Transcript International Economics

Foreign Direct Investment
- Effects Ivar Bredesen
Associate Professor
Oslo University College
Assessing the consequences of
MNE activity
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Topics to be discussed
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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 ?
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The Big Questions
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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 labor fashioned
or influenced by foreign MNE activity ?
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Hostility is the order of the
day (or has been, at least)
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Many politicians have been extremely
critical of MNE – activity
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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”
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Effects which need to be
considered
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Resource transfer effects
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Trade and balance of payments effects
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initial inflow and subsequent flows
Competitive and anti-competitive effects
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supply of capital, technology and management
MNEs operate in oligopolistic markets
Sovereignty and autonomy effects
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There may be some loss of national autonomy
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We can draw one lesson…
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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 undertaken
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A change of hart ?
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In the last decade or two, MNE activity
has been more favourably assessed
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their impact on development may be
positive after all
“multinationals – come back”
why this change of hart ?
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More faith in the market
system ?
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From a country`s perspective
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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
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Maybe firms behave differently
too…
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Dunning asserts that
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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. have decreased
there is a trend towards global networks –
alliance capitalism
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Do you agree ?
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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”
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Two statements, here nr. 1
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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
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Two statements, here nr. 2
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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
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The major benefit of FDI ?
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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 ?
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How can countries become
more competitive ?
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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
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Michael Porters diamond
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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
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Factor conditions
Demand conditions
Related and supporting industries
Firm strategy, structure and rivalry
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Firms competitiveness
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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
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Costs of FDI
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Payments (profits, interest, dividends
etc. which have to be made to attract
FDI
Behaviour of firms produce unwelcome
effects
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Some determinants of the
benefits
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We have to look at the motives behind
the investment being undertaken
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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
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Resource seeking investments
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Provides complimentary assets
(technology, management)
Provides access to foreign markets
Raises standard of product quality
May (or may not) foster clusters
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Market seeking investments
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Backward supply linkages and clusters
Stimulates local entrepreneurship and
domestic rivalry
Raises domestic consumers
expectations of indigenous competitors
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Efficiency seeking investments
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Improves international division of labour
and cross-border networking, supports
comparative advantage of host country
Provides access to foreign markets
Aids structural adjustment
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Strategic asset seeking
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Provides finance and complementary
assets
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There is no such thing as a
free lunch
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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
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