Download Benefits and Costs of Multinationals to the host country

Benefits and Costs of
Multinationals to the host country
• Definition of ‘host’ country:
– The host country is the country that receives the
capital from the multinational corporation i.e. it is
the country where the multinational enterprise has
decided to establish its subsidiary
• The establishment of a multinational
subsidiary/affiliate can have many effects on
the host country
– There can be both economic benefits and costs
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Benefits and Costs of Multinationals
to the host country
•
Economic benefits and costs:
1. Balance of Payments: the initial transfer of financial
capital to the host country will benefit the host
country’s balance of payments
(Note: standard definition of balance of payments is that it
is a statistical record of all economic transactions
which have taken place during a given period of time
between the residents of a country and the rest of the
world. The balance of payments provides an overall
view of the international position of a country. The
balance of payments records trade (exports –
imports) in goods and services under the current
account. Under the financial account, the balance of
payments records all financial transactions between
the country and the rest of the world under the
headings: direct investment (foreign), portfolio
investment, financial derivatives and reserve assets).
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Benefits and Costs of
Multinationals to the host country
• Economic benefits and costs:
1. Balance of Payments (cont’d): Once the affiliate or
subsidiary begins operating in the host country,
the repatriation of profits and dividends may
contribute a drain on the host country’s balance of
payments
2. Employment and national income: the affiliate will
contribute net value added to the host country’s
employment and national income (increase in
GDP). If the workers and other resources taken up
by the company would otherwise be unemployed,
there will be very significant net value added for
the host country
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Benefits and Costs of
Multinationals to the host country
•
Economic benefits and costs:
3. Externalities (external economies): the existence
of external economies may raise the productivity
of other firms in the host country. For example,
the MNE may train workers who subsequently
leave to take up employment with other local
firms. The MNE may also provide valuable
technical assistance to local suppliers to meet
the need for locally sourced inputs.
Technical/managerial knowledge or practices
may flow from the MNE to nearby local
indigenous companies
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Benefits and Costs of
Multinationals to the host country
•
Economic benefits and costs:
4. Economic Management: The MNE may have
different economic goals from the host country,
which complicates the host government’s
economic management function. For example,
the host government may be interested in
building up the economy’s research and
development (R&D) base to foster economic
growth. But the MNE may not engage in R&D in
the host country because the corporation may
want to protect its intellectual property. An MNE
may even pull out of the host country – shifting
its production elsewhere because it dislikes the 5
host’s economic policies
Political and social
implications
• Political and social implications for the host
country from the activities of an MNE:
– Key people (MNE executives) in the MNE may be
of a different political persuasion from that of the
host country
– There may be complicated legal issues relating to
the jurisdiction of the MNE and the host country. In
disputes with the host country, MNEs may seek
support from their home country’s government,
which may lead to a jurisdictional dispute between
the two countries. This can be a particular issue
with regards to trade policy.
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Political and social
implications
• Political and social implications for the host
country from the activities of an MNE:
– MNEs may run counter to nationalist sentiments.
MNEs could be suspected of undermining the host
nation’s sovereignty – bringing in alien cultural and
social values. Or MNEs may be regarded as
important agents of social and political change –
encouraging diversity, co-operation and
achievement within a strong multiethnic
environment.
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FDI in Ireland
• Source: Barry, F. and J. Bradley (1997), “FDI
and Trade: The Irish Host-Country
Experience”, The Economic Journal, Nov:
1798-1811 – Available on the server
• Introduction:
– Early 1930s to late 1950s: high tariff barriers and a
strict prohibition on foreign ownership of firms was
the cornerstone of economic policy
– Economic policy during this era was one of selfsufficiency
– Changes were forced on the Government in the
1950s because of stagnation characterising the
economy – economic downturn, no economic
growth
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FDI and Trade in Ireland
(Barry & Bradley (1997))
• Introduction:
– Control of Manufacturers Act (the act that
prohibited foreign ownership) was abolished
– New policy (1960s): a policy that cultivated FDI
(Foreign Direct Investment), using a zero
corporate tax rate on profits, attractive investment
grants and a complete dismantling of most tariff
barriers (completed within less than a decade)
– Next three and a half decades characterised by a
phenomenal growth of export-oriented FDI
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FDI and Trade in Ireland
(Barry & Bradley (1997))
• The article examines:
–
–
–
–
The experience of Ireland with FDI since 1958
Particular aspects of the FDI inflow
Possible adverse effects of FDI
Wider macroeconomic consequences of FDI
• FDI and trade: the experience since 1958
– Most striking consequence of FDI: it facilitated a
reduction in Ireland’s dependence on the United
Kingdom as a trading partner
– 90% of Ireland’s exports went the UK in 1960
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FDI and Trade in Ireland
(Barry & Bradley (1997))
• FDI and trade: the experience since 1958
– Today 23.9% of Ireland’s exports go to the UK
– The other main export destinations today are:
United States (18.1% of total exports)
Germany (7.2%)
France (5%)
Japan (3.6%)
Netherlands (3.3%)
Source: The Economist World in Figures, 2005
– The shift away from the UK in terms of exports was
not repeated quite as strongly for imports – traditional
cultural links important
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FDI and Trade in Ireland
(Barry & Bradley (1997))
• FDI and trade: the experience since 1958
– The main origins of imports today are:
UK (35.9% of the total imports)
United States (15.8%)
Belgium (14.4%)
Germany (6.4%)
France (4.1%)
Italy (3.8%)
Source: The Economist World in Figures, 2005
– The shift in export destinations would be expected
to alter the Irish growth rate from that of the UK
(up to the 1960s) to an average of the UK and the
other core EU economies today
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FDI and Trade in Ireland
(Barry & Bradley (1997))
• FDI and trade: the experience since 1958
– From the economic growth in the 1990s, Ireland’s
economy has converged in terms of living standards
– There was a long-term boost to the Irish growth rate
as a result of geographical and compositional shift –
though this was masked at times by world recessions
(1970s) and domestic fiscal policy errors of the Irish
government (1980s)
– This is viewed as a supply-side (labour market) rather
than a demand-side (increase in aggregate demand)
phenomenon, since it was Irish supply-side conditions
(availability of skilled labour) that allowed it to attract
firms that produced goods that were in high demand
and that sold them into high-growth markets in
Europe
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