Multinationals and the local economy: Implications for the Dutch ‘Topsectoren’ Policy

The Dutch government has the aim to invest substantially in industrial sectors which have a comparative advantage, are relatively competitive and are internationally oriented. More than half a billion euro will be invested in nine ‘topsectoren’, including horticulture, life sciences and health, high-tech industries, and somewhat surprisingly, multinational headquarters. The idea of the somewhat distinct latter category is that multinational headquarters contribute to a favourable economic image of the Dutch economy and generates employment. To attract and keep multinational headquarters, the government aims to generate a good atmosphere to do business. It is argued that tax, talent (highly-educated workforce) and infrastructure are crucial determinants of headquarters’ location choices.

Economists usually argue that policies are only justified if there are externalities. Hence, if every euro invested just leads to an additional euro increase in profits of a multinational corporation, the subsidy does not make much sense from a social welfare point of view. However, if every euro invested creates additional benefits for the local economy, it may be interesting to invest in attracting and keeping multinational firms (and headquarters).

Although it is almost impossible to exactly quantify the wider economic benefits of multinationals, a  forthcoming study by Jacobs, Koster and Van Oort has analysed whether multinational corporations yield benefits for the local economy. More specifically, we investigate whether there are more start-ups of business services in locations with more headquarters in the vicinity. The idea is that business services and multinationals may benefit from each other’s presence, resulting in innovations and new firm formation. Service innovation relies on close interaction and on customer-specific products, which is facilitated by geographical proximity. Locations that host multinationals are reservoirs of human capital, increasing the likelihood of new firm formation through spin-offs.

The paper uses micro-data on firm locations from the employment register LISA and the Dutch national agency for foreign direct investment (NFIA). Below, you may find maps with the clustering of business services and multinationals in the Noordvleugel of the Randstad. We mapped the location pattern of business services and multinational enterprises. Business services are primarily concentrated in the major cities of Amsterdam and Utrecht and to a lesser extent in the medium-sized cities of Haarlem and Almere. We see a strong clustering in the city centre of Amsterdam. The pattern of agglomeration of multinationals is somewhat similar . However, we also observe notable differences. For example, multinationals are more agglomerated near the international airport Schiphol and in the south of Amsterdam. Schiphol may be a favourable location because it implies a better connection with global cities such as London and New York.

We did some econometric analyses to verify whether multinationals generate more start-ups of business services and this seems to be the case. The results suggests that doubling the employment in multinational corporations generates about 4-13% more start-ups. The effect is particularly pronounced for marketing and IT services and not so important for R&D firms. The latter in line with the expectations that R&D prefer proximity to research universities, which is also confirmed by the results. Moreover, it seems that business services that are located close to multinationals have a higher survival probability.

To conclude, based on this research, that the Dutch Topsectoren policy aiming to attract multinational headquarters makes sense is too early, but at least, it seems that multinationals generate some additional employment up and above their own workforce and lead to some measurable benefits for the local economy.