Blog: The closure of Multinational Subsidiaries: Is there a silver lining?

Vinci-researcher Pedro de Faria

Multinational companies often reorganize their internal structure and move activities from one country to another in order to improve their overall performance. These internal reorganizations imply the opening of subsidiaries in countries that provide more growth opportunities and the closure of subsidiaries that are comparatively less productive than their counterparts. But what is the effect of a closure for the employees working at the closed subsidiary?

A closure of a subsidiary is an event that has deep economic and societal impact in the affected region since it often leaves a shadow of unemployment. Therefore, it is not surprising that the departure of multinationals motivates outrage and public protests in many countries. The decision of pharmaceutical company Merck Organon to close its R&D center in the Netherlands, Nokia shifting mobile phone manufacturing from Germany to Romania, and Deutsche Post closing its logistics center at Wilmington Airpark in Ohio are examples of closure decisions by multinationals that were impactful and gained great media attention.

The aim of a research project conducted by the Department of Innovation Management and Strategy of the University of Groningen in collaboration with researchers from the Copenhagen Business School and the University of Lisbon is to look at a less visible (yet brighter) side of the closure of multinational subsidiaries: the existence of potential benefits for the local economy. Using data from Portugal, the project studies the career path of employees that lost their jobs when a multinational decides to close the subsidiary where they worked and how local firms can benefit from them.

Employees of multinational subsidiaries have acquired throughout their careers at the multinational knowledge, skills, and abilities that may not otherwise be readily available in the host country and might be very relevant for local firms. Preliminary results of the project provide evidence that employees that come from closing multinationals are swiftly hired by local firms with salaries comparative higher than the ones from their counterparts from domestic firms. Workers coming from a closing multinational earn, in their new jobs, a salary that is on average almost twice the salary of workers coming from closing domestic firms. Therefore, the knowledge acquired by workers employed by a multinational is highly valued by local firms and is beneficial to the local economy.

We found evidence that the closure of a multinational subsidiary has a silver lining: it creates a pool of skilled workers who will contribute to the local economy by transferring the knowledge they acquired at the multinational to improve the competiveness of local firms. That is, these results show that the closure of multinational subsidiaries which often have very negative effects on local communities in the short run may have positive and multiplicative effects in the long run.

To learn more about this topic we suggest you to read the article: W. Sofka, M. T. Preto and P. de Faria, “MNC subsidiary closures: What is the value of employees' human capital in new jobs?”, Journal of International Business Studies, vol. 45 (2014), pp. 723-750.

Want to know more? Don’t hesitate to contact the author of this post: Pedro de Faria, p.m.m.de.faria rug.nl