[PPT]Introduction - George Mason Universityiie.gmu.edu/files/powerpoint/IIE Chapter 22.pptx · Web viewIntroduction What makes a developing country attractive to multinational enterprises

Chapter 22: International Production and DevelopmentAn Introduction to International

Economics: New Perspectives on the World Economy

© Kenneth A. Reinert, Cambridge University Press 2012


Analytical Elements

Countries Sectors Tasks Firms Factors of production


Introduction What makes a developing country attractive to

multinational enterprises (MNEs) as a potential destination for international production in the form of contracting or FDI?

We know from Chapter 10 and our discussion of the OLI framework that location advantages matter for MNE choices

So we can rephrase our question in terms of what types of location advantages matter for developing countries to be able to attract international production Domestic or adjacent markets for market seeking FDI Particular types of resources for resource seeking FDI


Patterns of FDI in Developing Countries Natural resource or resource-based FDI

The MNE wants access to the resource and the host country government needs to manage this so as to share in the income for the benefit of the country

Domestic market serving FDI and export processing Institutional quality can matter, including democracy, good

governance and lack of corruption Intellectual property protection can matter in order for MNEs to

avoid dissemination risk Bilateral investment treaties (BITs) and regional investment

treaties (RITs) can also help facilitate FDI inflows BITs have grown rapidly over time, from approximately 400 in

1990 to approximately 2600 in 2008


Benefits and Costs

It is helpful to have a sense of the potential benefits and costs of hosting MNEs

Table 22.1 gives a sense of these, for each of the following dimensions Employment and wages Competition Education and training Technology Balance of payments Health and the environment Culture


Table 22.1: The Benefits and Costs of Inward FDI

Sources: Adapted from Dunning and Lundan (2008) and Hill (2009)

Item Benefits Costs

Employment and Wages

Generate direct and indirect increases in employment. Might offer higher wages.

Transfer jobs from home to foreign firms.

Competition Promote competition by increasing the number of firms in an industry.

Retard competition in cases where the foreign firm has a large amount of market power.

Education and Training

Improve the education and training of host country workers.

Restrict education and training to expatriate employees. Discriminate against host-country workers.

Technology Transfer technology from developed to developing countries.

Technology employed might not be appropriate for the host country economy.


Table 22.1: The Benefits and Costs of Inward FDI

Sources: Adapted from Dunning and Lundan (2008) and Hill (2009)

Item Benefits Costs

Balance of Payments

Improve the import and export components of the current account. Improve the direct investment component of the capital/financial account.

Worsen the import component of the current account. Worsen the net factor receipt component of the capital/financial account.

Health and the Environment

Employ new technology that is more environmentally sound. Increase incomes and thereby make more resources available for the enforcement of existing environmental regulations.

Increase the amount of pollution and subject workers to unsafe workplaces.

Culture Introduce progressive aspect of business culture in the areas of organizational development and human resource management.

Increase dominance of urban and Western culture over rural and non-Western culture.


Policy Stances Given the information in Table 22.1, it is natural to

consider how to minimize the costs and maximize the benefits of the FDI

Attempts to achieve this are usually made through policy stances towards the MNE that can be grouped into ownership requirements and performance requirements Ownership requirements may be absolute as in the case of

foreign firms being excluded from certain sectors on national security grounds, or they may simply limit foreign ownership to a maximum specified amount

Performance requirements place controls on the behavior of the foreign firm in a number of areas, including local content requirements, training, technology transfer, exports, local research and development, and the hiring of local managers


Trade-Related Investment Measures (TRIMs) The Marrakesh Agreement on Trade in Goods (see

Chapter 7) included an Agreement on TRIMs, which prohibits some types of TRIMs in the case of goods (Table 22.3) These include domestic content, trade balancing, foreign

exchange balancing, and domestic sales requirements Export performance requirements were not prohibited

Investment related policies in services are covered under the General Agreement on Trade in Services (GATS)

Controversially, Some international economic policy experts are now calling for policies that would go beyond TRIMs to require the abandonment of all policies that discriminate between domestic and foreign firms


Table 22.3: Types of Trade-Related Investment Measures

Sources: Low and Subramanian (1996) and UNCTAD (2003)

Measure Explanation CommentLocal content requirement

Requires that a certain amount of local input be used in production.

Prohibited by TRIMs

Trade balancing requirement

Requires that import be a certain proportion of exports. Prohibited by TRIMs

Foreign exchange balancing requirement

Requires that use of foreign exchange for importing be a certain proportion of exports and the foreign exchange brought into the host country by the firm.

Prohibited by TRIMs

Domestic sales requirement

Requires that a proportion of output be sold locally. Prohibited by TRIMs

Manufacturing requirement

Requires that certain products be manufactured locally.

Manufacturing restriction

Prohibits the manufacturing of certain products in the host country.


Table 22.3: Types of Trade-Related Investment Measures

Sources: Low and Subramanian (1996) and UNCTAD (2003)

Measure Explanation Comment

Export performance requirement

Requires that a certain share of output be exported. Prohibited or discouraged by many BITs and RITs

Exchange restriction Limits a firm’s access to foreign exchange.

Technology transfer requirement

Requires that certain technologies be transferred or that certain R&D functions be performed locally.

Prohibited or discouraged by many BITs and RITs

Licensing requirement

Requires that the foreign firm license certain technologies to local firms.

Remittance restriction

Limits the right of the foreign firm to repatriate profits.

Local equity requirement

Restricts the amount of a firm’s equity that can be held by local investors.

Prohibited or discouraged by many BITs and RITs


Export Processing Zones Another policy stance towards hosting MNEs is to set up

an export processing zone or EPZ An EPZ is an area of the host country in which MNEs

can locate and in which they enjoy, in return for exporting most or the whole of their output, favorable treatment in the areas of infrastructure, taxation, tariffs on imported intermediate goods, and labor cost

Table 22.4 gives a sense of the number and extent of EPZs, with 3,000 of them in existence in 2006

In most cases, EPZs involve relatively labor-intensive, “light” manufacturing such as textiles, clothing, footwear, and electronics


Table 22.4: Export Processing Zones

Source: Singa Boyenge (2007)

1975 1986 1997 2002 2006Number of countries with EPZs

25 47 93 116 130

Number of EPZs

79 176 845 3,000 3,000

Employment (millions)

NA NA 23 43 66

Employment accounted for by China (millions)

NA NA 18 30 40


Export Processing Zones

A number of studies have tried to assess EPZs from the benefit and cost framework of Table 22.1

These studies show that in many (but not all) cases, the benefits do outweigh the costs

Some studies have shown that EPZs are an important source of employment

In some cases, infrastructure costs of setting up the EPZ were too high for a net positive benefi

In some cases, EPZs were helpful in diversifying the industrial structure of the country and attracting FDI


Promoting Linkages It is possible for MNEs to leave some parts of the

upstream components of the GPN to other firms, but chose to buy from local firms in the country in which it is located

This is known as backward linkages to domestic suppliers

Historically, backward linkages have been weak The increased role of MNEs in an economy without

significant backward linkages results in what are termed enclaves with little connection to the rest of the economy and little contribution beyond direct employment effects


Promoting Linkages: Traditional and New Approaches Traditionally, the means to avoid enclave FDI was via the

local content requirements discussed in the previous section, but these are no longer allowed for WTO members

New thinking in the area of facilitating backward linkages suggests that local content requirements should be replaced by efforts to support local suppliers in their efforts to secure contracts with foreign MNEs

If a foreign MNE can be induced to source inputs locally rather than by importing them, the host country can gain a number of important benefits


Promoting Linkages: Potential Benefits The potential benefits of promoting backward linkages

from MNEs to domestic firms include Employment can increase since the sourced inputs are new

production The balance of payments can improve since the inputs will no

longer be imported Production technologies can be better adapted to local

conditions Tangible and intangible assets can be, to some degree at least,

passed from the foreign MNE to the local, host-country suppliers, and local suppliers can coalesce into a spatial cluster that supports innovation and upgrading


Promoting Linkages: How To Do It

The key policy question for developing countries is how to foster backward linkages between foreign MNEs and potential local suppliers

The role government is one of coordination, attempting to bridge the “information gaps” among the players

The government can do this in a number of ways Provide a matching service between MNEs and local suppliers Provide support in standards formation, materials testing, and

patent registration Provide technical training and managerial training Remove small firms’ obstacles to access to financial resources


Transfer Pricing Transfer pricing practices reflect the fact that MNEs are

global, whereas tax systems are locally defined MNEs can therefore adjust the internal pricing of their

intra-firm trade to shift declared profits of subsidiaries to low-tax countries The goal is to maximize the post-tax profits of the firm

Policy options to address transfer pricing abuses are multifaceted International guidelines and codes of conduct, international

standardization of invoicing and customs procedures, global tax harmonization, negotiating and concluding international conventions, and the establishment of international arbitration procedures


Governance of International Production Policy postures towards MNE behavior involve

Constraining the policies of host countries towards MNEs Constraining the behavior of the MNEs themselves

In the realm of the former, the Organization for Economic Cooperation and Development (OECD) has promoted multinational approaches to FDI governance

In 1995, the OECD promoted a Multilateral Agreement on Investment or MAI The purpose of the agreement was to liberalize the cross-border

flows of foreign direct investment It would have required host countries to apply “national

treatment” to all foreign firms This effort failed due to a lack of support


Governance of International Production The second issue is the multilateral regulation of MNE

conduct A number of guidelines exist such as the World Bank’s

Equator Principles, the Extractive Industries Transparency Initiative, and Publish What You Pay

But the most general guidelines are the OECD’s Guidelines for Multinational Enterprises, developed in 1976, revised in 2000 and currently under revision again

See the appendix to this chapter for a list of the OECD Guidelines

Documents

[PPT]Introduction - George Mason Universityiie.gmu.edu/files/powerpoint/IIE Chapter 22.pptx · Web viewIntroduction What makes a developing country attractive to multinational enterprises