Multinationals and growth in developing countries

  • Blog Post Date 28 February, 2012
  • IGC Research on India
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John Van Reenen

Massachusetts Institute of Technology

"Recent work has highlighted the incredible dispersion of productivity in developing countries and how this contributes to their lower aggregate productivity levels. Low productivity in developing countries leads to lower wages and ultimately much lower consumption. This project argues that social capital as proxied by trust increases aggregate productivity by affecting the organisation of firms. To do this, the researchers collected new data on the decentralisation of investment, hiring, production, and sales decisions from corporate headquarters to local plant managers in almost 4,000 firms in the United States, Europe, and Asia. The project finds that firms headquartered in high-trust regions are significantly more likely to decentralise. They also show evidence suggesting that trust raises aggregate productivity by facilitating reallocation between firms and allowing more efficient firms to grow, as CEOs can decentralise more decisions."

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