Impact on developing economies & policy implications
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. Launch this chapter (PDF - 524 KB)
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?
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Making foreign investment work for China The radically different experience of two industries shows that the country needs more competition as well.
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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
