New Horizons: Multinational Company Investment in Developing Economies

By Martin Baily, Richard Cooper, Dani Rodrik
New Horizons: Multinational Company Investment in Developing Economies

Foreign direct investment has proven to be a necessary, but not a sufficient, condition for modernizing the auto industry in most developing economies

Auto sector case study

Emerging markets are in a position to not only attract significant foreign investment from automobile companies but also significantly improve the performance of the automotive assembly industry.

The critical component for success in developing economies is whether they foster a positive environment for investment. When they do, the results can be staggering. As an example, India, closed to foreign investment until 1983, has grown its automotive assembly industry by a factor of 13 since laws were liberalized.

The "very positives"

In the span of a generation, India's automotive market has transformed a failing local industry into a thriving producer of reasonably priced, reliable small cars, some for export. Alongside the assemblers, successful component manufacturers and suppliers have developed. Still, while India's industry is booming, consumers, rather than investors, are reaping the greatest rewards.

Mexico boasts a strong industry that has succeeded without offering incentives to lure American carmakers. Output, productivity, and employment have all increased, leading to higher tax revenues and high plant utilization.

The "positives"

In Brazil, incentives to lure investment backfired by creating an investment frenzy that led to overestimated demand and an oversupply of product. States that offered inducements lost money, although consumers ultimately prospered when car prices dropped.

China, lately a magnet for foreign investments, has acquired foreign infrastructure products and inherited manufacturing processes far superior to those present in incumbents. And as a result, prices have declined and sales grown rapidly - a trend is likely to continue as remaining barriers to FDI entry are being removed.

Conclusion

The automotive assembly industry and developing economies are in a position to reap massive rewards. But neither will reach their potential until remaining incentive and price controls are loosened to allow the laws of supply and demand to hold sway.

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