Internationalization

The Spectrum of Political Ideology Toward FDI Radical View Pragmatic Nationalism Free Market

the TRIAD World trade growth: average of 6.5% per year 1990 to 2000 Nearly half of the over $5 trillion in world trade is among the European union, the U.S., and Japan -- the TRIAD 1/3 of world’s private sector productive assets are owned by multinationals.

Radical View Marxist view is that MNE’s enslave less developed countries. Instrument of domination not development. Popular from WWII to the 1980s. Practiced by Eastern Europe, India, China, 3d World Countries. Ended with the collapse of Communism. Bad performance by those countries vs those with freer market approach

Free Market View Sees FDI as way to disperse production and flow of goods and services in the most efficient manner. Supported by Smith and Ricardo and ‘market imperfection’ explanations of FDI. However, all countries impose some restrictions on FDI.

Pragmatic View Lies somewhere between radical and free market views. Gov’ts should maximize national benefits and minimize costs of FDI.

Ideology and FDI Ideology Characteristics Host-Government Policy Implications Radical Marxist roots Prohibit FDI Views the MNE as an Nationalize subsidiaries of instrument of imperialist foreign-owned MNEs domination Free Classical economic roots (Smith) No restrictions on FDI Market Views the MNE as an instrument for allocating production to most efficient locations Pragmatic Views FDI as having both Restrict FDI where costs Nationalism benefits and costs outweigh benefits Bargain for greater benefits and fewer costs Aggressively court beneficial FDI by offering incentives

Benefits of FDI to Host Countries Resource-transfer effects. Employment effect. Balance-of-payments effect. Economic growth.

Resource-Transfer Effects Capital. Technology. Management.

Employment Effects Brings jobs that otherwise would not be created. Direct: Hiring host-country citizens. Indirect: Jobs created by local suppliers. Jobs created by increased spending by employees of the multi-national enterprise. Questions remain on whether net jobs gained.

Balance-of-Payments Effects Host country benefits from initial capital inflow when MNE establishes business. Host country benefits if FDI substitutes for imports of goods and services. Host country benefits when MNE uses its foreign subsidiary to export to other countries.

Economic Growth Increased: productivity growth, product and process innovation, and greater economic growth, Stemming from increased competition of MNE’s investments.

Host Country Problems With FDI Drives out local competitors. Can prevent the development of ‘local’ competitors. Profits brought home ‘hurts’ (debit) a host’s capital account. Parts imported for assembly hurt trade balance. Can affect sovereignty and national defense.

Home Country FDI Benefits Improves balance of payments for inward flow of foreign earnings. Creates a demand for exports. Export demand can create jobs. Increased knowledge from operating in a foreign environment. Benefits the consumer through lower prices. Frees up employees and resources for higher value activities.

Home Country Problems with FDI Negative effect on Balance of Payments Initial capital outflow. MNE uses foreign subsidiary to sell back to home market. MNE uses foreign subsidiary as a substitute for direct exports. Potential loss of jobs.

How Do Countries Encourage FDI? Risk insurance.(Home) Elimination of double taxation. (Home) Tax incentives.(Host) Low interest rates. (Host) Stable government and stable policies.

How Do Countries Discourage FDI? Limit capital outflows. (Home) Manipulate tax code to encourage domestic investment. (Home) Political restrictions on investing in certain countries. (Home) Ownership restraints. (Host) Performance requirements. (Host)