New horizons: Multinational company investment in developing economies

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.