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Centre for International

Business
Leeds University Business School

Creating Shared Value:


Economic View and Measurement

June 2009
Re-edited for Seoul G20 Business Summit Working Group
“Encouraging FDI” August 2010

Project Leader: Professor Peter J Buckley, Director, Centre for International


Business, University of Leeds

Research Team:
Dr Martin Carter
Mr Nicolas Forsans
Dr Mario Kafouros
Dr Andreas Moosdorf
Dr Hinrich Voss

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Foreword

For companies, policy makers and the wider public, it is important to understand
where and how business and more specifically FDI can have a positive impact on
stakeholders and society at large. Companies should only invest when they are
sure that others (consumers, employees, suppliers, downstream partners and in
particular communities the investment is established in) get a share of the value
generated. And, if well understood, such positive outcomes can be reinforced
both by companies and through policies.

A few years ago, Harvard Professor Michael Porter developed a new approach to
foster that understanding: Creating Shared Value (CSV). This follow-up study,
written by Professor Peter Buckley (University of Leeds) and his team, was
mandated in 2008 and finalised in 2009. It is meant to stimulate a more
systematic debate on and analysis of the CSV concept, and link it with state-of-
the-art academic research on the impact of FDI.

The study served as an important input towards the work of the Seoul G20
Working Group on “What strategies and measures should the G20 pursue to
encourage foreign direct investment?” Similar to the paper drafted by
Sauvant/Davies, we want to make it available to the wider public interested in the
process of preparing for the Seoul G20 Business Summit.

Peter Brabeck-Letmathe
Chairman Nestlé SA
Convenor of the Seoul G20 Business Summit Working Group “Encouraging FDI”

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Table of Contents

About the Report 3

1. Consumer impact 5
Consumer benefits 5
Review of the evidence 5
Possible avenues for empirical measurement 7
Low-income consumers and the value of “cash-at-hand” 9
Review of the evidence 9
Consumer information and education 12
Empirical measurement 13

2. Supplier impact 16

3. Industry and Competition impact 17


FDI Spillovers 17
Literature Review 17
Evidence 19
Measurement 21
R&D or Technological Spillovers 22
Literature Review 22
Evidence 23
Measurement 25

4. Impact on Stakeholders 27
MNEs and local wages 27
Review of the evidence 27
Measurement 31
Working conditions 32
Review of the evidence 32
Measurement 33

Summary of Recommended Methods and Data Requirements 34


Suggested Research Methodologies 34
Data Requirements 37

Conclusion 39
References 40
Appendix 46

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About the report

“By providing jobs, investing capital, purchasing goods, and doing business
every day, corporations have a profound and positive influence on society. The
most important thing a corporation can do for society, and for any community, is
to contribute to a prosperous economy”

Porter & Kramer, 2006, p.13

This report gives a conceptual framework and proposes an evaluation


methodology that could be applied by experts to measure the overall impact
within the concept of Creating Shared Value..

The impact of multinationals on an economy is shown in Figure 1 which


examines the effects in terms of economic and financial elements, knowledge
transfer, innovation / renovation, and social impacts. It looks at the effects of
multinational enterprises on suppliers, buyers, industry and competition, public
and government bodies and stakeholders. The table identifies 20 cells relating
the type of effect with the area of impact.

Terms of reference

The highlighted cells are the areas we have been directed to investigate in-depth.
In not all the areas is there an extant literature. This work led to the creation of a
theoretical framework which can in principle apply to any firm in any country.

This final report identifies avenues for empirical investigation in selected


countries. A summary of the suggested research methodologies is provided on
page 34 and beyond. Data requirements are identified throughout and
summarised on page 37 – included data to be generated as a result of primary
data collection.

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Figure 1 – A Framework for Identifying Nestle’s Impact on Local Economies

Multinational Enterprise (MNE)

3. 5.
1. 2. Industry 4.
Public &
Buyers Suppliers (competition) Stakeholders
Government

e.g. exchange &


4.1 inflation
2.1 3.1
1.1 e.g. LVA rates/economic growth
e.g. lending & e.g. price & cost
Economic/Financial e.g. consumer pressure/industry elements / /labour unions
payment policies /balance of
surplus clusters wages, local
to suppliers payment/capital
profits & taxes stock/employment
e.g. exposure to
3.2 international
1.2 knowledge 4.2 investment and trade/
2.2 legal advances
Knowledge Transfer e.g. health spillovers/ training, internal
backward regarding taxes, trade
consciousness/safety innovation – FDI learning and and FDI/ exposure to
awareness linkages
spillovers & education international (political)
forward linkages issues

4.3
1.3 e.g. opportunities to
2.3 3.3 upgrading of
Innovation / cash-in-hand for bridge technology
training, reduction of technological & skills, gaps for government
Renovation low-income waste R&D spillovers incremental purposes
consumers
changes

4.4 e.g. shared value


1.4 3.4
Social e.g. product
2.4
e.g. ethical practices, e.g. working
initiatives (pro bono,
e.g. sustainability programmes education), pollution
differentiation industry standards conditions effects

KEY: Coloured cells are the areas we have been directed to investigate in-depth in this report. 5
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1- Consumer Impact

1.1- Consumer benefits

1.1.1- Review of the evidence

The concept of the consumer surplus measures the direct economic benefit
delivered to the consumers of a product or service. It is a principal component of
the economic value created by the supply of consumer products and services.
The consumer surplus that an individual receives from a product is the difference
between the value the individual places on the product and the price they pay to
the seller. For a mass market product with many consumers, the consumer
surplus for the market as a whole is approximately equal to the area below the
product demand curve down to the product’s market price1.

Consumer surplus can be measured by estimating the demand curve for a


product or service, although this is not often done in normal market conditions.
The main use of the concept in economics is theoretical, in showing that
competitive conditions maximise consumer surplus and how market failures
result in reduced surplus relative to the competitive ideal. When quantitative
estimates are made, it is usually to measure the impact of a market failure, such
as the welfare loss of monopoly. Consumer surplus is also used in the cost-
benefit analysis of public sector investment projects undertaken when market-
based financial appraisal under-estimates wider economic gains.

We have found only one recent study (Hausman, 1994) which estimates the
demand curves of fast-moving consumer goods in a way that yields consumer
surplus and which would provide a sound method for estimating the value of
Nestlé products. However, it is data intensive and the costs of data acquisition
may be substantial.

The objective of Hausman’s paper is to establish a method for incorporating


newly introduced products into the Consumer Price Index, using for illustration an
estimated demand system for ready-to-eat (RTE) breakfast cereals in the USA.
He estimates the demand for breakfast cereals at three levels: the level of
individual brands, the level of market segments (children, family, adults) and the
level of the RTE breakfast cereal market as a whole. Hausman reports for
illustration an estimate of the annual consumer surplus for Apple-Cinnamon
Cheerios (a General Mills brand in the USA) of $78.1 million per year2.
1
An accurate measure of consumer surplus is the area below the Hicksian constant utility (income
compensated) demand curve rather than the area below the more usual Marshallian constant income
demand curve.
2
Hausman’s study estimates the precise measure of consumer surplus, the compensated variation due the
introduction of Apple-Cinnamon Cheerios, equivalent to the area under the Hicksian demand curve.
The procedure uses a fixed effects panel estimation with cost factors as
instrumental variables, necessary to achieve identification of the system. The
panel comprises seven metropolitan areas in the USA. A time series of 137
observations of weekly average brand prices for nine brands in the family market
segment are taken for each city from Nielsen Scantrack between January 1990
and August 1992. Data for the instrumental variables (wages and disposable
incomes) come from the US Bureau of Labour Statistics.

The data requirements of this procedure are quite demanding. Nielsen


Scantrack data must be acquired and may not cover all countries of interest.
Acquisition of data for instrumental variables may be more costly still in that high
frequency income records usually have to be collected by personal visits to the
statistical agencies in each country; the data may also be unavailable in some
countries.

Estimation of consumer surplus for even a small number of Nestlé brands in all
the countries of interest would require a large financial investment due to the
costs of data acquisition. It may also be infeasible in some countries (China and
India for example) due to limitations of data availability.

An approach to the estimation of price elasticities of demand when commodity


prices are not observed is described by Deaton (1987, 1988, 1990). He uses
data from household surveys on expenditures and quantities purchased by
commodity. While the data requirements of this approach appear less
demanding than conventional methods, it is not suitable for estimating the
demand for individual brands. In such surveys, commodities are broadly defined
and include different quality levels of the same commodity. (The commodity
meat, for example, would include all available cuts from the lowest to the highest
quality). Household expenditure on a commodity reflects an endogenous choice
of both quantity and quality, where higher quality implies a higher price. Although
prices are not observed it is possible, using such expenditure and quantity data,
to estimate indirectly price elasticities for broad commodities. In principle, some
measure of willingness to pay for quality might be derived as well, but
expenditure is not reported for individual brands and it would be difficult to draw
conclusions on any particular one3.

The impact studies that we could source do not try to estimate consumer surplus.
In examining economic impact they use more-or-less conventional approaches to
estimate the direct and indirect employment / income effects. The Nigerian study
3
In any case the method would not yield a reliable estimates of consumer surplus. Variation between
households within close geographic clusters, which are assumed to face the same prices, is used to estimate
the effects of household income and other characteristics when price is constant. Then variation in the
whole sample, including variation across clusters facing different prices, can be used to extract price
elasticities even though prices are not observed. However, while these estimates measure the relationship
between quantity and price the specification does not correspond to a rigorous demand system so that a true
measure of consumer surplus cannot be calculated.

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conducted for Nestle does this by analysing secondary data. Studies on Coca-
Cola in China, Morocco and South Africa by Moore Business School (see for
example Moore Business School, 2000) collect some primary data and use input-
output models to estimate multiplier effects. A number of papers provide
theoretical frameworks showing the potential impact of projects on consumer
surplus and producer surplus, but they do not provide examples of empirical
studies [Esty et al, 2003; Lysy, 1999]. Literature searches on consumer surplus
are dominated by discussions of the principles while empirical studies which
measure consumer surplus directly are rare.

1.1.2- Possible avenues for empirical measurement

None of the studies reviewed earlier attempts to measure consumer surplus or


produce any other direct measure of consumer benefit.

The Nigerian study mentioned earlier is quite wide ranging while focusing on four
issues:
• economic impact, mainly in terms of employment, direct and
indirect and also benefits to suppliers and investors
• social investment including promotion of good food and nutrition
culture
• facilities management and product development, and this includes
workers perceptions of terms of employment and consumers perceptions
of the benefits of using specific products
• environmental impact

Direct employment effects were generated by “adding up” the number of Nestle
employees while estimates of indirect employment impact were somehow based
on interviews – but this is not made explicit by their authors who also used
qualitative research methods (interview panels) to estimate consumers
perceptions of specific products.

The series of studies by the Moore Business School all have as their prime focus
on the employment impact of Coca-Cola in the study country, although their
authors also look at qualitative impacts. The principal approach that
distinguishes these studies is the use of input-output tables to quantify the overall
impact of employment and investment. In China, the input-output coefficients
come from the government’s own tables. In Morocco and South Africa,
coefficients are estimated from information available about various input
volumes. These are relatively sophisticated ways to assess the indirect
employment and output effects but, as already stated, they do not look at
consumer benefits.

The study by Hausman (1984) provides in principle the most effective empirical
approach to the consumer surplus of fast-moving consumer goods.

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Nevertheless, the data costs may make this impractical or prohibitively costly for
any meaningful measure of consumer surplus associated with individual
products. One possible naïve approach would be a simple survey asking a
sample of consumers to declare their maximum willingness to pay for a product.
This would result in a “declared” demand curve. We doubt very much its
reliability as an estimate of a true, behavioural demand curve and using this to
estimate consumer surplus would be of dubious accuracy. A comparative study
with other products might indicate meaningful relative valuations.

Market prices themselves provide an indication of customer valuation. We can


see no direct link from (say) the size of a price premium the consumer is willing to
pay to the level of consumer surplus enjoyed by the consumer. The nearest we
can suggest is that, for a monopolist, the mark-up of price over marginal cost
provides a measure of price elasticity of demand through the Lerner index of
market power. If we observe price points and if we know marginal cost, then we
can estimate price elasticity. For oligopoly we need assumptions about the form
of interaction between firms, such as Cournot conjectures, and we would have to
suppose some common “industry” marginal cost. But in principle, elasticities
might be estimated this way. However, we would then need assumptions (or
evidence) about the form of the demand curve as a whole before we could
estimate consumer surplus.

Hedonic pricing is a method for estimating shadow prices for particular


characteristics of products. One application is in predicting of the market price of
products with different combinations of characteristics, another to identify what
characteristics contribute to prices (Rosen, 1974; Combris et al, 1997). The
observed prices are market prices and the forecasts are of market prices too.
Prices correspond to consumers’ marginal valuation of characteristics but so far
the method has not been used to integrate marginal valuation functions in order
derive measures of consumer surplus. The problems of estimating demand
curves for characteristics would be similar to those encountered while estimating
product demand curves, only harder.

There are established methods used in marketing to compare relative values of


products. One example is a “value map” (Gale, 1994) which locates products on
a map with axes of perceived quality (low to high) and perceived price (low to
high). But this only provides a form of ranking and does not measure consumer
surplus delivered in the market. Besides, the market is the true laboratory in
which different consumers rank different products and a “value map” would add
little (or nothing) to what is observable there.

A possible avenue lies in the use of Lerner Index of market power to estimate
elasticity and then use a straight line formula to estimate consumer surplus from
that. This is a theoretical idea which, as far as we know, has not been used for
empirical estimation of this kind. The data requirements would be as follow:
• market price, easy to observe

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• marginal cost of the brand involved in the study (the true marginal cost in
the economists’ sense), which can probably be obtained or estimated from
in-house data

However the method relies on a somewhat unrealistic assumption – that of profit


maximising oligopoly pricing. A further assumption about the so-called
“Conjectural Variation”, that is how much competitors change the output of their
brands in response to a change in output by Nestlé. It might be possible to make
an informed guess based on subjective estimation by marketing or sales
managers.

There are caveats. This approach would pile assumption on top of assumption,
leading to potential implausible elasticity estimates.

1.2- Heath consciousness and safety awareness


This report does not investigate this particular issue

1.3- Low-income consumers and the value of “cash at-hand” propositions

1.3.1- Review of the evidence

The behaviour and needs of low-income consumers are generally under-


researched from a business perspective despite extant studies dating back to at
least the 1970s and repeated calls to pay commercial attention to ‘bottom of the
pyramid’ consumers (Goldman, 1974; Prahalad & Hammond, 2002; Hamilton &
Catterall, 2005; Martinez & Carbonell, 2007)4. The lack of research is particularly
prevalent for so-called ‘cash-at-hands’ consumers which are a sub-category of
low-income consumers. These consumers have too little daily or weekly
disposable funding to acquire food staples in large, economic quantities. They
rather assess their necessities and the affordability of products on a day-to-day
basis. As a reaction, businesses offer ‘cash-at-hand’ consumers readily
consumable products in smaller unit sizes (called here ‘cash-at-hands’ products).
An important, yet unanswered question is the value such offering brings to the
consumers. Assessing the value of dedicated ‘cash-at-hand’ products for this
consumer groups is difficult because of the thin literature on this topic and limited
data availability. In order to develop a methodology of measuring the value of
‘cash-at-hand’ products for consumers, we first review extant studies on low-
income consumers in high- and low-income countries.

Results from extant research on low-income consumers in high-income countries


point to the fact that this consumer group pays higher prices for lower quality
products in retail stores and that the range of products available to them is often

4
We have excluded food assistant and food stamp programmes from this review as they are government-
led or -initiated schemes.

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limited (Samli, 2003; Hamilton and Catterall, 2005; Kaufman & Lutz, 1997). The
higher prices are induced by their limited mobility which necessitates them to
purchase products at higher per-unit prices at proximate stores rather than
travelling to more distant retail stores that offer cheaper bulk products (Clifton,
2004). As a consequence, low-income consumers have a diet that does not
ensure the daily nutrition levels recommended (Hamilton and Catterall, 2005).
The latter is generally confirmed by a large-scale, representative survey on food
and nutrition intake of low-income consumers in the United Kingdom. Nelson et
al. (2007) report that low-income household consumers eat less wholemeal
bread and vegetables and that their intake of some minerals is lower than in the
general population. However, they also found that the reference nutrient intake
of vitamins of the general population is very similar to that of low-income
consumers (with the exception of Vitamin D). Despite these findings, Berry and
Solomon (1971) point out that it is difficult to generalise purchasing behaviours.
They stress that the behaviour of low-income consumers is accustomed to local
conditions. Barry and Solomon find that their sample is mobile enough to take
advantage of cheap products and shops in larger intervals. A well functioning
public transport system or alternative mobility solutions such as shared taxis can
impact on purchasing behaviour.

Evidence from research on low-income consumers in low-income countries


shows that consumers tend to spend a large proportion of their monthly income
on food. In addition, they tend to be concerned with food quality and safety, and
their consumption pattern differs to that of high-income groups. An Oxfam (2005)
study, commissioned by Unilever on households in Indonesia found that they
spend on average about 60% of their income on food, beverages, and tobacco
products (as of 2005). Of this, nearly 10% was spend on Unilever products, or
put differently, low-income families spend on average 5.7% of their monthly
income on Unilever products (food, household cleaning, and personal care
products) which was a higher proportion than evident for the higher income
strata. Similar high percentages of monthly food expenditures were also found
for Ethiopian consumers at the beginning of the 1980s (Fritsche, 1996). The
significant share of the monthly income spend on food may explain the high price
elasticity found for Indonesian low-income consumers (Jensen and Manrique,
1998). Oxfam (2005) reports that low-income families buy Unilever products in
small batches or sizes on a daily basis, i.e. do ‘cash-at-hand’ purchases. Buying
smaller units at higher per-unit price is argued to affect household budget less
because of the lower absolute costs while providing access to the product quality
and values the consumer seeks. Oxfam (2005) states that this product placing
and marketing strategy by Unilever is the result of research conducted by the
company during the Asian Financial Crisis at the end of the 1990s to identify
ways of how to continue servicing consumers in that region.

Unilever has spread this practice to other regions. It sells products in small
quantities and sizes in South Africa to ensure that low-income households can
afford their products (Kapstein, 2008). This is perceived as an important

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contribution to local society because low-income households cannot afford
buying multiple product samples from different companies until they have
established which company offers the best value. The adverse consequences of
spending scarce funding on underperforming products on the household would
be disproportionately high. By buying Unilever products in small quantities,
consumers circumvent these problems as they perceive the product quality and
functionality of Unilever’s products as high (Kapstein, 2008). Summarising the
Unilever-related studies, the potential value of ‘cash-at-hand’ products derives
from the possibility to purchase goods of stable high quality, which contribute well
to the daily recommended nutrition intake.

Some of Oxfam findings are challenged by Goktolga et al. (2006) who find that
low-income Turkish households are more influenced by the price of products
than food safety when they have to decide which product to buy. This indicates
the existence of regional variation in low-income consumer buying behaviour
which supports the notion of local consumer habits by Berry and Solomon (1971).

Despite the positive findings, Oxfam (2005) puts forward the question if it is
ethical to offer branded fast-moving consumer goods to low-income consumers in
developing countries who are money constrained and ‘should’ spend their scarce
income on education and health. This reservation is certainly the outcome of a
lack of research on this phenomenon. It is not certain how ‘cash-at-hand’
consumers benefit from smaller product batches and sizes. It still has to be
empirically shown that low-income consumers show a better dietary pattern and
have a nutrition intake because of the availability of ‘cash-at-hand’ products that
helps them to achieve the recommended daily nutrition levels. Further, it is not
clear if and how retail shops that offer dedicated ‘cash-at-hand’ products amend
the product range on offer to low-income groups. ‘Cash-at-hand’ products should
be displayed in addition to normal and large sized product batches to empower
consumers to choose for themselves the product that matches their preferences
best (cf. Samli, 2003; Hamilton and Catterall, 2005; Kaufman & Lutz, 1997). This
could intensify (price and quality) competition across the suppliers from which
consumers would benefit. Finally, Samli (2003) has shown that consumer prices
tend to increase faster for low-income consumers than for the average consumer
because of the characteristics of the product basket. It is not clear yet if this is
also reflected in the pricing of smaller sizes and batches, if prices for such
product sizes would increase slower than for larger batches low-income
consumers would be better of. Though, the possibility also exists that the
inflation rate for ‘cash-at-hand’ products is higher than normal.

Identifying the value cash-at-hand products offer to low-income consumers is


important as a positive value can add substantially to the corporate social
responsibility strategy of a company. This is regardless whether or not it has
been found that the value is of economic or non-economic character. Both
aspects can benefit greatly the acceptance, reputation, and justification of the
company commissioning a cash-at-hand study.

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1.3.2- Consumer Information and education

While Nestle sells pasteurized milk sold in sealed containers, thereby minimizing
health hazards, the informal sector sells unpasteurised milk in open containers.
This raises health concerns in countries where low-income consumers source
food items from the informal sector.

Product safety and quality is surely a concern for multinational enterprises


(MNEs) in the food industry especially when they are operating in developing
countries where distribution channels are not as well maintained and closed as in
economically more advanced countries. Selling products in sealed containers or
applying other measures to ensure that the product is genuinely manufactured by
or for the MNE is one solution. Other solutions could target the distribution
channels as such and include training and educational sessions for the
distributors to adhere to the MNE’s standards (within the capacities and
capabilities of the host county). These considerations can be extended to the
discussion of cash-at-hand products being offered to low-income consumers.
Low-income consumers are likely to emphasise access to a certain (basic and
luxury) goods which may sometimes lead to an under-representation of health
and safety standards with long-term negative implications. However, in cases
where this access can be provided and quality and safety ensured the consumer
benefits twice – first from the access to a good which was previously prohibited
by the high selling price and second from improved nutrition and health which will
be reflected in a decrease in sick days. They also benefit from the confidence
that acquiring that good is not potentially harmful to their health which can lead to
an increase in the purchase of this particular good. However, these aspects are
only exploitable if they are combined with the appropriate level of education, the
raising of awareness, and the financial support to allow for the necessary
investments through, for example, the collaboration with micro-credit institutions.
This, in turn, would have to appear in an open and honest manner as the degree
of harm potential varies by product category that can be offered as a ‘cash-at-
hand’ product.

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1.3.3- Empirical Measurement

The previous discussion has highlighted three separate areas of research to


assess the value of ‘cash-at-hand’ products for low-income consumers: (i) ‘Cash-
at-hand’ products and nutrition; (ii) ‘Cash-at-hand’ products and product variety;
(iii) ‘Cash-at-hand’ products and price development. In order to measure the
value of cash-at-hand products for any of these areas primary data is required as
related studies have shown. Primary data can be combined with secondary and
in-house data. The collected data will be used to develop case studies of
households.

Data collection method

At the outset a low-income household and a ‘cash-at-hand’ product have to be


defined. Extant studies use either income- or index-based definitions of ‘low-
income’ consumers. Income-based studies rely on e.g., below 50% of the
average household income or other national thresholds (e.g. Goldman, 1978;
Jensen & Manrique, 1998; Rosa-Diaz, 2004; Huang, Jones, & Hahn, 2007).
Income-based definitions vary significantly over time and country and are often
census-based. Index-based studies use indices of material deprivation which
accounts for government transfers to low-income groups, or calculate gross
income, or use a market basket based measure (e.g. Nelson et al., 2007;
Ponchio & Aranba, 2008; Guo et al., 2000). We propose the following definition
for low-income consumers which is applicable across countries: A low-income
household has an aggregate gross income (from, inter alia, work, pension,
government transfers, public social security schemes, and rent) that is below
50% of the national average. ‘Cash-at-hand’ products are defined as products
that represent one unit of consumption that is consumed shortly. This could be,
for example, one sachet of coffee for one cup or bottled water for one glass.

Data for single country studies should be collected at different locations to


account for contextual differences across the low-income communities within a
country. Data for multiple country studies has to ensure sample comparability
across countries and should be collected from multiple sites in each country.

In either case, the first step is to identify neighbourhoods that rank low in terms of
gross income and material deprivation through census data and extant surveys.
Further, information on households should be collected and households for
participation in the case study randomly sampled. Sampled households have to
comply with the definition of a low-income household which also requires that
each sampled household is questioned in an unintrusive manner to gain the
necessary information. The data collection process on consumption behaviour in
previous studies generally includes self-observation which range from 24 hours
to month-long self-observations in combination with interviews and surveys. The
most recent studies in the UK and the USA rely on 24-hour self-observations and
diary records in combination with interviews (e.g. Nelson et al., 2007). We

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suggest here a case study-oriented research design which would combine 24
hours self-observation and the collection of further data via interviews. Extant
studies have commonly collected the following data:

• socio-economic data (e.g., monthly disposable income, family size,


education levels, public infrastructure, retailing infrastructure);
• range of food products purchased during the observed time;
• food expenditures as a share of total expenditures

The measurement of the value of ‘cash-at-hand’ products in accordance to the


three areas of research as identified above requires additional information that
has to be collected:

1. ‘Cash-at-hand’ products and nutrition

The availability of ‘cash-at-hand’ products can be beneficial to the health of low-


income consumers. To investigate this further the following data would be
needed:

Data Source
Availability of ‘cash-at-hand’ products in retail Consumer survey
stores (controlling for store size and
proximity)
Expenditures for ‘cash-at-hand’ products as Consumer survey
share of total food products purchased
Nutrition levels of all food products Product survey and analysis
purchased (i.e. vitamins, minerals)
Nutrition levels of all cash-at-hand products Product survey and analysis
purchased (i.e. vitamins, minerals)

2. ‘Cash-at-hand’ products and product variety

Low-income consumers living in deprived areas experience restricted product


variety. The introduction of ‘cash-at-hand’ products can increase product variety
through competitive pressures which in turn can increase product quality and
decrease prices. To research this question the following data would be required:

Data Source
Historical and current data on product range National Statistical Bureau and
sold to retailers in the vicinity of low-income in-house
consumers
Historical and current data on product range National Statistical Bureau, in-
sold to retailers frequently visited by low- house and survey
income consumers

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Historical and current data on product range Survey of retailers supplemented
offered by competitors and retailers in the by low-income consumer surveys
vicinity of low-income consumers
Historical and current data on product range Survey of retailers supplemented
offered by competitors and retailers by low-income consumer surveys
frequently visited by low-income consumers

3. ‘Cash-at-hand’ products and price development

Low-income consumers generally experience higher inflation rates than other


consumer groups (Samli, 2003; Clifton, 2004; Hamilton and Catterall, 2005).
This can be a result of divergent trends in their gross income and the national
inflation rate which increases the share of their monthly income spent on food
products. Studies by Kapstein (2008) and Oxfam (2005) suggest that ‘cash-at-
hand’ products are more affordable to low-income consumers. It is not clear
though if low-income consumers additionally benefit from lower inflation rates for
these products. To assess whether or not low-income consumers benefit from
lower price increases of ‘cash-at-hand’ products, the following information has to
be collected:

Data Source
Monthly price developments for all food National Statistical Bureau
products
Monthly price developments for all food National Statistical Bureau and
products in the categories for which cash-at- in-house data
hand products are offered
Monthly price developments for all food cash- In-house data
at-hand products
Share of monthly income spend on cash-at- Survey
hand products
Monthly gross income development for low- Survey
income consumers

The suggested data collection method raises ethical considerations. Particular


attention needs to be paid on the identification and targeting of low-income
consumers, their voluntary and free involvement in the study, and the neutral and
respectful treatment of the research participants. Safety issues arise as the
fieldwork has to take place in low-income and deprived areas which could
evidence higher crime rates than other areas in the country. Moreover, those
areas will generally be unknown to the researcher and the researcher easily be
identified as an outsider. Thus, the personal safety of the researcher and the
approached households has to be ensured through the employment of local
guides and interpreters.

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1.4- Product differentiation
This report does not investigate this particular topic.

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2- Suppliers impact

Multinational firms impact on their suppliers through the following channels.

2.1- Support and lending and payment policies


This report does not investigate this particular topic.

2.2- Backward linkages


Backward linkages are discussed in detail in Section 3.2 on FDI spillovers.

2.3- Training
Companies’ contribution to the upgrade of skills of its suppliers is discussed in
Section 3.2.1.2.

2.4- Sustainability programmes


This report does not investigate this particular topic.

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3- Industry and Competition Impact

Multinationals often increase the level of competition in host countries. In turn,


this may lead to both positive and negative consequences. Specifically,
competitive pressures from multinational corporations usually force domestic
companies to update their production techniques, improve their organizational
processes, innovate, and allocate their resources more efficiently. This enables
domestic firms to become more productive and produce more output from the
same amount of input, thus increasing the value-added that the host economy
generates. Multinational corporations may also break down monopolies
(Blomstrom and Kokko, 1998). Higher levels of competition, in turn, benefit
consumers as they may force firms to reduce the prices of their products, as well
as domestic producers that may buy inputs of production at lower prices.

Nevertheless, the positive impacts of higher competition are often cofounded with
negative effects. High competitive pressures may drive out of business small
domestic companies. In such cases, the level of unemployment may increase.
Furthermore, market-stealing effects may force domestic companies to reduce
output in response to competition from technologically superior multinational
competitors. This may shift their cost curve higher, resulting in lower productivity.
In summary, it is likely that strong and efficient firms will become more
productive, whereas less efficient companies may be driven out of business.

3.1- Price and cost pressure


This report does not investigate this issue.

3.2- FDI Spillovers

3.2.1- Review of the evidence

FDI spillovers usually refer to the positive and/or negative effects that inward
foreign direct investment has on the citizens and companies of the host
economy. We should also note that outward FDI may enhance the social returns
in the home country (Blomstrom and Kokko, 1998). For example, it may enable
firms to access and acquire foreign know-how and technologies and, in turn,
improve the performance of their ‘home’ production and operations. As little
research has tried to quantify such effects, however, this section focuses on the
relationship between inward FDI and the social returns in the host country.

Spillover effects from inward FDI take place when multinationals establish their
subsidiaries abroad. Such effects occur through different channels, and depend
on a wide variety of factors such as the type of entry mode (greenfield or
brownfield), the linkages between foreign invested and local firms, and the way in

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which FDI influences the nature of competition. These issues are discussed
thereafter.

3.2.1.1- Backward and Forward Linkages

FDI spillovers also depend on the backward linkages between multinational


corporations and their suppliers. More specifically, multinational corporations
often assist their suppliers in:

• Increasing the quality and/or variety of their products


• Setting up new or better production facilities and R&D centres
• Improving their production techniques and operations
• Increasing their organizational learning (as MNEs may provide training
and technical assistance)

In all these cases, multinationals enhance the performance of their suppliers and,
consequently, social returns and economic growth. A study that examined the
issue of FDI spillovers through backward linkages is that of Javorcik (2004).
Using firm-level data from Lithuania, the study shows that increases in the foreign
presence in downstream sectors improve the output of domestic companies in
the supplying sector.

Similarly, FDI spillovers may result from forward linkages between multinational
firms and their customers, including local distributors and sales organizations
(Blomstrom and Kokko, 1998).

3.2.1.2- Training

Multinational corporations place emphasis on training. They organize many


seminars, give scholarships, fund overseas education, and promote other types
of training. These activities have a direct impact on the skills and efficiency of
their employees and, in turn, on their performance. Nevertheless, as employees
move to other firms or establish their own company, the benefits of training and
schooling spill over to other companies too. This type of spillovers is particularly
important in developing countries, where the education systems tend to be
weaker.

3.2.2- Evidence

This section offers a review of previous empirical studies that examined the
relationship between FDI spillovers and host-country productivity performance.
As noted earlier, however, comparisons across different studies must be looked
at very carefully as they often differ in terms of sample (country and industry),

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methodological specifications, and aggregation level (firm- or industry-level).
Table 1 summarizes the empirical findings of a selection of studies for both
developed countries and emerging economies. When interpreting the results of
Table 1, it is important to keep in mind that FDI incorporates different activities
(e.g. production facilities, sales offices and R&D laboratories). Consequently,
previous studies estimate the average impact of different types of foreign
investment on the output (or productivity) of local firms.

Table 1 - The Effects of FDI Spillovers

Country Year Result Reference

Mexico 1970/75 Positive Blomstrom and Wolff (1994)

Morocco 1985-1989 Negative Haddad and Harrison (1993)

Venezuela 1976-1989 Negative Aitken and Harrison (1999)

Indonesia 1991 Positive Blomstrom and Sjoholm (1999)

Taiwan 1991 Positive Chuang and Lin (1999)

India 1976-1989 Negative Kathuria (2000)

India 1980-1994 Insignificant Feinberg and Majumdar (2001)

UK 1991-1995 Positive Liu et al. (2000)

UK 1989-1992 Positive Driffield et al. (2001)

UK 1987-1997 Mixed Driffield and Love (2007)

US 1979-1991 Positive Chung et al. (2003)

China 1995 Negative Buckley et al. (2002)

China 1995 Mixed Buckley et al. (2007)

As Table 1 indicates, although there is an extensive empirical literature on the


relationship between FDI and host-country performance, it bears mixed results.
The effects of FDI spillovers are usually positive for developed countries such as
the UK and the USA (Liu et al., 2000; Driffield et al., 2001; Chung et al., 2003).
These effects, however, also depend on the type of foreign investment
(technology- or cost-based). Although there are significant benefits when foreign

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investment is motivated by a strong technology-based ownership advantage,
inward FDI motivated by technology-sourcing does not lead to spillovers in the
UK (Driffield and Love, 2007). Further, the effects of FDI spillovers tend to be
negative when the motivation for foreign investment is lower labour cost.

By contrast, as shown in Table 1, the impact of FDI spillovers on the economy of


emerging countries is usually mixed. A large number of empirical studies
reported negative FDI spillovers for India, Venezuela and Morocco (Kathuria,
2000; Aitken and Harrison, 1999; Haddad and Harrison, 1993), but positive
spillovers for Mexico and Indonesia (Blomstrom and Wolff, 1994; Blomstrom and
Sjoholm, 1999). A more recent study by Buckley et al. (2007) suggests that
these conflicting results may be explained by the fact that there is a curvilinear
relationship between spillovers and foreign presence. That is, past some level of
foreign investment, the spillover benefits begin to fall.

Other studies suggest that the effects of FDI also depend on firm ownership.
Using a data set of Chinese companies, Wei and Liu (2006) find that FDI from
OECD countries plays a more important role in inter-industry spillovers than FDI
that originates from Hong Kong, Macao and Taiwan. Furthermore, previous
empirical research shows that FDI spillovers are not restricted geographically.
Javorcik (2004) finds that domestic companies in Lithuania benefit from the
activities of downstream multinational firms in both their own region as well as in
other regions.

3.2.3- Measurement

In order to estimate the impact of MNEs on the performance of local firms,


previous studies use regression analysis and a production function. This
approach is similar to the method employed for the estimation of R&D spillovers.
It assumes that the output (or productivity) of local firms is a function of the
presence of MNEs, proxied by foreign direct investment. Nevertheless, previous
studies also incorporate in their analyses a number of other inputs (e.g. capital
and labour) and control variables (e.g. firm size and industry effects) that may
influence a firm’s output (or productivity performance). This model after
accounting for time (t) and firm (i) differences and after transforming it into
logarithmic form is:

yit = a + β1kit +β2lit + β3fdi + cv +εit

Where:
y = output (value-added) of each local firm
k = tangible resources
l = labor input
fdi = foreign direct investment
cv = a set of control variables (e.g. firm size, industry and time effects)

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ε = error term
a = constant
β1-3 = parameters to be estimated

The variable of interest here is ‘fdi’. The coefficient of this variable allows us to
examine the extent to which foreign investment improves the output (or
performance) of local firms. This approach may allow us to examine the extent to
which its foreign investments improve the productivity of local companies in the
same sector, or in other interconnected sectors (these estimations require firm-
level data). We should also note that a number of studies (e.g. Buckley et al.,
2007) disaggregate overall foreign presence into separate measures according
to the country of origin of the investors (e.g. developed countries vs. emerging
economies). Similarly, the foreign presence variable can be disaggregated into
intra- and inter-industry measures, as well as into separate regional measures.

3.3- R&D or Technology Spillovers

Foreign direct investment (FDI) and industrial research & development (R&D)
influence not only the operation and performance of the multinational that
undertakes such activities, but also the performance of other companies.
Empirical evidence confirms the existence of such effects, indicating that the
performance achieved by a firm depends on the activities, investments and
performance of other companies of the same industry or even of other industries.
Although previous evidence strongly supports that spillover effects are usually
positive (i.e. they enhance social returns), a number of studies have found their
effects to be either insignificant or negative. In this section, we discuss the
mechanisms underlying R&D and FDI spillovers, and review the relevant
empirical evidence.

3.3.1- Review

The rationale behind R&D (or technology) spillovers is that the ideas and
technologies that multinational corporations develop by undertaking research is
often relevant and useful for others as well. To be specific, in-house R&D leads
to the creation of an organizational stock of scientific knowledge (this stock
typically includes ideas and specialist know-how regarding technological
developments, scientific advances, and patents). As intellectual property laws do
not work in practice as they do in theory (Teece, 1986), firms cannot always
prevent other organizations from building on their work. As such, they often
acquire external knowledge by browsing patents, reverse engineering competing
products, hiring scientists from other firms, and collaborating with other
organizations (Griliches, 1992).

Therefore, the R&D undertaken by multinational corporations contributes not only


to their own performance, but also to society’s reservoir of scientific knowledge.

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This reservoir, in turn, enhances social returns as it may point to new
technological avenues, offer new solutions to old problems, reinvigorate existing
knowledge, lead to more efficient processes, serve as the starting point for future
technologies, and influence the general understanding and problem-solving
techniques (Kafouros and Buckley, 2008; Miller et al., 2007; Klevorick et al.,
1995; Rosenkopf and Almeida, 2003). These effects, therefore, are strongly
linked to the amount and type of R&D that a company undertakes in different
technological areas and in different locations around the globe. There are two
main types of R&D spillovers: intra-industry and inter-industry. The former type
of spillovers refers to the extent to which the R&D undertaken by a firm
contributes to the operation and performance of other companies within the
industry to which the firm belongs. Nevertheless, firms also use the scientific
knowledge, ideas and technologies that companies in other industries develop.
Accordingly, the inter-industry spillover effects refer to the indirect impacts that
the R&D undertaken by a firm has on the operation and performance of
companies outside the industry to which the firm belongs.

Positive spillover effects, however, are often confounded with negative effects
such as lower profits and a higher depreciation rate of knowledge (Jaffe, 1986).
The industrial research that a firm’s competitors undertake improves not only
society’s pool of knowledge but also their own products, processes and
productivity. Although one might expect that the increased productivity levels of
competitors would not negatively affect the productivity of a firm, they often do.
As the demand for products is limited, each firm’s performance is a comparative
(or relative) measure of it. Put differently, assuming that the demand for a
product remains relatively stable in the short term, when a firm loses market
share because of the technological advances and the better competitive position
of its rivals, a reduction in its measured (comparative) productivity performance
may be observed, despite the fact that its capacity to produce may remain the
same (Kafouros and Buckley, 2008). Similarly, Aitken and Harrison (1999) refer
to a market-stealing effect that may force an organization to reduce output in
response to competition from technologically superior rivals. In turn, this may
shift its cost curve higher, resulting in lower productivity and negative
externalities.

3.3.2- Evidence

This section offers a review of empirical studies that examine the relationship
between R&D spillovers and firm performance. Comparisons across different
studies, however, must be looked at very carefully as they often differ in terms of
sample (country and industry), methodological specifications, and aggregation
level (firm- or industry-level). Table 2 summarizes the empirical findings of a
selection of studies for developed economies. The first two columns provide
information about the sample and country examined. The next two columns

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(third and fourth) report the results, whereas the last column presents the
reference for each study.

As most studies employ a logarithmic specification, the coefficients reported in


Table 2 can be interpreted in the following way. If the coefficient of the R&D
spillovers, for example, is 0.12, then this shows that a 1 percent increase of the
spillover pool (explained later) leads to a 0.12 percent increase in output (or
productivity).

Table 2 - The Effects of R&D Spillovers on Firm Performance

Country Sample Result Coefficient Reference

India 192 firms positive 0.06-0.36 Raut (1995)

China 7697 firms positive 0.44 Wei and Liu (2006)

China industry-level positive 0.09 Liu and Buck (2007)

Italy 92 firms insignificant - Antonelli (1994)

Germany 443 firms positive 0.02-0.08 Harhoff (2000)

Japan and 209 US and 205 positive 0.7-0.83 Branstetter (1996)


US Japanese firms
Canada 680 firms positive 0.17-0.24 Bernstein (1988)

US 19561 plants positive 0.08-0.24 Adams and Jaffe (1996)

US 432 firms positive 0.02 Jaffe (1986)

US 435 firms positive 0.15 Jaffe (1989)

US 485 firms positive 0.51 Los & Verspagen (2000)

UK 170 firms insignificant - Wakelin (2001)

UK 117 firms positive and -0.11 - 0.12 Kafouros and Buckley


negative (2008)

As the empirical findings in Table 2 indicate, several studies carried out for
countries such as the US, Italy, Japan, Canada, Germany, India, China and the
UK, found R&D spillovers to be significant, indicating that the industrial research
that a firm undertakes benefits not only its own performance but also that of other
companies. Although these effects are on average positive, in some cases they

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are either negligible or even negative. There are also studies which showed that
firms can benefit from spillovers even when they voluntarily reveal their findings
(Harhoff et al., 2003). However, although R&D spillover effects are positive, not
all firms are capable of acquiring and using external knowledge. Many
researchers, such as Cohen and Levinthal (1990) and Mohnen (1999), highlight
the significance of the notion of absorptive capacity, according to which the
exploitation of external R&D depends on the firm’s own R&D resources and prior
research activity.

Johnson and Evenson (1999) examined the effects of new technologies


introduced in the agricultural and food-processing industries in 14 less developed
nations and newly industrialized countries. The results of this study show that
both international and inter-industry spillover effects improved agricultural
productivity. Furthermore, a number of studies focused on the effects of
international spillovers. These relate to the fact that the knowledge, ideas and
innovations developed in a country go beyond national borders, improving the
economic growth of other countries. A representative example is the study of
Coe and Helpman (1995) which indicates that there are significant spillover
effects between countries. In line with the work of Coe and Helpman (1995), a
number of other papers (Mohnen, 1999; Cincera and Van Pottelsberghe, 2001)
confirm that foreign R&D influences significantly the productivity of industrialized
economies. These studies also emphasize that spillover effects are particularly
important for smaller countries, and for those economies with a high degree of
openness (in terms of international trade).

When interpreting the results of the studies presented in Table 2, it is important to


keep in mind that reported R&D investments incorporate different research
activities, such as basic and applied R&D, product and process R&D, short-term
and long-term projects, and small and large projects (Mansfield, 1984; Kafouros,
2008). Consequently, previous studies examine the average impact of different
types of research activities on firm productivity performance.

3.3.3- Measurement

In order to estimate the effects of R&D spillovers, most studies use regression
analysis and a production function. This approach has been used extensively
during the last 30 years as it allows researchers to associate advances in output
(or productivity performance) with external R&D (i.e. with the technologies, ideas
and scientific knowledge that other firms develop). This model after accounting
for time (t) and firm (i) differences and after transforming it into logarithmic form
is:

yit = a + β1kit +β2lit + β3rit + β4intrait + β5interit + cv +εit

Where:

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y = output (value-added)
k = tangible resources
l = labor input
r = innovative activity
intra = intra-industry spillovers
inter = inter-industry spillovers
cv = this represents a number of control variables (e.g. firm size, industry, time
effects)
ε = error term
a = this is a constant
β1-5 = parameters to be estimated

The two variables of interest here are ‘intra-industry’ and ‘inter-industry’


spillovers. The former is a measure of the aggregate R&D that companies within
the industry in which the firm operates undertake. Following Griliches (1979), an
intra-industry spillover pool (or reservoir of scientific knowledge) is created by
measuring past and current R&D expenditures. This measure also takes into
account that past research (as any other type of capital) depreciates and
becomes less valuable over time. In order to account for the declining usefulness
of R&D, studies incorporate a depreciation factor in their models. Using this
measure, one may investigate whether the aggregate R&D undertaken by other
companies has a positive or negative impact on the output (or productivity) of
domestic firms. In the case of Nestle, for instance, this approach may allow us to
examine the extent to which the R&D activities of the firm improve the
productivity (and/or other measures of performance) of companies that operate in
the same sector (these estimations require firm-level data).

To examine whether firms benefit from the research activities of companies from
external industries, previous studies also estimate an inter-industry spillover pool
(Kafouros and Buckley, 2008). This is a measure of the aggregate R&D that
companies outside the industry in which the firm operates undertake. In order to
examine these effects, previous studies construct a proximity matrix that
identifies the technological distance between firms, i.e. the extent to which the
technologies developed in different industries were useful for each firm. To
construct this matrix, previous studies use either a patent-based or an input-
output weighting.

To measure the indirect (or spillover) effects associated with the operations of
Nestle, one should identify the extent to which the foreign direct investment
influence the performance of other firm within (or outside) comparable lines of
business. This should be done using regression analysis and a large number of
firms/observations (it would be difficult to measure these effects in a single case
study). This exercise is challenging as it requires the integration of previously
unconnected sources of information. To measure the spillover effects of Nestle,
the following data will be required:

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• detailed company data on foreign direct investment (foreign assets, for
example) and R&D undertaken. As the diffusion of knowledge takes time,
data for a number of years (at least 5) will be needed. Such data should
be country-specific (or even region-specific), and product-specific in the
case of R&D
• data on the performance of other firms, including competitors, suppliers,
and distributors. Again, data for a number of years (at least 5) will be
needed. These can be obtained by databases such as Datastream and
Thomson One Banker

This measurement exercise should also incorporate the fact that the performance
of companies in more distantly related industries may also be influenced. This
prompts for the need to identify the ‘technological distance’ between investing
companies and a number of other companies within the same industry, as well as
in other industries. This can be done by using input-output data from various
offices of National Statistics.

3-4 Industry standards and ethical practices


This report does not consider this issue.

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4- Impact on Stakeholders

Multinational firms tend to impact on the structure of the economies in which they
operate through their foreign direct investment – in particular those of emerging
economies. FDI can bring significant benefits by creating high-quality jobs and
introducing modern production technologies and management practices.
However, the activities of MNEs in foreign locations have also attracted much
controversy and social concerns. They have been accused of practicing unfair
competition when taking advantage of low labour costs and labour standards in
developing economies.5

As of 2006, an estimated 73 million workers, or 3% of the global workforce were


employed in foreign affiliates of MNEs – almost three times more than in 1990. A
disproportionate share of the workers is employed in the foreign affiliates of
MNEs in developing economies, possibly reflecting the higher labour intensity of
production in these countries.

One way through which FDI can be beneficial for host economies is by the
creation of high-quality jobs that are associated with higher wages and better
working conditions (OECD, 2008a). In this section, we consider MNEs impact on
(a) local salaries and wages and (b) local working conditions.

4.1- MNEs and local wages

4.1.1- Review of the evidence

Although MNEs are not expected to pay higher wages than domestic firms, they
may do so under certain circumstances. For example, MNEs may wish to
implement pay incentives in order to maximise productivity and efficiency, given
the higher cost of monitoring production activities from foreign locations. MNEs
may also offer above-market wages in order to dissuade workers from moving to
other firms or disrupting activities. This is consistent with Dunning’s O-L-I
paradigm (Dunning, 1977). In this framework, foreign firms own special assets
that are more profitably exploited via foreign direct investment than via exporting.
Under this argument, foreign firms would pay higher wages in order to prevent
costly turnover which would occur when quitters share firm-specific knowledge
with competing firms (Fosfuri et. al., 2001). Alternatively, foreign firms may share
with workers the rents produced by those assets, driving their wages above those
of comparable individuals working firms whose assets do not produce these
rents. However, foreign firms are also likely to enjoy a stronger bargaining power
5
This section on stakeholder Impact focuses exclusively on the relationship between Nestle and its
employees through a review of studies on wages and working conditions in multinational firms. Earlier
versions of the report attempted to include a review of multinational firms’ environmental impact as well,
but this went beyond the specifications of the current project and is no longer included in the final report
following discussions with Nestle.

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than domestic firms, since they may easily shift production across countries
(Caves, 1996). It is therefore ambiguous whether the rent-sharing effect would
outweigh the bargaining power effect (Martins, 2006).

In practice, MNEs have often been found to pay higher wages than domestic
firms. Empirical studies have used a variety of methodologies to investigate the
link between ownership and the existence of a wage premium. These studies
are summarised in Table 3 and discussed briefly thereafter.

Until recently there was a consensus that foreign firms tend to provide better pay
to workers than their domestic counterparts, particularly in developing
economies. For example, Aitken et al. (1996) found that average wages in
foreign-owned plants in Mexico and Venezuela tended to be about 30% higher
than in domestic ones, even after controlling for moderating factors such as firm
size, location, skill mix and capital intensity. However, this did not apply to the
case of the United States. This suggests that foreign-owned firms pay higher
wages than their domestic competitors in developing countries. This does not
necessarily mean that foreign ownership improves working conditions as both
types of firms may employ qualitatively different workforces.

To address this point further studies have attempted to analyse the impact of
foreign ownership on wages after controlling for differences in the quality or skill
mix of the workforce. Using a plant-level dataset in Indonesia, Lipsey and
Sjoholm (2004) found that the difference in wages remain large even after
controlling for the educational background of workers employed in both types of
firm. For example, wages in foreign-owned plants were 12% higher for
production workers and 20% higher for non-production workers. Further studies
confirm the scale of the pay differential for five Sub-Saharian countries
(Morrissey and Te Veide, 2003).

Alternative methodologies were also used in order to quantify the wage


difference between foreign- and domestically-owned firms, such as changes in
ownership following cross-border acquisitions. Such studies have identified the
causal effect of foreign ownership on employment conditions under the
assumption that the composition of the workforce is not affected by cross-border
takeovers. By focusing on acquisitions, these studies do not capture the role of
greenfield investments, the effects of which may be different. Studies that follow
that approach suggest that FDI has the potential to increase significantly the
number and quality of jobs in foreign-owned firms, particularly in developing
countries. Girma and Grogg (2007) find for the UK that foreign takeovers of
domestic firms tend to increase wages, but the effects are relatively small. For
Indonesia, Lipsey and Sjoholm (2006) find that foreign takeovers raise
production-worker wages by 17% and non-production-worker by 33%. Other
studies for Portugal, Hungary and Finland also find positive effects for foreign
takeovers of domestic firms on average wages.

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Table 3 – A Summary of the Literature on the Link between Ownership and
Wage Premium

Study Country Main Findings


Cross-sectional studies
Aitken, Harrison and Mexico, United Positive and significant wage differences for
Lipsey (1996) States, Mexico and Venezuela after controlling for
Venezuela plant size, location, skill mix and capital
intensity, but not in the United States
Morrisey and Te Velde Cameroon, Foreign wage premium ranging from 8% to
(2003) Ghana, Kenya, 23% after controlling for observable worker
Zambia, and firm characteristics
Zimbabwe
Lipsey and Sjoholm Indonesia Wages in foreign plants 12% higher for
(2004) production workers and 20% higher for non-
production workers than in domestic plants
Longitudinal studies
Balsvik (2006) Norway Foreign takeovers have a small positive effect
of 3% on individual wages. Movers from
domestic to foreign firms experienced wage
increases of 8%
Martins (2006) Portugal Foreign takeovers have a small negative
effect of -3% on individual wages
Longitudinal studies – firms-fixed effects
Girma and Gorg (2007) United Kingdom Takeovers of UK firms by US firms increase
the wages of both unskilled and skilled
workers (+4 to 13%) but takeovers by non-UK
EU firms do not
Lipsey and Sjoholm Indonesia Foreign takeovers have a positive effect of
(2006) 10% on the average wage of blue-collar
workers and 21% of those of white-collar
workers

Source: Adapted from OECD (2008)

However these studies do not take account of the possible impact of changes in
the composition of the workforce as a result of the takeover. To the extent that
takeovers are associated with skill upgrading, the evidence presented so far
tends to overestimate the positive effects of the change from domestic to foreign
ownership on individual wages. Recent empirical work has used linked
employer-employee (or worker-level) data in order to control for these changes
by focusing on the wage effects for individual workers who stay in the same firm
following the change in ownership. Those data also enable researchers to
investigate the role of foreign ownership for workers who change jobs between
domestic and foreign firms. This makes it possible to analyse differences in pay
conditions between foreign- and domestically-owned firms for new workers. As
productivity differences may have more important implications for workers at the
moment of hiring than for those who stay in the same firm, one may expect the
role of ownership to be more important for this category of workers.

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Studies that have used worker-level data reveal that foreign takeovers in
developed countries have, at best, a small positive effect on individual wages,
and that their effect could even be negative. For example, Martins (2006) found
that the foreign wage premium disappears after controlling for worker selection,
and it may even reduce individual wages by 3% for workers in foreign firms
relative to those in domestic firms. Similar findings applied to Sweden. However,
small positive effects were found by Andrews et al (2007) for Germany and
Balsvik (2006) for Norway. Studies which consider worker mobility to analyse the
role of foreign ownership found that workers moving from a domestic to a foreign
firm experience a 6% increase in wages in Germany and 8% in Norway. These
results may indicate that the short-term effects of foreign ownership may be more
important for new recruits in foreign firms than for workers who remain in firms
that change ownership.

Using data from the World Bank Entreprise Survey for Brazil and Indonesia as
two emerging economies and Germany, Portugal and the United Kingdom as
developed economies, the OECD (2008) find that MNEs tend to employ more
workers and provide better jobs than local firms in the countries where they
invest. They find that average wages are almost 50% higher in foreign MNEs
than in domestic firms, and that pay differences are larger in Asia and Latin
America, as are the technological and productivity gaps between foreign MNEs
and local firms in those regions. In all regions surveyed by the OECD, the
productivity gap between foreign and domestic firms appears to be even larger
than the wage gap. This may be explained by weaker bargaining power of
workers in foreign firms relative to domestic ones, perhaps because fewer
comparable outside job opportunities are available for workers in such firms.
Using worker-level data, they find that foreign takeovers of domestic firms tend to
have a small positive effect on the individual wages of workers who stay in the
same firm relative to similar workers who stay in domestic firms that are not taken
over, but these effects vary a lot across countries with no effect in the UK and a
small positive effect for Brazil and Portugal. They also find large wage gains for
workers who move from domestic to foreign firms, suggesting that foreign-owned
firms offer higher pay than domestic firms for similar workers. Furthermore the
foreign wage premia accruing to workers who move from domestic to foreign
firms are considerably larger than those found in the context of takeovers. This
may indicate that foreign firms share their productivity advantage more
extensively with new workers than with workers who do not change firms. The
wage effects of foreign ownership differ considerably across countries – from 6%
in the United Kingdom to 8% in Germany, 14% in Portugal and 21% in Brazil.

So overall, FDI has been shown to have a positive effect on wages in foreign-
owned firms in the host country, and these positive wage effects are likely to be
more pronounced in developing and emerging economies than in mature,
developed countries. Presumably this reflects the greater productivity advantage
of foreign MNEs over local firms in less developed countries. Worker-level

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© Leeds University Business School
results tend to indicate that the positive impact of FDI resides primarily in the
provision of better job opportunities to new employees, rather than in the
provision of better pay to workers who stay in firms who happen to be taken over
by foreign MNEs, at least in the short-term.

4.1.2- Measurement

Studies reviewed earlier have attempted to understand the source of the wage
differential between foreign and domestic firms in selected countries.

Our concerns here are threefold. We aim to


• identify whether inward investors pay their workers higher-than-average
wages than industry average in selected countries
• quantify the wage differential (if any)
• identify whether any wage differential can be explained by the employment
of a higher skill mix relative to industry average

To address these questions, we are proposing to collect aggregate worker data


on wages and salaries at Nestle’s subsidiaries in two developed and one
developing countries. These data will be analysed and compared with industry-
specific data on wages and salaries in each of the three countries using UNIDO
Industrial Statistics Database accessed through Economic & Social Data Service.
From this, the wage differential (if any) will be quantified.

The dataset will be supplemented by data on the background of workers to


include educational background and skill typology. The dataset will then be
broken down into two sub-datasets – one for “blue collar” workers and one for
“white collar” workers. Firm-level data on wages and salaries by type of
positions/skill set in the food industry will then be collected using the World Bank
Entreprise Survey and/or national statistical agencies.

4.2- Training, internal learning & education


This report does not explicitly consider this topic, although our proposed
methodology takes into account training and development opportunities while
assessing Nestle’s impact on non-wage working conditions (Section 4.4).

4.3- Upgrading of skills and incremental change


This report does not consider this topic.

4.4- Working conditions

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4.4.1- Review of the evidence

Very little is actually known about the impact of foreign MNEs on working
conditions in host economies. Various studies have attempted to characterise
employment conditions and analysed their determinants. Although the definition
of employment conditions differs across studies, the literature tends to indicate
that MNEs have a low propensity to export home-country working conditions in
foreign locations. Instead, MNEs tend to adopt local practices (Almond and
Ferner, 2006).

Bloom et al (2008) show that US MNEs export management practices but not
work-life balance practices. This could be explained by a number of factors.
First, labour practices tend to be embedded in national rules and social norms.
Strategic considerations may also intervene – for example, local affiliates with a
domestic market orientation may enjoy a significantly greater degree of discretion
about the way human resources are managed than firms with a greater export
orientation. Finally, US MNEs have a specific management style which may not
necessarily apply to MNEs originating from countries other than the United
States.

Unfortunately, there is no systematic evidence on the propensity of MNEs to


export labour practices to developing countries.

In their 2008 study the OECD estimates the impact of foreign takeovers on a
number of working conditions, such as working hours and worker turnover and
union bargaining power. They find that working hours tend to be longer in foreign
firms in Brazil, Portugal and the United Kingdom, although this is largely due to
the specific characteristics of firms that are acquired by foreign MNEs. When
focusing on changes in ownership status, they find no effect or a slight negative
impact on working hours. However, the results are generally not statistically
significant. They also find that foreign takeovers increase worker turnover in
Portugal, but not in Brazil or Germany. This may reflect the process of
restructuring firms following an acquisition. However, it is also possible that
foreign-owned firms have higher worker turnover than domestic firms in the
longer term as MNEs tend to adjust employment levels more swiftly in response
to changes in market conditions and wages

The question whether MNEs promote better working conditions than domestic
firms is a complex one for which there is very little evidence. It appears however
that the evidence that foreign ownership affect working conditions other than
average wages is much weaker than that for raising average wages. It also
appears that the impact of foreign ownership on working conditions is not
unambiguously positive. Overall, there is little evidence to suggest that MNEs
export working conditions abroad.

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4.4.2- Measurement

Given the scarcity of relevant studies we propose to build on the OECD’s attempt
(OECD, 2008) to measure the impact of foreign ownership on non-wage working
conditions. In particular, we are concerned with identifying whether the inward
investor provides their workers with better-than-industry-average working
conditions in individual host countries.

We propose to use firm-level data from the World Bank Enterprise Survey.
Simple comparisons of working conditions vis-a-vis domestic and other foreign
firms can be conducted for selected host countries. This involves the collection
of firm-level data on (i) working hours, and (ii) worker turnover.

We believe opportunities for training and development are also part of a firm’s
working conditions. Unfortunately, no aggregate nor firm-level data are available.

5- Impact on public and governments


This report does not address this topic.

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Recommended Research Methods and Data Requirements

• Suggested Research Methodology

Table 4 on page 36 summarises the range of recommended research methods


as justified throughout the report, together with the type of data to be created or
collected. As Nestle’s impact may differ according to the type of countries it
operates within, we suggest empirical evidence should originate from 1 or 2
developed countries (e.g. the USA and the UK, where data availability
opportunities can be maximised) and 1 or 2 emerging countries (such as India
and China, two countries for which the research team has developed an
expertise of data sources and an understanding of their limitations).

Two types of research methods are suggested following our review of the
literature. Qualitative methods include consumer / worker / product and retailer
surveys. These surveys would ideally take place simultaneously in the countries
studied to maximise impact and minimise the costs associated with the data
collection process. Quantitative methods include the use of descriptive statistics,
econometric modelling and development analysis techniques as appropriate.

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© Leeds University Business School
Table 4- A Summary of Proposed Research Methods and Data Requirements
Proposed Methodology Data Availability

Consumer Impact
Consumer benefit
No methodology can provide with an accurate estimate of
consumer benefits
Lerner index of market power methodology and “straight Primary data collected through observations
line” formula, although relies on unrealistic assumptions combined with industry-level data and company
data

Value of “cash-at-hand” propositions


Case study combining 24 hours self-observation and Primary data
interviews
Consumer /product and retailer surveys combined with Primary data combined with secondary data
observations (including company data)

Industry & Competition Impact


Local firms performance benefit
Quantitative methods - econometric modelling
Firm- and industry-level secondary data typically
R&D Spillovers available
Quantitative methods - econometric modelling

Stakeholder Impact
Workers financial benefits
Quantitative methods – descriptive statistics and data Company data on wages and salaries, measures of
envelopment analysis techniques “skill mix”, input / ouput measures
Industry-level data typically available
Working conditions
Quantitative methods – descriptive statistics and Company data combined with industry-level data 39
modelling
© Leeds University Business School typically available
Qualitative methods - workers survey Primary data on training and development
Table 5 on page 37 has details of the data requirements for empirical investigation, together with primary data to be
generated.

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© Leeds University Business School
• Data requirements

This Section summarises data requirements for empirical investigation. These


are broken down according to the nature of the issue under investigation. Red
text highlights the nature of the data to be generated through primary collection.

“Cash-at-hand” products and nutrition

Data Source
Availability of ‘cash-at-hand’ products in retail Consumer survey
stores (controlling for store size and
proximity)
Expenditures for ‘cash-at-hand’ products as Consumer survey
share of total food products purchased
Nutrition levels of all food products Product survey and analysis
purchased (i.e. vitamins, minerals)
Nutrition levels of all cash-at-hand products Product survey and analysis
purchased (i.e. vitamins, minerals)

“Cash-at-hand” products and variety

Data Source
Historical and current data on product range National Statistical Bureau and
sold to retailers in the vicinity of low-income in-house
consumers
Historical and current data on product range National Statistical Bureau, in-
sold to retailers frequently visited by low- house and survey
income consumers
Historical and current data on product range Survey of retailers supplemented
offered by competitors and retailers in the by low-income consumer
vicinity of low-income consumers surveys
Historical and current data on product range Survey of retailers supplemented
offered by competitors and retailers by low-income consumer
frequently visited by low-income consumers surveys

“Cash-at-hand” products and price development

Data Source
Monthly price developments for all food National Statistical Bureau
products
Monthly price developments for all food National Statistical Bureau and
products in the categories for which cash-at- in-house data
hand products are offered
Monthly price developments for all food cash- In-house data
at-hand products
Share of monthly income spend on cash-at- Survey
hand products
Monthly gross income development for low- Survey
income consumers

Industry & Competition benefits

Data Source
Value Added Annual reports / Company House
or similar
Tangible resources Annual reports / Company House
or similar
Labour force Annual reports / Company House
or similar
Asset Value In-house
Control variables (firm size, etc.) National Statistical Bureau and
Company House
R&D In-house and Company House or
similar

Workers benefits

Data Source
Wages & Salaries In-house; UNIDO Industrial
Statistics Database; LABORSTA;
Prowess database (India) or
similar
Educational background World Bank Enterprise Survey or
similar
Skills World Bank Enterprise Survey or
similar
Gross Value Added and other measures of Prowess database (India) or
Output similar
Assets Prowess database (India) or
similar
Number of employees Prowess database (India),
Company House and similar
Training & Development Survey
Number of hours worked World Bank Enterprise Survey or
similar

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Labour turnover World Bank Enterprise Survey or
similar

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© Leeds University Business School
7- Conclusion

The impact of a multinational firm on an economy is many faceted. This report


has provided a framework for the evaluation of that impact by means of a matrix
that examines the economic/financial, knowledge transfer, innovation/renovation
and social impacts on buyers, suppliers, consumers, stakeholders, public and
government and on competition in the countries in which the multinational firm
operates. Further, it has shown that, in principle, these impacts can be measured
using tractable methods, providing that the data are available. Some of the
boxes in the "impact matrix" have been examined in a preliminary fashion. A full
analysis, and the complete estimation of their impact in any one area is beyond
the scope of this report.

The framework can be applied to any country and investor.


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Appendix

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TABLE A1- Integration of Meyer’s (2004) findings in the framework
Suppliers Buyers Competition/Industry General public/Government
Economic/ (+) “MNEs improve the (+) “[…] spillovers may arise from (+) “In a joint venture, two (+) “Greenfield projects
Financial productivity of indigenous market transaction if a buyer partners share their resources in create new businesses, and thus
firms […] by assisting values a resource more highly return for access to the partner’s have direct positive effects on
them in purchasing of raw than the price paid, known in resources. This can lead to employment and domestic value
materials.” (Meyer, 2004: economics ads the consumer mutual learning, and thus extend added” (Meyer, 2004: 265)
264) surplus” (Meyer, 2004: 260) linkages and knowledge (+/-) “Some observers fear that
(+) “FDI may increase (+) “Local firms acting as transfers in the local business the strong bargaining power of
demand for marketing outlets for foreign community.” (Meyer, 2004: 265) multinational firms vis-a`-vis their
intermediate goods, and investors may receive support […] (+) “Greenfield projects create employees, and vis-a`- vis
thus allow local suppliers by generating more economies of new businesses […] and potential host countries, leads to
to realise scale scale” Meyer, 2004: 264) increase competitive pressures a lowering of
economies” (Meyer, 2004: (+)”FDI in infrastructure and on local competitors, which may standards and wages (Cerny,
264) business services directly lead to their improving their 1994; Palley, 2002)”, but “[…]
(-) “[…] some export influences efficiency, or being forced to exit concern with global
processing operations productivity of its customers if the market.” (Meyer, 2004: 265) standardisation and the firm’s
operate in exclaves with services required by businesses (+) “[…] FDI can facilitate cluster reputation induces many MNE
few linkages to the local improve, or are newly introduced” development” (Meyer, 2004: affiliates to pay higher wages
economy. Other FDI (Meyer, 2004: 264) 267) and to
operations sell the global (+) “Local businesses can link into (+) “FDI by a lead firm may draw employ high labour standards
MNE’s products and [MNE’s] networks as other network members to the with respect to working hours,
services to the local subcontractors or as original same sick leave, child labour,
market, with or without equipment manufacturers.” location, and thus create a unionization etc. (Caves, 1996:
local processing.” (Meyer, (Meyer, 2004: 264) larger impact than the initial 228; Moran, 2002).” (Meyer,
2004: 266) (-) “In extreme cases, the balance investment alone.” (Meyer, 2004: 270).
of benefits might even be 2004: 267)
negative for local partners facing
asymmetric
information and high sunk costs. If
local firms invest heavily in fixed
equipment, but the price is
subsequently driven down to
marginal costs due to additional
entry, local firms may not be able
to recover their initial investment
and may thus be worse off.”
(Meyer, 2004: 269)
(+) “MNEs may […] supply
intermediate goods and

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machinery of better quality, and
with more comprehensive after-
sales services than provided by
previous local suppliers.” (Meyer,
2004: 264)
Educational “MNEs improve the (+) “Local firms acting as (+) “Demonstration effects work (+/-) “Foreign investors may
productivity of indigenous marketing outlets for foreign through the direct contact influence the institutional
firms […] by helping in investors may receive support in between local agents and an development, but at the same
management and the form of MNE operating at different levels time they adjust to local
organisation” (Meyer, training in sales techniques and of technology. After observing a institutions.” (Meyer, 2004: 271)
2004: 264) supply of sales equipment” product innovation or a novel
“MNEs improve the (Meyer, 2004: 264) form of organisation adapted to
productivity of indigenous local conditions, local
firms by […] training of entrepreneurs may recognise
employees to increase the their feasibility, and thus strive to
quality of suppliers’ imitate them.” (Meyer, 2004:
products […]”(Meyer, 262)
2004: 264) (+) “MNEs build local human
capital through training of local
employees, yet these highly
skilled individuals may move to
locally owned firms or start their
own entrepreneurial businesses.
[…] If these employees then
move to local firms, they can
take some of this tacit
knowledge with them, thus
enhancing productivity
throughout the economy”
(Meyer, 2004: 262)
(+) “entrepreneurial activity by
individuals leaving a foreign-
owned affiliate to establish their
own business generates
potentially large spillovers.”
(Meyer, 2004: 267)
Technological “MNEs improve the (+/-) “Some observers are
productivity of indigenous concerned that MNEs crowd out
firms by providing local entrepreneurs, or at least
technical assistance” inhibit the emergence of locally

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(Meyer, 2004: 264) controlled MNEs. However, FDI
can also act as a stimulus to
evolutionary processes of
resource creation by promoting
innovation and discovery (Kogut,
1996).” (Meyer, 2004: 267)
Environmental/ (+/-) “Some authors stress the
Social transfer of modern,
environmentally friendly
technology and production
processes by MNEs, which
improve
the standards prevalent in the
host economy – a pollution halo
effect. Other scholars are
concerned that MNEs choose to
transfer outdated technology to
locations with less stringent
environmental regulation – a
pollution haven effect.” (Meyer,
2004: 269)

Source: Adapted from Meyer (2004)

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