The Importance of Multinational Companies for Global Economic Linkages

We investigate to what extent the expansion of FDI and the internationalization of production can be related to the recent phenomenon of more synchronized business cycles. We first focus on the relationship between bilateral FDI positions and cross-country output correlations in the period 1982-2001. We find that countries that have comparatively intensive FDI relations exhibit a greater degree of output comovement, and that this positive association seems to become stronger over time. We then present evidence that international rent sharing might be an important aspect of global economic linkages. German, French, Belgian and Dutch labour markets are significantly affected by profits of foreign-based multinationals, with employment being more sensitive than wages. By contrast, US and UK labour market conditions do not, or hardly, react to changes in foreign profitability.