Developing Host Countries Research Articles

Multinational Enterprises and the New Development Paradigm: Consequences for Host Country Development

The New Development Paradigm (NDP) integrates the theoretical and empirical views on development that have gained prominence since the mid‐1990s. In particular the multifaceted nature of development objectives‐including social and ecological development next to economic growth‐and the critical role of institutions in the development process characterize the NDP. This new perspective has important consequences for understanding the role of Multinational Enterprises in fostering development. This paper addresses these implications and delineates a research agenda that pays systematic attention to the wide variety of direct and indirect, active and passive ways in which MNEs can (and do) affect sustainable development

Tax competition and FDI: The special case of developing countries

According to the foreign direct investment (FDI) literature, the elasticities between FDI and its determinants vary considerably with the level of host country development. This may be a major concern when dealing with the influence of corporate tax rates on FDI in developing countries, since most studies concentrate on developed countries. Using data on Japanese firm location choices between 1990 and 2000, we contrast differences in regional tax rates in order to reveal an asymmetry between developed and developing countries. By looking at the interaction effects between Japan and host developing countries' tax systems, we also put forward the idea that special tax sparing provisions signed with Japan can alter the effect of host country taxes on Japanese firms' location choices. Finally, we find that even though tax competition can be strong in developing countries, this competition should not lead to an effective rate of zero taxation for these countries in their competition for FDI inflows. J. Japanese Int. Economies 22 (1) (2008) 85–108.

Egalitarianism, Cultural Distance, and FDI: A New Approach

This study addresses an apparent impasse in the research on organizations’ responses to cultural distance. We posit that cross-country differences in egalitarianism — a cultural orientation manifested in intolerance for abuses of market and political power and support for protection of less powerful actors — affect multinational firms’ choices of destinations for foreign direct investment (FDI). Using historically motivated instrumental variables, we observe that egalitarianism distance has a negative causal impact on FDI flows. This effect is robust to a broad set of competing accounts, including the effects of other cultural dimensions, various features of the prevailing legal and regulatory regimes, other features of the institutional environment, economic development, and time-invariant unobserved characteristics of origin and host countries. We further show that egalitarianism correlates in a conceptually compatible way with an array of organizational practices pertinent to firms’ interactions with non-financial stakeholders, such that national differences in these egalitarianism-related features may affect firms’ international expansion decisions.

Subsidiary role development: The effect of micro-political headquarters–subsidiary negotiations on the product, market and value-added scope of foreign-owned subsidiaries

This paper focuses on subsidiary role development in terms of changes in the market, product and value-added scope of foreign subsidiaries within multinational corporations (MNC). In its theoretical part, it identifies three interrelated reasons to explain such role changes: (1) subsidiary capabilities, (2) host-country localization advantages and (3) headquarters' realized strategies—that is, headquarters' intended strategies and the outcomes of micro-political headquarter–subsidiary negotiations. Based on the results of interviews with 65 managers in 11 German headquarters and their 13 Hungarian subsidiaries, the paper reveals the interrelated effects of the three factors on subsidiary role development and shows that headquarters' intended strategies are decisive to explain role development in peripheral host countries, though micro-political headquarter–subsidiary negotiations being an integral part of subsidiary role development.

Was von ausländischen Direktinvestitionen zu erwarten ist: Unbegründete Ängste in den Heimatländern, übertriebene Hoffnungen in den Gastländern?

Abstract The rise in foreign direct investment flowing to developing countries has created high expectations that, by drawing on this source of external financing, developing countries could initiate or accelerate processes of economic catching-up to advanced industrialized countries. By contrast, the public in advanced countries such as Germany is increasingly concerned that the relocation of production and the outsourcing of inputs by multinational enterprises add significantly to domestic labor market problems. A critical review of the literature and own empirical analyses suggest, however, that both views have to be qualified in major respects. As concerns developing host countries, it appears to be more difficult to derive macroeconomic benefits from foreign direct investment than to attract it. The labor market repercussions in advanced home countries are fairly complex. While relocation and outsourcing are important means to support the international competitiveness of domestic enterprises, the employment prospects and the relative wages of less qualified workers are likely to deteriorate.

How Corruption Influences Foreign Direct Investment: A Panel Data Study

This article analyzes the sign and development of the effect of corruption on foreign direct investment (FDI). Economic theory distinguishes grabbing hand corruption from helping hand corruption. The former suggests a negative impact of corruption on FDI, the latter one a positive effect. Empirically, we apply a data set of 21 home and 59 developed and less developed host countries covering between 1983 and 1999. To investigate the corruption impact, we employ a panel data model that particularly refers to the knowledge‐capital model of multinational activity. We find a negative relationship between corruption and FDI. This, in turn, suggests that the helping hand effects of corruption are outweighed by the grabbing hand effects. Further, we observe that corruption is an important impediment of FDI in developed economies but not in less developed ones. Finally, we demonstrate that the importance of corruption has decreased over the years.

Growing industrialization and our damaged planet. The extraterritorial application of developed countries’ domestic environmental laws to transnational corporations abroad

There is serious concern over environmental devastation caused by commercial activities worldwide. Transnational corporations (TNCs) have substantially contributed to such devastation through their ‘double standards’ practice. TNCs have been conducting their operations in developing host countries in accordance with much lower environmental standards than those adopted in their home countries or in developed host countries. Considering the seriousness of environmental destruction and the social responsibility of TNCs, it is argued that TNCs should be subject to the same stringent environmental standards in developing host countries as well. Recently, foresighted TNCs have voluntarily adopted uniform stringent environmental standards; however, it seems unlikely that the majority of TNCs will follow suit. The international harmonization of environmental standards also appears unlikely due to irreconcilable national interests. Given the economic dependence on TNCs and the lack of enforcement mechanisms, developing countries do not seem to be able to regulate TNCs effectively. The only remaining possible solution seems to be the extraterritorial application of the environmental rules of the TNCs’ home countries. Although controversial, this approach would be viable if the rules in question would not directly apply to foreign affiliates of TNCs and if it were implemented through multilateral action by the OECD member states.

Spillovers from foreign direct investment and firm growth: technological, financial and market structure effects

This article examines spillover effects from inward investment on domestic firm growth in the case of a developed host country. The emphasis is placed on the role of the technological gap between domestic and foreign firms in identifying the importance of technology diffusion from the presence of multinationals. An augmented production function is employed to account for technological, financial and market structure effects. Based on a sample of 2589 manufacturing firms operating in Greece between 1992 and 1997, the analysis provides evidence that the significance of spillovers varies with the relative technological position of domestic firms and is higher in the middle and upper quantiles of the growth distribution. It was estimated that a unit increase in the foreign presence in Greek industry raises output growth by 7% on average, in a five‐year period, after controlling for technological differences among firms. This result is consistent with the ‘absorptive capacity’ hypothesis that the technological capability of the host country relates positively to FDI spillover benefits.

Sustainable Development and the Clean Development Mechanism: A South African Case Study

The clean development mechanism (CDM) is often seen as providing the financial benefits and transfers of cutting-edge green technology that enable developing countries to reduce emissions and achieve their sustainable development goals. The process of implementing the mechanism is, however, fraught with challenges. The absence of the United States in the carbon market has induced the low price of certified emissions reductions through the CDM, while host countries desire to ensure the sustainable development benefits of the CDM is likely to result in a complex approval process, which would further increase transaction costs. This article examines the CDM implementation environment in the context of a South African case study. It is argued that a fine balance needs to be struck between the spirit of the CDM, as encapsulated in its mandate to promote sustainable development in host countries, and its economic rationale when host countries approve those projects they deem beneficial.

Foreign Direct Investment and the Environment: A Transaction Cost Perspective

ABSTRACT Traditionally, the extant literature on foreign direct investment and the natural environment has conceived the investment-environment nexus in terms of foreign investors exploiting weak environmental regulations and abundant natural resources in developing host countries. This paper provides a corrective to the literature's focus on location factors as determinants of foreign investors' environmental strategies. Based on a presentation of various insights regarding the environmental strategies of foreign investors offered by transaction cost economics, the paper reaches the conclusion that internalization, not location, may be the more significant aspect of the investment-environment nexus.

Foreign Direct Investment and Economic Growth in the European Union

This paper contains an empirical assessment of the growth effects of foreign direct investment (FDI) in European Union (EU) countries, when controlling for other growth determinants. Using data over the period 1980-1996, we obtained estimates of the growth effects of FDI for each country in isolation and by pooling the data for the whole Union. Country-specific estimates suggest that growth determinants vary across EU members and that only past FDI inflows have a significant effect on growth. Interestingly, when data are pooled, the empirical results show that FDI has a positive effect on the growth rate of EU economies both directly and indirectly (through trade reinforcement). Also, unlike previous empirical findings concerning developing economies, we obtained evidence that the growth effect of FDI is not conditional upon the level of human capital in developed host countries.

ANALYSIS OF FOREIGN DIRECT INVESTMENTS AND ITS’ IMPACT ON RESTRUCTURING OF LITHUANIAN ECONOMY

The paper deals with foreign direct investments (FDI) in Lithuania. An issue of priority is to determine if inflow of foreign capital in all cases contributes sufficiently to development of national economy. Investigation of controversial impact of FDI on Lithuania is based on theories presented by concise review of the literature examining the role of FDI in transition economies. The detailed analysis of FDI directed to different sectors of Lithuanian economy let to determine cases when globalization retards economic development of host country.

Analysis of foreign direct investments and its' impact on restructuring of Lithuanian economy

Abstract The paper deals with foreign direct investments (FDI) in Lithuania. An issue of priority is to determine if inflow of foreign capital in all cases contributes sufficiently to development of national economy. Investigation of controversial impact of FDI on Lithuania is based on theories presented by concise review of the literature examining the role of FDI in transition economies. The detailed analysis of FDI directed to different sectors of Lithuanian economy let to determine cases when globalization retards economic development of host country.

Collective Technology Learning Between Transnational Corporations and Local Business Partners: The Case of West Sweden

Unique firm-level data from 287 majority-owned foreign affiliates (MOFAs) located in West Sweden are used to analyse the extent in which transnational corporations (TNCs) in a developed host country have established technological linkages, leading to collective technology learning where both TNCs and their local business partners benefit. The findings indicate that local business partners have established substantial levels of organised technological cooperation, not only with manufacturing MOFAs but also with wholesale MOFAs supplying industrial products. This seems to result in collective technology learning where both MOFAs and business partners in Sweden, especially customers, earn advantages. In the case of manufacturing MOFAs, local business partners in West Sweden seem to be important as cooperative partners. By using a multiple logistic regression to analyse key determinants, it was found that the size of MOFAs positively affected the establishment of technological linkages to business partners in Sweden, among both manufacturing MOFAs and sales MOFAs. A positive correlation with linkage formation was also found among manufacturing MOFAs regarding both increasing age and the extent in which they operate within competitive Swedish industry clusters.

Global economic implications of alternative climate policy strategies

This paper investigates the world economic implications of climate change policy strategies, and particularly evaluates the impacts of an implementation of clean development mechanisms (CDM), joint implementation (JI) and emissions trading with a world integrated assessment model. Of special interest in this context are welfare spill over and competitiveness effects resulting from diverse climate policy strategies. This study elaborates and compares multi-gas policy strategies and explores the impacts of sink inclusion. We furthermore examine the economic impacts on all world regions of the USA’s non-cooperative, free rider position resulting from its recent isolated climate policy strategy decision. It turns out that CDM and JI show evidence of improvement in the economic development in host countries and increase the share of new applied technologies. The decomposition of welfare effects demonstrates that the competitiveness effect (including the spill over effects from trade) have the greatest importance because of the intense trade relations between countries. Climatic effects will have a significant impact within the next 50 years, will cause considerable welfare losses to world regions and will intensify if nations highly responsible for pollution like the USA do not reduce their emissions.

Multinational Subsidiary Evolution and Public Policy: Two Tales from the European Periphery

The paper explores the link between subsidiary evolution and public policy towards multinational enterprises (MNEs). The cases of two peripheral EU economies (Portugal and Ireland) are contrasted, both in terms of their “inward investment” policy stances and as regards differential evolutionary processes at subsidiary level unveiled by empirical results from a new survey of subsidiaries operating in those two host countries. After examining issues such as motivations underlying investment, subsidiaries roles/strategies and evolution (addressing distinct paths in subsidiary transition), the paper discusses the potential contribution of subsidiaries to host country development and what constitutes an appropriate policy towards multinationals. Explicit consideration is given to subsidiaries’ value-added scope and the density and quality of local linkages as key determinants of host country impact.

Toward an ‘International Business’ Paradigm of Endogenous Growth: Multinationals and Governments as Co-Endogenisers

Endogenous growth theory has recently originated in economics. Building on this theory, this paper conceptualises the phenomenon of endogenous growth in terms of some new ideas developed in the field of international business (IB), especially Dunning's eclectic paradigm and his notion of macro-organisation policy. These ideas have so far not been linked to the notion of endogenous growth. At the same time, mainstream economics has not made much progress in exploring the MNC-government relationships through which growth-inducing 'mechanics' are created, a topic of great importance in IB. Both MNCs and governments complement each other in facilitating an efficient matching of ownership-specific assets (notably knowledge) with location-specific advantages through Dunning's OLI mechanism, thereby enabling the developing host countries to realise potential growth in an intensified manner, a new mode of endogenous growth that counteracts the law of diminishing returns. The phenomenon of MNC-cum-governmentdriven endogenous growth will be conceptualised.

The product cycle model of foreign direct investment and developing country welfare

Abstract Raymond Vernon's product-cycle model predicts two distinctive kinds of foreign direct investment in developing countries: fist, subsidiaries whose operations are tightly integrated into the parent's strategy to advance its competitive position in international markets; second, subsidiaries toward the host market whose profits help fund the needs of the parent but whose output is not an integral part of the parent's global sourcing network. In practice, the latter are frequently subject to domestic content, joint venture, and technology-sharing requirements; the former almost never are. How do the two kinds of foreign direct investment differ in their impact on host country development? Somewhat surprisingly, to those who may be wary of what Vernon himself reffered to as “captive” plants, foreign investor operations intimately linked into the parent's global sourcing network make a systematically larger and more dynamic contribution to the host economy via the activities of the affiliates themselves, via backward linkages to local suppliers, and via spillovers and externalities. Foreign investor operations impeded from close integration via domestic content, joint venture, and technology-sharing requirement provide a much less positive and sometimes genuinely negative impact, especially if they are protected by trade barriers or other forms of market exclusivity.

Japanese FDI, the implications of “hollowing out” on the technological development of host countries

Japanese FDI, the implications of “hollowing out” on the technological development of host countries

The role of export processing zones for host countries and multinationals: a mutually beneficial relationship?

This paper examines export processing zones (EPZs) and the reasons behind their limited success in the development of host countries’ economies, especially in terms of employment, technology transfer, and foreign earnings. It is posited that (1) the extent to which host governments derive net benefits from EPZs is a function of the location-specific advantages they provide; net benefits to the host country increase as location-specific advantages increase; (2) net benefits tend to decrease at any given level of location-specific advantages as the number of countries offering equivalent advantages increases; (3) host countries’ net benefits are generally higher when EPZ operations are not insulated from the domestic economy, but this policy can be risky; and (4) there is little difference between EPZ-related foreign direct investment (FDI) and more traditional forms of FDI when the EPZ is not insulated from the domestic economy.