31st March 2010Word count: 2120OutlineIntroduction: Gives brief background information on foreign direct investment and the role multinational play in movement of capital across borders. Employment: This section shows how multinationals contribute towards employment in host countries as a fundamental factor in economic growth and development. Technology transfer: this section explains how technological know-how from home countries introduced in host countries filters into other industries thereby increasing efficiency across the boardSource of revenue: Through taxation, corporations act as sources of revenue to host governments. However, this part also explains that tax holidays are best ways to attract FDI for poor countries.
Trade opportunities: Where multinationals export goods and services as is common, host countries have a host of improving their foreign trade balance. Domestic investment: explains how multinationals encourage domestic investment where the firms are listed in local stock exchange markets. Conclusion: Wraps up the discussed issues in the paper and concludes the paper. Introduction Multinationals are responsible for foreign direct investment for major economic powerhouses globally. Corporations such as Coca Cola, Nike, Mobil, Toyota, Wal-Mart etc have an international presence spreading from the developed to the developing/underdeveloped world.
Given that majority of the homes countries are developed, competition is usually high thus forcing these companies to explore foreign markets which more often than not are unexplored. Home governments have been known to offer subsidies and information to their corporations to explore other markets (Kehl 2009). The department of foreign trade and the foreign affairs offers up-to-date information to their corporations seeking to explore foreign markets. The United Nations Conference on Trade and Development (UNCTAD) publishes annual reports on national FDI changes. Between 1991 and 2002, UNCTAD noted that there were over 1,500 favourable changes on policies by various countries to encourage inward FDI as compared to only 100 that were deemed unfavourable (Lipsey & Sjoholm 2007).
Therefore, majority of the countries are keen on encouraging inward FDI. So what are the benefits of inward FDI? The UN states that FDI from the developed to the developing and underdeveloped countries is one of the sure ways of reducing poverty in such countries while Moran, Graham and Blomstrom (2005) claim that FDI to the third world countries is more effective than financial and economic aid in alleviating poverty in such countries.
As of 2000, the top fifty largest multinationals held $1.8 trillion in foreign capital and $2.1 trillion in sales (Kehl 2009). These multinationals afford economic benefits to the host countries through provision of employment, capital, revenue, trade, and technology transfer. Employment As new entrants in the market, multinationals offer employment opportunities to the host countries. However, given that most multinationals employ superior technology, expatriates have to be brought in. As such, the locals do not get to enjoy the senior positions but tend to occupy the low level positions.
Nonetheless, foreign owned corporations have a tendency to offer higher wages than other employers in the host country (OECD 2010; Lipsey & Sjoholm 2007). Multinationals may furthermore offer above-market wages in order to cut down employee turnover and prevent competitive advantage in technology spilling over to competitors. Kehl (2009) notes that worker turnout is one potential way through which technology from the multinationals spills over to the rest of the host country. An investigation by the OECD revealed that foreign ownership of automobile manufacturing units in Brazil had a positive effect on the domestic wage market ranging from 1-4%.
The same situation is reported by Moran et al (2005) who say that foreign based automobile industries operating in Mexico have grown from a small base into a $7 billion dollar industry as of 2000 employing over 354 000 locals.