Working Paper No. 02-22

Quality Requirements of Multinational Firms and Technological Change in Developing Countries
Galina An
September 2002

ABSTRACT

This paper explores how quality standards imposed by the subsidiaries of multinational enterprises on local suppliers can trigger adoption of better techniques and processes in local intermediate goods industries thereby increasing the technological capability of the host country. The model includes the possibility that the local suppliers might improve quality of the product beyond the required threshold, a situation widely described by the empirical literature. The model shows that hte decision to invest in quality improvements depends on the profitability of the venture, which in turn is a function of prices for final goods, intermediate content in final goods production as well as the cost of production and investment. If a host country is backward, which implies a very high investment costs, the investment liberalization might not bring any changes to the economy. The host government as well as multinational firms can improve the situation by providing technological and/or financial assistance.

JEL classification: F15, F21, F23, O31, O33.
Keywords: technological spillovers, foreign direct investment, quality improvement.

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