Académique Documents
Professionnel Documents
Culture Documents
Older explanations
– market disequilibrium and distortions
Newer explanations
– market failures and market imperfections
Ari Kokko
Market disequilibrium and
distortions as motives for FDI
Temporary disequilibria in markets
– Differential rates of return
– Cost differentials
– Valuation of currencies
Government imposed distortions
– Trade barriers
– Tax rules
– Investment incentives
Ari Kokko
Market imperfections
as motives for FDI
External effects and scale economies
could mean that doing A makes you
better at B.
– If R&D makes you a more efficient
producer, then you should expand through
FDI.
– Licensing will not be a good alternative,
because other firms (with no R&D) will
never be as efficient as you can be.
Ari Kokko
Market failures
as motives for FDI
Markets for intangible assets -
technology, trade marks, marketing -
often fail.
The transactions costs for finding a
price that satisfies both seller and buyer
are very high.
Firms based on intangible assets tend
to expand through FDI rather than
licensing.
Ari Kokko
Conclusions:
motives for FDI and MNCs
Many different types of FDI
Older explanations are not sufficient,
because FDI continues when
disequilibria and distortions disappear
New theories suggest that intangible
assets - technology, trade marks,
marketing skills - are central to MNCs.
Ari Kokko
Host country effects of FDI
Ari Kokko
FDI as a source of capital
Arguments:
– MNCs have plenty of capital and access to
international capital markets
– MNCs may help mobilize local savings
– MNCs may stimulate aid flows
Objections:
– not much capital transfer going on, most of
investments financed locally
– FDI is an expensive source of funds
– profits are repatriated
Ari Kokko
FDI as a source of technology
Arguments:
– most commercial technology owned by
MNCs
– few countries can afford comprehensive
R&D programs on their own
– benefits possible even if MNCs keep
ownership of technology: spillovers
Objections:
– MNC technology may be too expensive
– MNC technology may not be appropriate
Ari Kokko
Spillovers
When locals benefit from the presence
of MNCs without paying the full price.
Several possible channels:
– Demonstration effects, ”copying” MNCs
– Training of employees who may leave the
MNCs for jobs in local firms
– Forward and backward linkages
– Local firms are forced to work harder
because of tougher competition
Ari Kokko
Evidence on spillovers
Lots of case studies showing that locals
learn from MNCs
Spillovers are not automatic. Effects are
determined by the local environment:
– Technological capability and labor skills
– Level of competition
– Trade policy
Ari Kokko
Balance-of-payments effects
Arguments:
– shortage of forex for imports of investment
goods a common development problem
– both export-oriented and import-
substituting FDI should improve BoP
Objections:
– MNCs import a lot. Import-substituting
MNCs, in particular, may create import
dependence
– MNCs repatriatiate profits
Ari Kokko
Competitive and
anti-competitive effects
Arguments:
– MNC entry may stimulate competition,
efficiency, and development
– MNCs often enter industries where entry
barriers for local firms are high
Objections:
– MNCs are stronger and may outcompete
local firms. Risk for foreign oligopolies and
monopolies
Ari Kokko
Sovereignty and autonomy effects
Arguments:
– Foreign ownership always carries a cost.
Foreign MNCs may push for policies that
are good for them but not necessarily for
the host country
Objections:
– Who cares if the Americans own our
factories, as long as we get jobs and tax
revenue
Ari Kokko
Other effects
Negative externalities from FDI, e.g. on
the environment?
Cultural imperialism?
Inappropriate consumption patterns -
Camel, Heineken, and Yves St. Laurent
in poor countries?
FDI may create dependence on foreign
capital
Ari Kokko
FDI policies
What do host countries want from FDI
and foreign MNCs?
What policy measures are available to
host country governments?
How effective are FDI policies?
Ari Kokko
Host country objectives
To acquire
– capital and jobs
– technology, production, and R&D skills
– organizational and managerial skills
– marketing and exporting skills
Ari Kokko
Policy measures
Ari Kokko
Investment promotion
Information
– Consumer preferences, markets, production
factors, rules and regulations
Incentives
– Investment and profit repatriation guarantees
– Beneficial tax rules - tax holidays, reduced rates,
investment allowances, and other fiscal incentives
– Tariff protection
– Subsidies and grants
– Provison of infrastructure - industry parks and
export processing zones
Ari Kokko
FDI incentives
Used by almost all countries
Financial incentives in OECD - fiscal incentives
in developing countries
Probably becoming more important for
corporate decision making…
– WTO membership makes other policies more
similar across countries
…but also risk for excessive subsidization
– politically attractive
– competition between host countries
– uncertainty about spillover benefits
Ari Kokko
Market access restrictions
Licensing requirements (where
applications are individually screened)
Outright prohibitions
– military industries
– mass media
– air and land transports
Ari Kokko
Are FDI policies efficient?
Prohibitions work
Performance requirements not very efficient -
easy to get around
– and increasingly in conflict with WTO rules
Investment incentives increasingly important,
but mainly because everyone else is offering
them
– fundamentals like political stability, market size,
and growth rate more important
– risk for ”bidding wars” between host countries
– better to focus on industrial policy?
Ari Kokko
Example:
Objectives of FDI policy in India
technology transfer avoid concentration
technology diffusion diversification
limitations on foreign local content
ownership export promotion
save foreign advancement of
exchange Indians
national local R&D
independence regional development
priority sectors
capacity utilization
employment creation
Ari Kokko
Consequences of
Indian FDI policies
Very little FDI until early 1990s
Major MNCs left because of regulations
Reform recommendations in late 1980s
– liberalize and simplify bureaucracy
– focus on employment creation and labor-intensive
industry
– allow foreign majority ownership
Reforms and somewhat increased inflows of
FDI from early 1990s
– but still only a fraction of that directed to China
Ari Kokko