IIT Madras – Humanities and Social Sciences

Department of Humanities & Social Sciences

Indian Institute of Technology Madras

Multi-National Corporations (MNCs) and Economic Analysis


In this course we will examine theories of foreign direct investment (FDI) and understand the applications of these theories and the rise of multinational firms. We will explore how multinational firms make decisions from a microeconomic perspective, and also understand some key elements of the macroeconomic environment that impact multinational strategy and profitability. Outcomes: At the end of this course the students gain a deep understanding of the economic aspects of multinational corporations.

Course Content:

  1. Introduction:
    Current challenges facing the global economy; Growth of Multinational corporations; Role of MNCs in economic development Business across borders; An overview of macroeconomic factors and MNE strategy; Theories of the multinational firm; Horizontal Multiplant Enterprises and the MNCs; Vertically Integrated MNCs Gains from trade and factor advantage; Trade Costs and FDI.
  2. Organization and Growth of the MNCs:
    Expansion of the Firm; Organizational Structure; Effects of Organization: New Venture or Acquisition? Joint Ventures or Other Agreement Between Firms; Patterns of Market Competition- Foreign Investment and Oligopoly; Market Behavior with MNEs Present; Vertically Integrated MNEs and Competition for Resource Rents; Competition Policy and National Welfare
  3. Technology and Productivity:
    The MNE as Producer of Technical Knowledge; Licensing or Foreign Direct Investment?. General-Equilibrium and Welfare Aspects. Knowledge Stocks and Spillovers- productivity spillovers, efficiency spillovers; heterogeneity of firms and spillovers; vertical and horizontal spillovers.
  4. MNCs and R&D:
    Innovation ecosystems and the role of MNCs; Determinants of R&D; market Structure and R&D; innovation, learning and R&D; In-house R&D and Import of Technology; R&D Cooperation and innovative activities; FDI in R&D two motives access to market and access to science; home base augmenting and home base exploiting FDI; FDI in R&D – emerging economies.
  5. International Taxation:
    Jurisdiction: Who Taxes Whom; Simple Algebra of International Taxation; Taxation of MNCs’ Earnings from Abroad; Withholding Taxes; Tax Reduction Strategies; Transfer Pricing; Thin Capitalization; Tax Havens
  6. Multinationals in Developing Countries and Economies in Transition:
    Determinants of MNEs’ Activities; Effects on Economic Development; Third-World Multinationals; Economies in Transition

Text Books:

  1. Keith Head (2007), Elements of Multinational Strategy, Springer. Caves, R.E. (2007).
  2. Multinational Enterprise and Economic Analysis, (Third Edition), Cambridge Survey of Economic Literature, Cambridge UniversityPress, Cambridge. Barba Navaretti,G.,Venables, A.J., 2004.
  3. Multinational Firms in theWorld Economy. Princeton University Press John Dunning and Sarianna M Lundan (2008), Multinational Enterprises and the Global Economy, Second Edition, Edward Elgar Publishing Limited
  4. N S Siddharthan and Y S Rajan (2002), Global Business, Technology and Knowledge Sharing, Macmillan.
  5. Prasada Reddy (2011), Global Innovation in Emerging Economies, Routledge, New York and Oxon, i-xxv, 1-294.

Reference Books:

  • Hymer, Stephen H., The International Operations of National Firms: A Study of Direct Foreign Investment, (1960)
  • F. Contractor (2012) Why do multinational firms exist? A theory note about the effect of multinational expansion performance and recent methodological critiques Global Strategy Journal, 2 (4), pp. 318-331
  • Yeaple, Stephen (2013), “The Multinational Firm” Annual Review of Economics.
  • Aitken, Brian J. and Ann E. Harrison (1999), “Do Domestic Firms Benefit from Direct Foreign Investment” Evidence from Venezuela”. American Economic Review.
  • Hennart, JF (1982), “The Model” in A Theory of the Multinational Enterprise, University of Michigan Press.
  • Markusen, James R. (1984), “Multinationals, Multi-Plant Economies, and the Gains from Trade,” Journal of International Economics 16(3-4): 205-226.