This dissertation analyzes selected policies designed to attract foreign direct investment (FDI) as a means of economic growth. The focus is on multinational corporations (MNCs) because most foreign direct investment is done by MNCs. The dissertation first shows the effects that the presence of MNCs has on economic growth before examining tradeoffs between direct costs (i.e., transportation and production costs) and policy factors in attracting MNC FDI.
Essays 1, 'Multinational Corporations and Their Effect on Gross Domestic Product' and 2, 'Competing for Innovation: The Economics of Knowledge Acquisition' examine how FDI in combination with socioeconomic, economic, and policy factors affect the growth of gross domestic product (GDP). The collective results suggest that policies of regionalization drive GDP growth and influence FDI location. Nations that are corporate homes of the largest and most internationalized MNCs benefit from policies of regionalization as they aid the global expansion of their corporations. Importantly, these two essays provide empirical evidence of the value transfer of MNC internationalization back home and of the importance MNC concentration at the national level. The presence of MNC networks provide knowledge and aid in the innovative capacity of both developed and developing countries. Both essays find that GDP growth driven by MNC activity has been stronger in the developing world since 2000. The two essays contribute to the globalization literature by providing empirical evidence of the increasing importance of emerging markets in the new economy, the role of MNCs in that increasing importance, the political and diplomatic implication of these related developments, and the policies nations currently employ to stay competitive in a turbulent environment.
Essay 3, 'Fleeing Regulation: Pollution Havens in Textile Manufacturing' provides an example of the importance of regulatory policy by examining the effect of a policy change on FDI flows in the context of the garment sector. The results indicate that the removal of the quota system in the international trade of garments increased FDI in nations with permissive environmental policies, which in turn, has contributed significantly to leading to toxins and pollutants in local ecosystems.
The dissertation provides empirical evidence that under globalization nations compete for FDI through policy. The extant literature argues that globalization is a product of two sets of factors: (1) reductions in `spatial friction' (i.e., decreasing transportation, information, and organization-of- production costs), and (2) reductions in trade barriers, both in terms of border restrictions and in terms of domestic policies affecting foreign and domestic direct investment. The major contribution of the dissertation is in providing empirical evidence that under globalization nations compete for FDI by creating attractive regulatory environments for MNCs. There are social costs to be born in the competition for FDI and this dissertation shows that the nations that are corporate homes to the world's largest MNCs are often better positioned to absorb costs associated with knowledge sourcing as well as export pollution costs to their more lenient trading partners.
Anguelov, Nikolay, "Essays on Attractiveness of Multinational Corporations" (2012). All Dissertations. 989.
MULTINATIONAL CORPORATIONS AND THIRD WORLD DEVELOPMENT
Multinational Corporations (MNC) are important transitional agents in the contemporary global political economy. Although they can be viewed as economic actors following the logic of international market, their activities inevitably arouse questions of national power. Not surprisingly, such questions are most pronounced in the study of developing countries where weak government and societies potentially give the MNC strong bargaining position. Thus, the nature of their relationship between developing countries and the implication of this relationship for economic growth remains highly controversial. How ever, proponents of MNC posit in the past that MNC have made important contribution to developing countries. This interaction between MNCs and third world economy has led to a profound relationship whose impacts are enormous. Although many scholars have written more on the impact of MNC on host less developed countries, the most important question is, Do foreign firms behave differently from locally owned firms and if so what are their implication?
Multinational corporations are one of the main conduits through which investment is channelled and their evolution has reflected broader developments (OECD 2003).
This impact however will be examined from the negative and positive impact gearing towards the development of third world. However it is imperative to examine the characteristics of developing countries as well as some objectives of Multinational Corporations (MNC).
CHARACTERESTICS OF DEVELOPING COUNTRIES
It is imperative to know the characteristics of the world economic system which is divided into two spheres: a relatively affluent and industrialized North and relatively poor and non industrialized South which encompasses the third world countries and their economies. Third worlds are the formal colonial countries of Africa, Asia, Central and South America. According to Krugman and Obsfeld (2003), poverty is the basic problem of these developing countries and escaping from poverty is their overriding economic and political challenge. Comparing them with the industrialized economies, most developing countries are poor in factors of production essential to modern industry. The scarcity to these factors of production contributes to low level of per capital income and often prevents developing countries from realizing economies of scale which many rich countries benefit. Politically, instability, insecure property right and non guided economic policies have discouraged investment in capital and skills thus reducing economic efficiency.
In the United Nations conference in Brussels (2001), these countries have limited human, institutional and productive capacity; acute susceptibility to external economic shocks, natural and man made disasters, limited access to education, health and other social services, poor infrastructure and lack of access to information and communication technologies
OBJECTIVES OF MNC
MNC are in business to make money. Their leading objective is obviously the maximization of profit. This requires them to produce goods and services at the lowest possible cost there by taking advantage of low fixed and variable production cost that exist in countries other their base country (Pool and Stamos 1990).
Closely allied with the economic power of “bigness”, MNC economically play an important role in world trade and investment (Krugman and Obstfeld 2003).
According to Grubel (1981) MNC provides opportunities for employment, growth, immediate foreign exchange income, tax, revenue and technological know- how.
Advocates further propound on the assertion that MNC do serve as principal means of satisfying the desire of most countries to attract foreign direct capital and technological know-how. The inflow of capital improves the balance of payment picture, brings advance technology, create jobs locally, effect savings on research and development, and enhance technical, productive and organizational managerial skills of indigenous personnel and manufacturing of domestic consumption. With this, through their own personnel policies, they introduce higher standard of wages, housing, and social welfare which affect other segment of the society. Despite all their influence, one can present a balance sheet of MNC.
An overwhelming proportion of direct foreign investment in the third world countries is activated by MNC.
In this view, FDI can alleviate poverty in host country by generating employment and create jobs (Asiedu 2004), and (Athreye 2003).
MNC employment boost domestic wages as they pay higher; offer training program for workers, foster the transfer of technology between foreign and domestic firms and enhance the productivity of the labor force. In another article by Asiedu (2004) the employments by MNC have both indirect and direct impact on the domestic employment. FDI generate new employment (direct employment) and create jobs (indirectly) through forward and backward linkage with domestic firms. Estimates show that FDI in developing countries has a multiplier effect on domestic employment as it creates about 26 million direct jobs with 41.6 million indirect jobs in 1997 in Namibia.
In a related example, 8 out of 12 industries, out put per worker was higher in foreign owned enterprise than in domestically owned firms with a difference in productivity ranging from 50% in electronics, to about 13% in non metallic minerals. This same applies in Ivory Coast where the productivity gap existed in fewer industries. This can be accounted partly by the difference in training opportunities for workers in foreign owned enterprises and domestically owned enterprises. In Kenya and Zimbabwe, the availability of training programs increases with foreign ownership as training is more prevalent in foreign owned firms that jointly owned firms. The diagram below shows foreign and domestic owned enterprises providing training to workers.
Percentage of Foreign Owned enterprises and Domestic Owned
Enterprises providing formal training to workers 1995
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Source: Asiedu E.
Development Policy Review 22: 2004
Table 1 Pages 7
Further more, employment fosters technological transfer in less developed countries. One of the ways by which foreign technology is been diffused in host countries is through labour turn over as domestic employees move from foreign firm to domestic firm. In this, foreign firms pay higher in order to retain their workers thereby preventing domestic firms from appropriating their superior technology.
More so, (Asiedu 2004) reiterates the fact that FDI is important source of capital and has become important to Sub-Saharan Africa in other to achieve its millennium development goals. In the same argument, during the United Nations Conference on Trade and Agreement (UNCTAD) (2005) , FDI into primary, mining and agricultural sectors in African countries have been a sole source of increased employment, government revenue and foreign exchange earnings, and a catalyst for a diversified industrialization path. A large scale of proportion of FDI has gone to the mining sector which has been a major drive of growth recovery. With reforms to liberalized and privatized the mining sector, Africa has become as attractive continent for mining. New investments have expanded the capacity of existing producers, including the development of new mines. Mali which did not have large scale mining sector has hosted large scale operations.