The role of relatedness and strategic linkages between domestic and MNE sectors in regional branching and resilience

TL;DR

This paper investigates how multinational enterprises influence domestic industry dynamics and regional resilience in Ireland, emphasizing knowledge spillovers, industry relatedness, and the impact of Brexit diversification funds.

Contribution

It introduces two new cohesion measures, weighted closeness and strategic closeness, to quantify industry relatedness and examines their effects on domestic industry entry and exit.

Findings

Domestic industries more likely to enter and less likely to exit related sectors.

Negative impact of MNE-exclusive industries on domestic entry and survival.

Brexit funds in 2017-18 temporarily altered industry dynamics.

Abstract

Despite the key role of multinational enterprises (MNEs) in both international markets and domestic economies, there is no consensus on their impact on their host economy. In particular, do MNEs stimulate new domestic firms through knowledge spillovers? Here, we look at the impact of MNEs on the entry and exit of domestic industries in Irish regions before, during, and after the 2008 Financial Crisis. Specifically, we are interested in whether the presence of MNEs in a region results in knowledge spillovers and the creation of new domestic industries in related sectors. To quantify how related an industry is to a region's industry basket we propose two cohesion measures, weighted closeness and strategic closeness, which capture direct linkages and the complex connectivity structure between industries in a region respectively. We use a dataset of government-supported firms in Ireland (covering 90% of manufacturing and exporting) between 2006-2019. We find that domestic industries are both more likely to enter and less likely to leave a region if they are related to so-called 'overlapping' industries containing both domestic and MNE firms. In contrast, we find a negative impact on domestic entry and survival from cohesion to 'exclusive MNE' industries, suggesting that domestic firms are unable to 'leap' and thrive in MNE-proximate industries likely due to a technology or know-how gap. This dynamic was broken, with domestic firms entering MNE exclusive sectors, by a large injection of Brexit diversification funds in 2017-18. Finally, the type of cohesion matters. For example, strategic rather than weighted closeness to exclusive domestic sectors matters for both entries and exits.