Multinational enterprises can provide both benefits and costs to host economies. The main benefits are extra investment, which is important for capital-scarce developing countries, and technology and skills transfer. However, MNEs can also result in leakages from the economy as profits are sent abroad. They may also threaten local competition and have the power to withdraw investment. Governments often provide incentives to attract MNEs for the jobs and growth they can generate, but sometimes seek to limit their expansion to protect domestic firms.

1. Effects of multinationals on
host economies:
• The main benefits can include:
· Extra investment and related effects
· Technology and skills transfer

2. 1-Extra investment
• The key benefit to host economies is the
introduction of new investment. Such
investment will represent investment which
is extra to that which a host economy is
able to generate itself and is important
because capital tends to be scarce in
developing countries and such capital
shortages can retard economic
development

3. The effects of the foreign
investment
• Construction phase
• Operating phase

4. • The effects of such investment will be the
primary effects (resulting from
construction of facilities, etc.) and the
secondary effects (resulting from running
of the facilities). The investment will give
rise to extra income and growth in the
economy and the associated benefits in
terms of employment and foreign currency
earnings.

5. 2-Technology and skills
transfer
• It may be that the use of skilled labor and
advanced technology introduced to an area
by MNEs transfers to the local economy by
way of demonstration effects. This depends
partly upon the training and level of skilled
employees offered by the MNE.

6. The problems that can arise from
MNEs activities include:
1. · Leakages from economy
2. · Prices and bargaining power
3. · Threat to local competition
4. · Power to pull out
5. · Enclaves and dual development
6. .Resource grabbing

7. 1-Leakages
• Remittance of profits by investors
• Remittance by employees
• Importing inputs( i.e. McDonalds

8. • MNE investment in an economy will
generally generate more leakages than
investment funded locally. This is because
MNEs will remit profits to the parent
company; often employ more foreign staff
and sometimes use more imported inputs.

9. 2-Prices and bargaining
power:
• MNEs who represent monopoly or near
monopoly purchasers of a local input (for
example, hotel rooms) will be able
negotiate low prices with suppliers and
thus reduce the impact of foreign
expenditure in a local host area.

10. 3-Threat to local competition
• Low costs
• High technology
• High quality
The result is:
It is difficult for local firms to enter the
industry

11. 3-Threat to local competition:
• The low-cost, high- technology and high-
quality goods and services associated with
MNEs may make it difficult for new local
firms to enter the industry.

12. 4-Power of pull out:
• MNEs, like other private sector organizations,
seek to maximize profits.
• They are therefore constantly monitoring the
environment to exploit changes in international
costs or demand patterns.
• They thus have no particular loyalty to an area
and can pull out, taking with them foreign
expenditure (in the case of tour operators) or
employment (in the case of manufacturers).

13. 5-Enclaves and dual
development:
• One possible result of MNE investment is that a
development will be exclusively for foreigners
and exclude local people.
• For example, the Coral Resort owned by a
Japanese company on an island in the Philippines
is guarded by armed security personnel and the
beach area is only accessible to Coral Resort
guests. Exclusive developments such as these are
termed enclaves.

14. 7-Resource grabbing:
• Local resources prices in developing countries
(particularly land) are often low in international
terms, and developing countries are generally
short of capital and foreign exchange. MNEs tend
to have ready access to capital and thus are
granted planning permission. One result of this is
that MNEs may purchase large areas of land
relatively cheaply. This resource is then lost to
local exploitation, which might be appropriate at
a future stage of a country’s development.

15. Government policy and
multinationals
• Assistance for multinationals.
• Resistance for multinationals.

16. Government assistance for
multinationals:
• Because of the potential benefits to a host
economy, governments often offer
incentive packages to MNEs to attract their
projects. For example, Initial estimates for
Disneyland Paris suggested that the project
would create 18 000 jobs in the
construction phase and 12000 jobs in the
operating phase as well as earning US$
700m in foreign currency each year.

17. Disneyland Paris
• 18000 jobs in the construction phase
• 12000 jobs in the operating phase
• Earnings US$ 700m in foreign currency
each year

18. • Because of this there was considerable
competition between the governments of
France, the UK and Spain to provide the
most attractive incentive Package to
Disneyland Paris and enable their national
economies to benefit from its effects.

19. • . In the event the French government
provided a comprehensive infrastructure
package including new roads and rail
connections. It assisted Disneyland Paris
with land purchase, provided a loan at
preferential interest rates and gave
planning permission for future linked
developments.

20. Government resistance to
multinationals:
• In some cases governments may think that
MNE expansion in their country may pose
a danger to domestic companies and thus
may attempt limit MNE expansion.