New horizons: Multinational company investment in developing economies

By Diana Farrell, Jaana Remes, Vivek Agrawal, et al.
New horizons: Multinational company investment in developing economies

Global expansion has its opportunities as well as its pitfalls. CEOs and policymakers need to understand them both.

Multinational company investment in the developing world opens up new horizons for economic development and for company strategy. The McKinsey Global Institute's latest report shows that the overall economic impact of multinational investment on developing economies has been overwhelmingly positive despite the persistence of policies that lead to negative, unintended consequences. Companies are also seeing substantial benefits but have only started to capture the large cost savings and revenue gains possible from operating in these markets.

Opportunities for Companies

New horizons for cost savings and revenue generation are opening up for multinational companies. Our sector findings suggest that there are enormous opportunities for companies to create value by taking full advantage of falling barriers in regulation, transportation costs, communications costs, and infrastructure. To find the value, companies need to rethink their entire business process.

Going global is obviously not a recipe for success in and of itself. Multinational companies are well positioned to transfer their competitive products and processes, but less equipped to tailor them appropriately to local conditions. Currently, the interplay of industry characteristics, regulatory restrictions, and organizational limitations prevent some companies from pursuing further industry restructuring. However, as a result of competition, liberalization, and new technologies, new possibilities are opening up where a greater degree of specialization is possible and likely.

Opportunities for Developing Economies

The opportunities for developing economies are significant as well. Through the application of capital, technology, and a range of skills, multinational companies' overseas investments have created positive economic value in host countries, across different industries and within different policy regimes.

The single biggest effect evidenced was the improvement in the standards of living of the country's population, as consumers have directly benefited from lower prices, higher quality goods, and broader selection. Improved productivity and output in the sector and its suppliers indirectly contributed to increasing national income. And despite often-cited worries, the impact on employment was either neutral or positive in two-thirds of the cases.

Foreign direct investment is already having a dramatic impact on the way companies do business and developing economies integrate with the global economy. Compared to its potential, however, it's just a drop in the bucket.

Impact on developing economies & policy implications

The process of globalization is not uniform across all industries, and there are large differences in the extent to which developed and developing economies have been integrated into a single global market. Our case evidence suggests that policies targeted at foreign direct investment such as incentives, import barriers, and trade-related investment measures often did not achieve their objectives and frequently incurred significant costs.

Impact on global industry restructuring & implications for companies

Policy and communications barriers to integrating developing economies into the global economy are declining. This creates new opportunities for radically reducing costs. There is no one correct approach to managing global optimization. Companies that understand where the potential restructuring opportunities lie and are able to remove any existing barriers to globalization can succeed.

Automobile sector

Foreign direct investment has proven to be a necessary, but not a sufficient, condition for modernizing the auto industry in most developing economies. Once foreign direct investment is present in the country, conventional market forces—old-fashioned competition and managerial innovation—matter a great deal and the resulting economic impact can be highly varied.

Consumer electronics sector

We found the impact on the host countries of a disaggregated production process to be either positive or very positive in every case. However, these positive impacts have surfaced in very different ways according to each country's unique market and policy environment.

Food retail sector

Food retail is a sector that is critical to all the economies studied. Our study reveals that the initial market conditions are of critical influence on both the performance of the foreign players in these markets and the impact foreign direct investment has in the sector.

Retail banking sector

The retail banking sectors in Brazil and Mexico are the two largest in Latin America and both experienced significant inflows of foreign direct investment in the second half of the 1990s following a period of macroeconomic instability. Yet the impact of foreign direct investment has been quite different in each case.

IT/business process sector

Companies are increasingly turning to offshored services in information technology (IT)–related services and other business services to leverage differences in wage levels. Offshoring has, in large, been enabled through recent advances in communications technology, the increasing penetration of PCs, and removal of trade barriers in developing countries.

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