New Horizons: Multinational Company Investment in Developing Economies

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

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.

Consumer electronics case study

Consumers are the clear winners when multinational companies invest in electronics in China, Brazil, Mexico, and India.

In each country studied, the sector accounts for at least US $ 8 billion in sales, with China's market roughly four times that size and growing at a healthy 20 percent per year. Corporations, however, don't consistently fare quite as well.

Chinese success story

China owes its global success to its combination of a large, growing domestic market and favorable environment for low cost export production (skilled workforce, low labor costs, and liberalized foreign investment policies). MNCs have provided the technology and export access that, together with competition from strong local entrepreneurs, have made China a global production hub for many consumer electronics products.

Tax, tariff, and infrastructure concerns

Corporate investment in Mexico is driven by assembly operations for the U.S. market. Yet scarcity of skilled labor, four times higher labor costs than in China, and continuing infrastructure problems have slowed down sector growth recently.

Success has been as difficult to attain in both India and Brazil. The Indian market is constrained by strong tax and labor laws, while Brazil's import tariffs, along with its proprietary standards for consumer electronic devices and government policies designed to encourage businesses to locate in remote Manaus province, limit growth in the consumer electronics sector and often add unnecessary costs.

Recommendations

In all three countries, foreign investments have succeeded in bolstering the economy and benefiting consumers, but unfavorable policies still prevent MNCs from reaching their full potential.

For companies to achieve better returns, Mexico, Brazil, and India need to undertake changes that foster a more openly competitive environment by either improving export infrastructure (Mexico), loosening labor laws and indirect taxes (India), or loosening unsuccessful incentive programs (Brazil).

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