1 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

2 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).

3 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

4 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

5 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 host’s economic policies

6 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.

7 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.

8 FDI in Ireland Source: Barry, F. and J. Bradley (1997), “FDI and Trade: The Irish Host-Country Experience”, The Economic Journal, Nov: – 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 self- sufficiency –Changes were forced on the Government in the 1950s because of stagnation characterising the economy – economic downturn, no economic growth

9 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

10 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

11 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

12 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

13 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