the effects of tncs’ activities0

8/2/2019 The Effects of TNCs activities0

1/38

The Effects of TNCs activities


2/38

What is foreign direct investment?

Foreign direct investment (FDI) occurs when a firminvests directly in new facilities to produce and/or marketin a foreign country

Once a firm undertakes FDI it becomes a multinational

enterprise

There are two forms of FDI

A greenfield investment(the establishment of a whollynew operation in a foreign country)

Acquisition or merging with an existing firm in theforeign country


3/38

MNC economic power


4/38

Foreign direct investment

Foreign direct investment reflects the objective of obtaininga lasting interest by a resident entity in one economy(direct investor) in an entity resident in an economyother than that of the investor (direct investment

enterprise). The lasting interest implies the existence ofa long-term relationship between the direct investor andthe enterprise and a significant degree of influence onthe management of the enterprise. Direct investmentinvolves both the initial transaction between the two

entities and all subsequent capital transactions betweenthem and among affiliated enterprises, both incorporatedand unincorporated.


5/38

OECD recommends that a direct investment enterprise be defined as anincorporated or unincorporated enterprise in which a foreign investor owns10 per cent or more of the ordinary shares or voting power of anincorporated enterprise or the equivalent of an unincorporated enterprise.

The numerical guideline of ownership of 10 per cent of ordinary shares orvoting stock determines the existence of a direct investment relationship.An effective voice in the management, as evidenced by an ownership of atleast 10 per cent, implies that the direct investor is able to influence orparticipate in the management of an enterprise; it does not requireabsolute control by the foreign investor.

Direct investment enterprise


6/38

Some countries may consider that the existence of elements of a directinvestment relationship

may be indicated by a combination of factors such as:a) representation on the board of directors;b) participation in policy-making processes;c) material inter-company transactions;d) interchange of managerial personnel;e) provision of technical information;f) provision of long-term loans at lower than existing market rates.

Other relationships may exist between enterprises in differenteconomies which exhibit the characteristics set out above, althoughthere is no formal link with regard to shareholding. For example, twoenterprises, each operating in different economies, may have acommon board and common policy making and may share

resources including funds but with neither having a shareholding inthe other of 10 per cent or more. In such cases where neither is adirect investment enterprise of the other, the transactions could betreated as between related subsidiaries. These are not regarded asdirect investment.


7/38

Main Types of FDI Resource seeking

FDI in natural resources (minerals, raw materials,and agricultural products) FDI seeking low-cost or specialized labor . Market seeking

FDI into markets previously served by exports,or into closed markets protected by high importor other barriers

FDI by supplier companies following their

customers overseas FDI that aims to adapt products to local tastesand needs, and to use local resources


8/38

Efficiency seeking

Rationalized or integrated operations(regionally/globally) leading to cross-border product or process specialization.

Strategic asset seeking

Acquisitions and alliances to promotelong-term corporate objectives.


9/38

Most FDI in developing and transitioneconomies is resource seeking.

This type of investment aims to exploit acountrys comparative advantage.

For instance, countries rich in primary materials,

such as oil or minerals, will attract companiesseeking to develop these resources.

Low-cost or specialized labor are two otherfactors that attract resource-seeking FDI.

Resource-seeking FDI is generally used toproduce goods for export.


10/38

Market-seeking investment is aimed atreaching local or regional markets, often

including neighboring countries. Companies making this type of investment

typically manufacture a wide variety ofhousehold consumer products or other types ofindustrial goods in response to actual or futuredemand for their products.

In some cases, market-seeking FDI occurs as

supplier companies follow their customersoverseas. For example, an auto componentsmanufacturer may follow a car producer.


11/38

Efficiency-seeking FDI frequently occursas a follow-on form of investment.

A TNC may make a number of resource-or market-seeking investments, and overtime, it may decide to consolidate theseoperations on a product or process basis.

Companies are able to do this, however,only if cross-border markets are open andwell developed.

As a result, this form of FDI is mostcommon in regionally integrated markets,most notably in Europe and Asia.


12/38

Strategic asset-seeking FDI occurs whencompanies undertake investments,

acquisitions or alliances to promote theirlong-term strategic objectives.

For example, a TNC may form a strategic

alliance with a company based in anothercountry to jointly undertake mutuallybeneficial R&D.

Strategic asset-seeking FDI is common inindustrialized countries.


13/38

The key factors by which differentlocations are rated can be broken into

general categories.

Market characteristics (local and regional)

Costs (including labor, transport and otherinputs)

Natural resources (availability and quality)

Infrastructure

Policy framework

Business support and promotion
http://www.fdipromotion.com/toolkit/Documents/1/Module1-1.pdfhttp://www.fdipromotion.com/toolkit/Documents/1/Module1-1.pdf


14/38

The importance of each of these factorsvaries, according to the type of investment.

For example, resource-seeking TNCsexamine closely the availability and qualityof natural resources.

Other important factors, such as thecountrys basic infrastructure; economic,

political, and social stability; and policy

framework are then evaluated.


15/38

Foreign Direct Investmentin the World Economy

Historically, most FDI has been directed at thedeveloped nations of the world, with the UnitedStates being a favorite targetFDI inflows have remained high during the early

2000s for the United States, and also for theEuropean UnionSouth, East, and Southeast Asia, and particularlyChina, are now seeing an increase of FDI inflows

Latin America is also emerging as an importantregion for FDI


16/38

Foreign Direct Investmentin the World Economy

The majority of cross-border investment involvesmergers and acquisitions rather than greenfieldinvestments

Firms prefer to acquire existing assets because: it is easier, faster, and perhaps less risky for a firm to acquiredesired assets than build them from the ground up

firms believe that they can increase the efficiency of an acquiredunit by transferring capital, technology, or management skills

In the last two decades, there has been a shift towardsFDI in services


17/38

The Direction of FDI

Figure 7.3: FDI Inflows by Region ($ billion),1995-2006


18/38

Economic Rationale for FDI: acloser look

Why would a firm go to all the trouble andexpense of setting up operations in aforeign country?

FDI is expensive because a firm must bear thecosts of establishing production facilities in aforeign country or of acquiring a foreignenterprise

FDI is risky because of the problems associatedwith doing business in another culture where therules of the game may be different


19/38

Why Foreign Direct Investment?

Why do firms choose FDI instead of:

exporting - producing goods at home and thenshipping them to the receiving country for sale

or

licensing - granting a foreign entity the right toproduce and sell the firms product in return for

a royalty fee on every unit that the foreign entitysells


20/38


An export strategy can be constrained bytransportation costs and trade barriers

Foreign direct investment may be undertakenas a response to actual or threatened tradebarriers such as import tariffs or quotas


21/38


Theory suggests that licensing has three majordrawbacks:

1. It may give away valuable technological know-how

2. It does not give a firm tight control overoperations

3. The firms competitive advantage may not beamenable to licensing


22/38

Host-Country Benefits

Inward FDI has four main benefits:

1.resource transfer effects -

FDI can make a positive contribution to a host

economy by supplying capital, technology, andmanagement resources that would otherwisenot be available

2.employment effects FDI can bring jobs to a host country that wouldotherwise not be created there


23/38

Host-Country Benefits

3.balance of payments effects

FDI can help a country to achieve a currentaccount surplus if the FDI is a substitute for

imports of goods and services, and if the MNEuses a foreign subsidiary to export goods andservices to other countries

4.effects on competition and economic growth

FDI in the form of greenfield investment increases

the level of competition in a market, driving downprices and improving the welfare of consumers


24/38

Host-Country Costs

Inward FDI has three main costs:

1. possible adverse effects of FDI on

competition subsidiaries of foreign MNEs may have greater

economic power than indigenous competitors

2. adverse effects on the balance of payments

outflow of capital as the foreign subsidiaryrepatriates earnings to its parent country

import of inputs creates debit on current account

3. perceived loss of national sovereignty

MNE affects ke overnment decisions


25/38

THE HOST COUNTRY ROLE IN ATTRACTINGFDI

Economic and Other Benefits from FDI. Capital. A new investor will bring in capital

with which a new production facility will beconstructed, or a local company acquired.

Employment. While the number of jobscreated varies in accordance with the size of theinvestment and the production process itself, themost common benefit associated with FDI is

increased or protected employment. And, ofcourse, with new employment comes additionalincome and spending power for local residents.


26/38

Revenue benefits. FDI widens the localtax base and contributes to government

revenues. Even if foreign investors aregranted complete relief from taxes for ashort period of time through investment

incentives, governments can earnincreased revenue from the payment ofpersonal income taxes because of the new

jobs created by FDI. In addition, export-oriented investment generates foreignexchange earnings.


27/38

Favorable impact on localinvestment. FDI inflows tend to lead to

an increase in domestic investment ascompanies gain access to distributionchannels opened by TNCs, become

suppliers to TNCs, or respond tocompetition from TNCs.


28/38

Effects on whom?

Different companies, people, groups,classes are likely to be affected differently.

The effects span more than the economic

domain. There are effects on society ingeneral, on politics, on the environment,on culture etc.

Besides some obvious direct effects, thereare many effects that come about in moreindirect ways.


29/38

Effects of International Productionon Performance

The performance of companies, industriesand macroeconomies

Cumulative processes, short- and long-term

issues: direct and indirect effects

Indicators of performance

Profitability; sales; productivity; output growth;

innovation TNC and innovation


30/38

Effects of International Productionon Labour

Employment effects

Direct: Greenfield versus mergers and acquisitions FDI

Host and home country effects

Indirect: Value chain; repercussions on the vertical and horizontal

chains

Income

Wider effects on labour Quality of labour (productivity, skills development, wages)

Labour fragmentation and its bargaining power


31/38

Effects of International Productionon Trade

Trade and international production;substitutes or complements?

Resource-based production

Market-oriented production

Effects on trade patterns


32/38

Benefits of FDI to the host-country

domestic firms Linkage effects: Backward and forwardCrowd-in investment and growth upstream and

downstream Competitive pressure in product, labour and creditmarkets

Crowd-out domestic investment and innovationForce efficiency gains

Knowledge Spillover effectsTechnology and management skills and export market

access.

Benefits of FDI to the host country


33/38

Benefits of FDI to the host-country

workers

Employment and wages of workers hired by theInvestor

Productivity: Non-volatile Capital and Knowledge

Ambiguous effects on employment of domesticestablished producers

Governments

Force good policies

Raise tax revenues on foreign capital

Tax incentives competition dilute these gains


34/38


35/38

Finance & Development, March 2003 - Managing OilWealth

Finance & Development, June 2001 - How Beneficial IsForeign Direct Investment for Developing Countries?

http://www.unctad.org/en/docs/pogdsmdpbg24d9.en.pdf http://homepages.ulb.ac.be/~dtraca/TITSD/slides%2006/

session7%20-%20effects%20of%20FDI.pdf

http://homepages.ulb.ac.be/~dtraca/TITSD/readings/McK

inseyFDI.pdf
http://www.imf.org/external/pubs/ft/fandd/2003/03/eife.htmhttp://www.imf.org/external/pubs/ft/fandd/2003/03/eife.htmhttp://www.imf.org/external/pubs/ft/fandd/2001/06/loungani.htmhttp://www.imf.org/external/pubs/ft/fandd/2001/06/loungani.htmhttp://www.unctad.org/en/docs/pogdsmdpbg24d9.en.pdfhttp://homepages.ulb.ac.be/~dtraca/TITSD/slides%2006/session7%20-%20effects%20of%20FDI.pdfhttp://homepages.ulb.ac.be/~dtraca/TITSD/slides%2006/session7%20-%20effects%20of%20FDI.pdfhttp://homepages.ulb.ac.be/~dtraca/TITSD/readings/McKinseyFDI.pdfhttp://homepages.ulb.ac.be/~dtraca/TITSD/readings/McKinseyFDI.pdfhttp://homepages.ulb.ac.be/~dtraca/TITSD/readings/McKinseyFDI.pdfhttp://homepages.ulb.ac.be/~dtraca/TITSD/readings/McKinseyFDI.pdfhttp://homepages.ulb.ac.be/~dtraca/TITSD/slides%2006/session7%20-%20effects%20of%20FDI.pdfhttp://homepages.ulb.ac.be/~dtraca/TITSD/slides%2006/session7%20-%20effects%20of%20FDI.pdfhttp://homepages.ulb.ac.be/~dtraca/TITSD/slides%2006/session7%20-%20effects%20of%20FDI.pdfhttp://homepages.ulb.ac.be/~dtraca/TITSD/slides%2006/session7%20-%20effects%20of%20FDI.pdfhttp://www.unctad.org/en/docs/pogdsmdpbg24d9.en.pdfhttp://www.imf.org/external/pubs/ft/fandd/2001/06/loungani.htmhttp://www.imf.org/external/pubs/ft/fandd/2001/06/loungani.htmhttp://www.imf.org/external/pubs/ft/fandd/2001/06/loungani.htmhttp://www.imf.org/external/pubs/ft/fandd/2001/06/loungani.htmhttp://www.imf.org/external/pubs/ft/fandd/2001/06/loungani.htmhttp://www.imf.org/external/pubs/ft/fandd/2003/03/eife.htmhttp://www.imf.org/external/pubs/ft/fandd/2003/03/eife.htmhttp://www.imf.org/external/pubs/ft/fandd/2003/03/eife.htmhttp://www.imf.org/external/pubs/ft/fandd/2003/03/eife.htmhttp://www.imf.org/external/pubs/ft/fandd/2003/03/eife.htm


36/38

Pro-FDI outlook of the politicalframework Stability and reliability of politicaland business environment Availability and low-cost of Skilled

and Semi-skilled labor Infra-structure (transport,electricity) Other factors: Security, NoUnions, Low Trade Barriers,Presence of other foreign firms,Special incentives to FDI (and toIntel)

Key factors in Intels choice ofCosta Rica Educated, technical workforceand No labor unions Political and Economic stability;

Transparent legal system; Pro business and FDI outlook,including commitment ofgovernment and competenceof CINDE Good logistics infrastructure

and access to airport No capital controls A good package of incentives,made available to similarinvestors (Intel inspiredreforms!?)

Spillovers effects


37/38

Spillovers effects Spillovers effects from MNC activity in host countries exist and they may

substantial both within and between industries, but there is no strongevidence on their exact nature and magnitude.

Recent research suggests that [they] vary systematically between countriesand industries and that the positive effects of FDI are likely to increase withthe level of local capability and competition. (Blomstrom and Kokko (1998)

Empirical research shows mixed support for the idea that FDI generatespositive spillovers for domestic industry. While MNCs tend to be high-productivity firms which pay relatively high wages, on average theirpresence appears to depress the productivity of domestic plants (perhaps bydriving them into less profitable market segments). Hanson (2001)

The overall effect of FDI on national welfare in the host economy is perhapsweakly positive, depending on whether the superiority of foreign firmscompensates for the loss of profits (through repatriation) and for thepotentially slower productivity growth [negative spillovers] in domestic firms.Dirk Willem te Velde (2001)


38/38

The gains to host countries from FDI can take several other forms:

FDI allows the transfer of technologyparticularly in the form ofnew varieties of capital inputsthat cannot be achieved through

financial investments or trade in goods and services.

FDI can also promote competition in the domestic input market.Recipients of FDI often gain employee training in the course ofoperating the new businesses, which contributes to human capital

development in the host country.Profits generated by FDI contribute to corporate tax revenues in the

host country.