The effects of foreign MNEs on host economies and governments roles in maximising the MNE presence to the host country competitiveness (Part I)

1. Introduction

Recent inward foreign domestic investment (FDI) trends suggest that market liberalisation gains significant attentions in many countries (ADB, 2004). A report from UNCTAD (2006) noted that world inward FDIs in 2005 rose to $916 billion, a 29% increase from the previous year. In Asia alone, the FDI growth has a substantial magnitude. Cross border mergers and acquisitions valued at $32.9 billion were transacted in developing Asian countries in 2001 (ADB, 2004). By 2005, the expansion of multi national enterprise (MNE) projects in the Asian regions increased to 1,081 within four years (UNCTAD, 2006).

Empirical evidences presented above may have significant meanings to MNEs. The trend above suggests that MNEs, as the arm length of FDI, are charging their dominance to capitalise their strength under the approval of host countries (ADB, 2004; Farrell, Remes, & Schultz, 2004). There is no illogical explanation of such phenomenon. Dunning (1997) suggested that competition forced MNEs to expand outside their home territories. MNEs looked for alternatives to maintain their competitive advantages (Hirst & Thompson, 1999; Porter, 1990; UNCTAD, 2006). In parallel with these, market liberalisation has forced governments to open their countries for FDI in sustaining the economic growth (Farrell, et al., 2004).

In luring foreign investments, the government may involve in providing attractive incentives, aligning institutional systems as well as providing infrastructures (ADB, 2004). Contrary to this argument, a survey by McKinsey, a global consulting company, suggested that incentives were becoming irrelevant to MNE decision to invest in a particular country (Farrell, et al., 2004). Thus, the understanding of the effects of the MNE presence and the roles of the government appear to be essential in stimulating the competitiveness of a host country.

This essay will discuss effects of the MNE presence in the host country. Parallel to the discussion, the essay will outline government roles in stimulating competitiveness in association with the presence of MNEs. The first part of the discussion will highlight MNE contributions in the host country. It will be followed by discussing controversial effects perpetuated by the presence of MNEs. The subsequent part will outline government roles in fostering competitiveness through maximising the contribution of MNEs. Conclusion will be provided in the end of the discussion.

2. MNEs contribution to host economies

Apart from capital flows, creating welfare is often cited as the positive effect of the MNE presence to the host economy (Farrell, et al., 2004; UNCTAD, 2006). Regardless of the aim, the MNE operation requires local resources to support MNE activities (Dunning, 1997). The unemployment rate of the host country can be reduced. Additionally, it is argued that employees working in MNEs have better welfare conditions (UNCTAD, 2006). A study conducted by Glass and Saggi (2002) found that individuals working in MNEs were paid higher than those working in the local counterparts. The study of Farrel et al (2004) on India and China supported the finding. They concluded that the MNE workers in these countries were paid 50 to 100 percent higher than those working in local firms.

Indications of MNE contributions to the living standard of a host country appear to be significant (ADB, 2004). A survey conducted by McKinsey found that the propensity of MNE presence was more market seeking than resource exploitation. Consumers in a host economy benefited from lower cost products. The survey also noted that MNEs offered more product choices than those offered by local firms (Farrell, et al., 2004).

The MNE investment in the host country can increase the productivity level through the adoption of advance technology (Blomstrom & Kokko, 1997). MNEs bring new production and processing techniques unparalleled to local firms (ADB, 2004). MNEs also set up production facilities and provide technological knowledge to their employees (UNCTAD, 2006). Through ownership advantages, MNEs gain better efficiency and produce lower good costs (Blomstrom & Kokko, 1997; Porter, 1990). In such stage, competition starts to emerge (Dunning, 1997). Local firms try to adopt more efficient production function to retain their market shares (Farrell, et al., 2004). The presence of Suzuki in India exemplified the case. Since the inception, car prices had dropped significantly and consumer choices rose to over 30 car models by 2004 (Farrell, et al., 2004).

It is noted that MNEs contribute positive effects through knowledge transfers (Blomstrom & Kokko, 1997). This has been noted in the case of IBM Japan. As the sales of ThinkPad laptop weakened, some of the firm engineers utilised their expertise in consulting activities to electronic manufacturers (FEER, 2004a). Knowledge spill over may also be channelled through customers and suppliers (Blomstrom & Kokko, 1997; UNCTAD, 2006). MNEs can provide valuable inputs to the improvement of supplier products (Blomstrom & Kokko, 1997). For example, the presence of multinational companies such as Dell and Sony Ericsson in Taiwan has benefited Lite-On, a local electronic company, not only in supplying the products to these companies but also in improving the products quality (Dean, 2004).

The MNE presence may stimulate higher value investments through setting up R&D facilities (ADB, 2004). By setting R&D facilities in a particular country, the host country gains recognition in R&D sectors. Such status will attract more MNEs to invest in other R&D areas (Laudicina & White, 2005). Increasing trends of research and development (R&D) investment in the host country was noted particularly in India and China (Winters & Yusuf, 2007). In China for example, since Motorola’s inception in setting up R&D facilities in 1993, more than 700 foreign based R&D units were set up by 2006. Similar phenomenon was also noted in India. R&D investments in clinical research set up by major pharmaceutical MNEs such as Astra-Zaneca has attracted other global players in carrying out R&D activities in the country (Laudicina & White, 2005).

To summarise this section, through manifestation of foreign direct investments, MNE contributions to the host country are channelled by creating job (ADB, 2004), raising living standard (Farrell, et al., 2004), increasing productivity level (ADB, 2004; Blomstrom & Kokko, 1997; Dunning, 1997), transferring knowledge and technological capabilities (Blomstrom & Kokko, 1997) and setting up R&D facilities (ADB, 2004). Having gone through the positive effects, the next section will discuss the controversial effects contributed by the MNE presence in the host country.