Cs11 12


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Cs11 12

  1. 1. FDI, MNCs, and host country policy What’s special about MNCs? Effects of FDI FDI policy
  2. 2. Why worry about FDI?  Sales of foreign affiliates larger than total world exports  MNCs account for 2/3 of world trade  FDI is growing faster than world production or world trade = Capital, jobs, technology, exports? Expansion driven by international trade liberalization, regional integration, technical progress Ari Kokko
  3. 3. Why do FDI and MNCs exist?  Understanding what is special about MNCs helps understand their behavior and predict their effects  Older explanations – market disequilibrium and distortions  Newer explanations – market failures and market imperfections Ari Kokko
  4. 4. Market disequilibrium and distortions as motives for FDI  Temporary disequilibria in markets – Differential rates of return – Cost differentials – Valuation of currencies  Government imposed distortions – Trade barriers – Tax rules – Investment incentives Ari Kokko
  5. 5. Market imperfections as motives for FDI  External effects and scale economies could mean that doing A makes you better at B. – If R&D makes you a more efficient producer, then you should expand through FDI. – Licensing will not be a good alternative, because other firms (with no R&D) will never be as efficient as you can be. Ari Kokko
  6. 6. Market failures as motives for FDI  Markets for intangible assets - technology, trade marks, marketing - often fail.  The transactions costs for finding a price that satisfies both seller and buyer are very high.  Firms based on intangible assets tend to expand through FDI rather than licensing. Ari Kokko
  7. 7. Conclusions: motives for FDI and MNCs  Many different types of FDI  Older explanations are not sufficient, because FDI continues when disequilibria and distortions disappear  New theories suggest that intangible assets - technology, trade marks, marketing skills - are central to MNCs. Ari Kokko
  8. 8. Host country effects of FDI  Resource transfer effects: capital and technology  Trade and balance-of-payments effects  Competitive and anti-competitive effects  Sovereignty and autonomy effects Ari Kokko
  9. 9. FDI as a source of capital  Arguments: – MNCs have plenty of capital and access to international capital markets – MNCs may help mobilize local savings – MNCs may stimulate aid flows  Objections: – not much capital transfer going on, most of investments financed locally – FDI is an expensive source of funds – profits are repatriated Ari Kokko
  10. 10. FDI as a source of technology  Arguments: – most commercial technology owned by MNCs – few countries can afford comprehensive R&D programs on their own – benefits possible even if MNCs keep ownership of technology: spillovers  Objections: – MNC technology may be too expensive – MNC technology may not be appropriate Ari Kokko
  11. 11. Spillovers  When locals benefit from the presence of MNCs without paying the full price.  Several possible channels: – Demonstration effects, ”copying” MNCs – Training of employees who may leave the MNCs for jobs in local firms – Forward and backward linkages – Local firms are forced to work harder because of tougher competition Ari Kokko
  12. 12. Evidence on spillovers  Lots of case studies showing that locals learn from MNCs  Spillovers are not automatic. Effects are determined by the local environment: – Technological capability and labor skills – Level of competition – Trade policy Ari Kokko
  13. 13. Balance-of-payments effects  Arguments: – shortage of forex for imports of investment goods a common development problem – both export-oriented and import- substituting FDI should improve BoP  Objections: – MNCs import a lot. Import-substituting MNCs, in particular, may create import dependence – MNCs repatriatiate profits Ari Kokko
  14. 14. Competitive and anti-competitive effects  Arguments: – MNC entry may stimulate competition, efficiency, and development – MNCs often enter industries where entry barriers for local firms are high  Objections: – MNCs are stronger and may outcompete local firms. Risk for foreign oligopolies and monopolies Ari Kokko
  15. 15. Sovereignty and autonomy effects  Arguments: – Foreign ownership always carries a cost. Foreign MNCs may push for policies that are good for them but not necessarily for the host country  Objections: – Who cares if the Americans own our factories, as long as we get jobs and tax revenue Ari Kokko
  16. 16. Other effects  Negative externalities from FDI, e.g. on the environment?  Cultural imperialism?  Inappropriate consumption patterns - Camel, Heineken, and Yves St. Laurent in poor countries?  FDI may create dependence on foreign capital Ari Kokko
  17. 17. FDI policies  What do host countries want from FDI and foreign MNCs?  What policy measures are available to host country governments?  How effective are FDI policies? Ari Kokko
  18. 18. Host country objectives  To acquire – capital and jobs – technology, production, and R&D skills – organizational and managerial skills – marketing and exporting skills  To retain national control over strategíc industries and strategic decisions Ari Kokko
  19. 19. Policy measures  Investment promotion - to attract foreign MNCs  Market access restrictions - to retain national control  Regulation of MNC operations - to make the foreign MNCs behave in the right way Ari Kokko
  20. 20. Investment promotion  Information – Consumer preferences, markets, production factors, rules and regulations  Incentives – Investment and profit repatriation guarantees – Beneficial tax rules - tax holidays, reduced rates, investment allowances, and other fiscal incentives – Tariff protection – Subsidies and grants – Provison of infrastructure - industry parks and export processing zones Ari Kokko
  21. 21. FDI incentives  Used by almost all countries  Financial incentives in OECD - fiscal incentives in developing countries  Probably becoming more important for corporate decision making… – WTO membership makes other policies more similar across countries  …but also risk for excessive subsidization – politically attractive – competition between host countries – uncertainty about spillover benefits Ari Kokko
  22. 22. Market access restrictions  Licensing requirements (where applications are individually screened)  Outright prohibitions – military industries – mass media – air and land transports – banking and finance – telecommunications Ari Kokko
  23. 23. Regulation of MNC operations  Performance requirements – technology transfer – exports – employment – local content  Requirements for joint ventures – to secure transfer of technology to local industry Ari Kokko
  24. 24. Are FDI policies efficient?  Prohibitions work  Performance requirements not very efficient - easy to get around – and increasingly in conflict with WTO rules  Investment incentives increasingly important, but mainly because everyone else is offering them – fundamentals like political stability, market size, and growth rate more important – risk for ”bidding wars” between host countries – better to focus on industrial policy? Ari Kokko
  25. 25. Example: Objectives of FDI policy in India  technology transfer  avoid concentration  technology diffusion  diversification  limitations on foreign  local content ownership  export promotion  save foreign  advancement of exchange Indians  national  local R&D independence  regional development  priority sectors  capacity utilization  employment creation Ari Kokko
  26. 26. Consequences of Indian FDI policies  Very little FDI until early 1990s  Major MNCs left because of regulations  Reform recommendations in late 1980s – liberalize and simplify bureaucracy – focus on employment creation and labor-intensive industry – allow foreign majority ownership  Reforms and somewhat increased inflows of FDI from early 1990s – but still only a fraction of that directed to China Ari Kokko