have a look at the attached pdf


Anonymous - Invited Reader Comment 1
October 21, 2013 - 13:43

See attached file