Assessing the consequences of MNE activity

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 ?

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 ?

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”

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

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

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 ?

More faith in the market system ? • From a country`s 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

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

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”

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

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

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 ?

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

Michael Porters diamond • A strongly competitive home market can sharpen a firm`s 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

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

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

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

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

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

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

Strategic asset seeking • Provides finance and complementary assets

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

Assessing the consequences of MNE activity