Transcript Introduction

Chapter 22: International
Production and Development
An Introduction to International
Economics: New Perspectives on the
World Economy
© Kenneth A. Reinert, Cambridge University
Press 2012
Analytical Elements
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Countries
Sectors
Tasks
Firms
Factors of production
© Kenneth A. Reinert, Cambridge University
Press 2012
Introduction
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What makes a developing country attractive to
multinational enterprises (MNEs) as a potential
destination for international production in the form of
contracting or FDI?
We know from Chapter 10 and our discussion of the OLI
framework that location advantages matter for MNE
choices
So we can rephrase our question in terms of what types
of location advantages matter for developing countries to
be able to attract international production
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Domestic or adjacent markets for market seeking FDI
Particular types of resources for resource seeking FDI
© Kenneth A. Reinert, Cambridge University
Press 2012
Patterns of FDI in Developing Countries
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Natural resource or resource-based FDI
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The MNE wants access to the resource and the host country
government needs to manage this so as to share in the income
for the benefit of the country
Domestic market serving FDI and export processing
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Institutional quality can matter, including democracy, good
governance and lack of corruption
Intellectual property protection can matter in order for MNEs to
avoid dissemination risk
Bilateral investment treaties (BITs) and regional investment
treaties (RITs) can also help facilitate FDI inflows
BITs have grown rapidly over time, from approximately 400 in
1990 to approximately 2600 in 2008
© Kenneth A. Reinert, Cambridge University
Press 2012
Benefits and Costs
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It is helpful to have a sense of the potential benefits and
costs of hosting MNEs
Table 22.1 gives a sense of these, for each of the
following dimensions
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Employment and wages
Competition
Education and training
Technology
Balance of payments
Health and the environment
Culture
© Kenneth A. Reinert, Cambridge University
Press 2012
Table 22.1: The Benefits and Costs of
Inward FDI
Item
Benefits
Costs
Employment
and Wages
Generate direct and indirect
increases in employment. Might
offer higher wages.
Transfer jobs from home to foreign
firms.
Competition
Promote competition by increasing
the number of firms in an industry.
Retard competition in cases where
the foreign firm has a large amount of
market power.
Education
and Training
Improve the education and training
of host country workers.
Restrict education and training to
expatriate employees. Discriminate
against host-country workers.
Technology
Transfer technology from developed
to developing countries.
Technology employed might not be
appropriate for the host country
economy.
Sources: Adapted from Dunning and Lundan (2008) and Hill (2009)
© Kenneth A. Reinert, Cambridge University
Press 2012
Table 22.1: The Benefits and Costs of
Inward FDI
Item
Benefits
Costs
Balance of
Payments
Improve the import and export
components of the current account.
Improve the direct investment
component of the capital/financial
account.
Worsen the import component
of the current account. Worsen
the net factor receipt
component of the
capital/financial account.
Health and
the
Environment
Employ new technology that is more
environmentally sound. Increase
incomes and thereby make more
resources available for the enforcement
of existing environmental regulations.
Increase the amount of
pollution and subject workers to
unsafe workplaces.
Culture
Introduce progressive aspect of business Increase dominance of urban
and Western culture over rural
culture in the areas of organizational
and non-Western culture.
development and human resource
management.
Sources: Adapted from Dunning and Lundan (2008) and Hill (2009)
© Kenneth A. Reinert, Cambridge University
Press 2012
Policy Stances
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Given the information in Table 22.1, it is natural to
consider how to minimize the costs and maximize the
benefits of the FDI
Attempts to achieve this are usually made through policy
stances towards the MNE that can be grouped into
ownership requirements and performance requirements
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Ownership requirements may be absolute as in the case of
foreign firms being excluded from certain sectors on national
security grounds, or they may simply limit foreign ownership to a
maximum specified amount
Performance requirements place controls on the behavior of the
foreign firm in a number of areas, including local content
requirements, training, technology transfer, exports, local
research and development, and the hiring of local managers
© Kenneth A. Reinert, Cambridge University
Press 2012
Trade-Related Investment Measures (TRIMs)
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The Marrakesh Agreement on Trade in Goods (see
Chapter 7) included an Agreement on TRIMs, which
prohibits some types of TRIMs in the case of goods
(Table 22.3)
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These include domestic content, trade balancing, foreign
exchange balancing, and domestic sales requirements
Export performance requirements were not prohibited
Investment related policies in services are covered under
the General Agreement on Trade in Services (GATS)
Controversially, Some international economic policy
experts are now calling for policies that would go beyond
TRIMs to require the abandonment of all policies that
discriminate between domestic and foreign firms
© Kenneth A. Reinert, Cambridge University
Press 2012
Table 22.3: Types of Trade-Related
Investment Measures
Measure
Explanation
Comment
Local content
requirement
Requires that a certain amount of local input be used in
production.
Prohibited by TRIMs
Trade balancing
requirement
Requires that import be a certain proportion of exports.
Prohibited by TRIMs
Foreign exchange
balancing
requirement
Requires that use of foreign exchange for importing be
Prohibited by TRIMs
a certain proportion of exports and the foreign exchange
brought into the host country by the firm.
Domestic sales
requirement
Requires that a proportion of output be sold locally.
Manufacturing
requirement
Requires that certain products be manufactured locally.
Manufacturing
restriction
Prohibits the manufacturing of certain products in the
host country.
Sources: Low and Subramanian (1996) and UNCTAD (2003)
© Kenneth A. Reinert, Cambridge University
Press 2012
Prohibited by TRIMs
Table 22.3: Types of Trade-Related
Investment Measures
Measure
Explanation
Comment
Export performance
requirement
Requires that a certain share of output be exported.
Prohibited or
discouraged by many
BITs and RITs
Exchange restriction Limits a firm’s access to foreign exchange.
Technology transfer
requirement
Requires that certain technologies be transferred or that
certain R&D functions be performed locally.
Licensing
requirement
Remittance
restriction
Local equity
requirement
Requires that the foreign firm license certain technologies
to local firms.
Limits the right of the foreign firm to repatriate profits.
Restricts the amount of a firm’s equity that can be held by
local investors.
Sources: Low and Subramanian (1996) and UNCTAD (2003)
© Kenneth A. Reinert, Cambridge University
Press 2012
Prohibited or
discouraged by many
BITs and RITs
Prohibited or
discouraged by many
BITs and RITs
Export Processing Zones
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Another policy stance towards hosting MNEs is to set up
an export processing zone or EPZ
An EPZ is an area of the host country in which MNEs
can locate and in which they enjoy, in return for
exporting most or the whole of their output, favorable
treatment in the areas of infrastructure, taxation, tariffs
on imported intermediate goods, and labor cost
Table 22.4 gives a sense of the number and extent of
EPZs, with 3,000 of them in existence in 2006
In most cases, EPZs involve relatively labor-intensive,
“light” manufacturing such as textiles, clothing, footwear,
and electronics
© Kenneth A. Reinert, Cambridge University
Press 2012
Table 22.4: Export Processing Zones
1975
1986
1997
2002
2006
Number of
countries with
EPZs
25
47
93
116
130
Number of
EPZs
79
176
845
3,000
3,000
Employment
(millions)
NA
NA
23
43
66
Employment
accounted for
by China
(millions)
NA
NA
18
30
40
Source: Singa Boyenge (2007)
© Kenneth A. Reinert, Cambridge University
Press 2012
Export Processing Zones
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A number of studies have tried to assess EPZs from the
benefit and cost framework of Table 22.1
These studies show that in many (but not all) cases, the
benefits do outweigh the costs
Some studies have shown that EPZs are an important
source of employment
In some cases, infrastructure costs of setting up the EPZ
were too high for a net positive benefi
In some cases, EPZs were helpful in diversifying the
industrial structure of the country and attracting FDI
© Kenneth A. Reinert, Cambridge University
Press 2012
Promoting Linkages
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It is possible for MNEs to leave some parts of the
upstream components of the GPN to other firms, but
chose to buy from local firms in the country in which it is
located
This is known as backward linkages to domestic
suppliers
Historically, backward linkages have been weak
The increased role of MNEs in an economy without
significant backward linkages results in what are termed
enclaves with little connection to the rest of the economy
and little contribution beyond direct employment effects
© Kenneth A. Reinert, Cambridge University
Press 2012
Promoting Linkages: Traditional and New
Approaches
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Traditionally, the means to avoid enclave FDI was via
the local content requirements discussed in the previous
section, but these are no longer allowed for WTO
members
New thinking in the area of facilitating backward
linkages suggests that local content requirements should
be replaced by efforts to support local suppliers in their
efforts to secure contracts with foreign MNEs
If a foreign MNE can be induced to source inputs locally
rather than by importing them, the host country can gain
a number of important benefits
© Kenneth A. Reinert, Cambridge University
Press 2012
Promoting Linkages: Potential Benefits
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The potential benefits of promoting backward linkages
from MNEs to domestic firms include
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Employment can increase since the sourced inputs are new
production
The balance of payments can improve since the inputs will no
longer be imported
Production technologies can be better adapted to local
conditions
Tangible and intangible assets can be, to some degree at least,
passed from the foreign MNE to the local, host-country suppliers,
and local suppliers can coalesce into a spatial cluster that
supports innovation and upgrading
© Kenneth A. Reinert, Cambridge University
Press 2012
Promoting Linkages: How To Do It
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The key policy question for developing countries is how
to foster backward linkages between foreign MNEs and
potential local suppliers
The role government is one of coordination, attempting
to bridge the “information gaps” among the players
The government can do this in a number of ways
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Provide a matching service between MNEs and local suppliers
Provide support in standards formation, materials testing, and
patent registration
Provide technical training and managerial training
Remove small firms’ obstacles to access to financial resources
© Kenneth A. Reinert, Cambridge University
Press 2012
Transfer Pricing
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Transfer pricing practices reflect the fact that MNEs are
global, whereas tax systems are locally defined
MNEs can therefore adjust the internal pricing of their
intra-firm trade to shift declared profits of subsidiaries to
low-tax countries
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The goal is to maximize the post-tax profits of the firm
Policy options to address transfer pricing abuses are
multifaceted
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International guidelines and codes of conduct, international
standardization of invoicing and customs procedures, global tax
harmonization, negotiating and concluding international
conventions, and the establishment of international arbitration
procedures
© Kenneth A. Reinert, Cambridge University
Press 2012
Governance of International Production
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Policy postures towards MNE behavior involve
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Constraining the policies of host countries towards MNEs
Constraining the behavior of the MNEs themselves
In the realm of the former, the Organization for Economic
Cooperation and Development (OECD) has promoted
multinational approaches to FDI governance
In 1995, the OECD promoted a Multilateral Agreement
on Investment or MAI
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The purpose of the agreement was to liberalize the cross-border
flows of foreign direct investment
It would have required host countries to apply “national treatment”
to all foreign firms
This effort failed due to a lack of support
© Kenneth A. Reinert, Cambridge University
Press 2012
Governance of International Production
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The second issue is the multilateral regulation of MNE
conduct
A number of guidelines exist such as the World Bank’s
Equator Principles, the Extractive Industries
Transparency Initiative, and Publish What You Pay
But the most general guidelines are the OECD’s
Guidelines for Multinational Enterprises, developed in
1976, revised in 2000 and currently under revision again
See the appendix to this chapter for a list of the OECD
Guidelines
© Kenneth A. Reinert, Cambridge University
Press 2012