Abstract: I develop a dynamic general equilibrium model to understand how multinationals affect host
countries through knowledge diffusion. Workers in the model learn from their managers and knowledge diffusion takes place through worker mobility. Unlike in a model without learning, I present a novel mechanism through which an integrated equilibrium represents a Pareto improvement for the host country. I go on to explore other dynamic consequences of integration. The entry of multinationals makes the lifetime earning profiles of host country workers steeper. At the same time, if agents learn fast enough, integration creates unequal opportunities, thereby widening inequality. The ex-workers of foreign multinationals also found new firms which are, on average, larger than the largest firms under autarky.
Keywords: Multinationals, knowledge diffusion, learning, worker mobility, Pareto improvement, spin-offs.
JEL Classification: F15, F23, F40