Assessing the consequences of MNE activity

1
Assessing the consequences of MNE activity

• Topics to be discussed
• How can multinational enterprises (MNEs) affect
  economic welfare ?
• Which effects should we look for ?
• Are the effects good or bad ?
• How can the MNEs be controlled ?

2
The Big Questions

• Is the impact of FDI on economic welfare a good
  or bad thing ?
• If it is good, how can it become even better ?
• Do we wish our country to be tied to an
  international division of labour fashioned or
  influenced by foreign MNE activity ?

3
Hostility is the order of the day (or has been,
at least)

• Many politicians have been extremely critical of
  MNE activity
• These are large and very powerful companies
  exploiting poor countries
• Companies are footloose their bargaining power
  is very strong
• Companies have often been seen as instruments in
  new colonialisation

4
Effects which need to be considered

• Resource transfer effects
• supply of capital, technology and management
• Trade and balance of payments effects
• initial inflow and subsequent flows
• Competitive and anti-competitive effects
• MNEs operate in oligopolistic markets
• Sovereignity and autonomy effects
• There may be some loss of national autonomy

5
We can draw one lesson

• Literally thousands of studies have been carried
  out to investigate these questions, but there is
  no satisfactory general answers to these
  questions
• Impacts will depend on country-, industry and
  firm specific characteristics and the kind of FDI
  being underaken

6
A change of hart ?

• In the last decade or two, MNE activity has been
  more favourably assessed
• their impact on development may be positive after
  all
• multinationals come back
• why this change of hart ?

7
More faith in the market system ?

• From a countrys perspective
• renaissance of the market system
• globalisation of economic activity
• enhanced mobility of wealth creating assets
• many countries reaching the take off stage in
  economic development
• convergence of economic structures
• changing criteria for evaluating FDI
• better appreciations of the costs and benefits

8
Maybe firms behave differently too

• Dunning asserts that
• firms need to exploit global market to cover R
  D costs
• competitive pressures for cheaper raw materials
  and lower cost of production
• transports costs etc. has decreased
• there is a trend towards global networks
  alliance capitalism

9
Do you agree ?

• Dunning (p. 212) In the 1990s, MNEs are the main
  producers and organisers of the knowledge based
  assets now primarily responsible for advancing
  global economic prosperity, and they are the
  principal cross border disseminators of the
  fruits of these assets

10
Two statements, here nr. 1

• History and geography matter. Policy makers
  should seek to learn from their successes and
  failures of the past, and from those of other
  countries. But, they should not be slaves to
  these successes and failures. In the light of the
  perceived contributions of FDI, they should
  devise and implement the macro organisational
  strategies most suited to their own unique
  situations and needs

11
Two statements, here nr. 2

• Policy makers should be cautious about expecting
  easy generalisations about the consequences of
  FDI. Not only will its effects vary according to
  the kinds of FDI undertaken, but they will depend
  on the economic and other objectives set by
  governments, the economic policies pursued by
  them, and the alternatives to FDI open to them

12
The major benefit of FDI ?

• FDI should be evaluated based on its contribution
  to the improvement of the competitiveness of the
  resources and asset-creating capabilities located
  within their areas of jurisdiction
• Is this the single most important objective for
  many governments in the short and long term ?

13
How can countries become more competitive ?

• Increased efficiency and more effective quality
  control
• Innovate new products, processes and
  organisational structures
• Improve resource allocation
• Capture new markets
• Reduce cost or increase speed of structural
  adjustment

14
Michael Porters diamond

• A strongly competitive home market can sharpen a
  firms competitive advantage relative to firms
  located in less competitive home markets. The
  diamond has four components
• Factor conditions
• Demand conditions
• Related and supporting industries
• Firm strategy, structure and rivalry

15
Firms competitiveness

• Success of a firm to compete in a particular
  industry depends partly on the availability of
  factors of production
• Countries which are either naturally endowed with
  the appropriate factors or are able to create
  them, will probably spawn firms which are both
  competitive at home and potentially competitive
  abroad

16
Costs of FDI

• Payments (profits, interest, dividends etc. which
  have to be made to attract FDI
• Behaviour of firms produce unwelcome effects

17
Some determinants of the benefits

• We have to look at the motives behind the
  investment being undertaken
• Resource seeking investments
• Market seeking investments
• Efficiency seeking investments
• Strategic asset seeking
• The first two have often been motives for initial
  FDI, and the last two for sequential FDI

18
Resource seeking investments

• Provides complimentary assets (technology,
  management)
• Provides access to foreign markets
• Raises standard of product quality
• May (or may not) foster clusters

19
Market seeking investments

• Backward supply linkages and clusters
• Stimulates local entrepreneurship and domestic
  rivalry
• Raises domestic consumers expectations of
  indigenous competitors

20
Efficiency seeking investments

• Improves international division of labour and
  cross-border networking, supports comparative
  advantage of host country
• Provides access to foreign markets
• Aids structural adjustment

21
Strategic asset seeking

• Provides finance and complementary assets

22
There is no such thing as a free lunch

• All good things have to be paid for
• Is the price attached to FDI a fair one ?
• It is very difficult to formulate policies for
  FDI activity when costs and benefits are not
  known
• Again each case has to be judged on its own
  merits