New horizons: Impact on developing economies & policy implications

By Martin Baily, Richard Cooper, Dani Rodrik
New horizons: 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.

Investments by multinational companies (MNC) allow developing economies to share in the considerable benefits of the global economy. Official incentives, trade barriers, and other regulatory policies, though, can result in inefficiency and waste.

Case studies reveal that in virtually all cases, MNC investment had a positive to very positive impact on the host country. Rather than leading to the exploitation of lower-wage workers, as some critics have charged, the investments fostered innovation, productivity, and an improved living standard. Therefore, government seeking those advantages would be advised to favor policies of openness, rather than regulation, when it comes to foreign direct investment.

Consistent value

MNCs were shown to create substantial value for host countries regardless of whether investments were market seeking (to seek new consumers) or efficiency seeking (to tap into lower local production costs.) Only in retail banking in Brazil did investment fail to make a significant difference.

In every other case, foreign investment spillover effects stimulated supplier businesses and fostered improvements in technology and skills. Though in some cases, jobs were lost through elimination of inefficient local players or streamlining inefficient production operations, benefits to consumers were significant in terms of lower prices, more product choice, and increased productivity, which in turn increased national wealth.

Policy implications

Barriers to foreign investment and trade can create a competitive disadvantage for developing nations, rendering the considerable benefits of the global economy inaccessible to them. Targeted incentives, by the same token, rarely have a positive effect and often create harmful unintended consequences.

Governments can more effectively grow MNC investments by putting the basic building blocks of productivity in place, through strengthened power, transportation, and legal infrastructures, and the enactment and enforcement of clear and consistent official policies.

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