Few topics are more intensely debated or create more contrasting emotions than do the merits and costs of global economic integration. And few are more in need of a robust set of facts on which to base assessments.To provide insight, the McKinsey Global Institute launched an in-depth inquiry into multinational company investment in developing economies. The result is a report that challenges some preconceptions about global integration and outlines the opportunities available for those who are ready to grab them.MGI's report focuses on five sectors – auto, consumer electronics, food retail, retail banking, and information technology/business process offshoring – in four major economies: Brazil, Mexico, China, and India.
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.
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.
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 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.
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.
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.
The truth about foreign direct investments in emerging markets Developing countries think they must not only offer incentives to attract foreign direct investment but also protect their local economies by restricting the way multinationals operate. Are these countries wrong on both counts? Read more on the McKinsey Quarterly site
Making foreign investment work for China The radically different experience of two industries shows that the country needs more competition as well. Read more on the McKinsey Quarterly site
A richer future for India Two industries have shown what can be achieved when the country opens itself up to the world. Now the rest of the economy should follow suit. Read more on the McKinsey Quarterly site
