Growth and Employment Effects
Growth and Employment Effects
Unlike balance of payments, the growth and employment effects of MNEs are
not necessarily a zero-sum game among countries. Early economists assumed
production factors were at full employment; consequently, a movement
OI anY °f these factors abroad would result in an increase in output abroad
and a decrease at home. Even if this assumption were true, the gains in the recipient country might be greater or less than the losses in the donor country.
The argument that both the donor and the recipient country may gain from direct investment is premised partly on the assumption that resources are not necessarily fully employed and partly on the industry-specific and complementary nature of capital and technology. A farm-machinery manufacturer may, for example, be producing maximally for its domestic and export market. This firm may not move easily into other product lines or use its financial resources to effect domestic productivity increases. By participating in the establishment of a foreign production facility the firm may be able to develop foreign sales without decreasing the employment of resources domestically. In fact, the firm may hire additional domestic personnel to manage the international operations. The firm may receive dividends and royalties from its capital and technology being used abroad, thus further increasing domestic income. The foreign facility may even stimulate export sales because of a need for components and replacement parts and because of the ability of the foreign operation to sell the companies' related products.
Donor Country Losses As the largest donor country for foreign licensing and direct investment, U.S. policy understandably arouses some of the major critics of outward movements. One such critic is organized labor, which argues that foreign production often displaces what would otherwise be U.S. production. For example, a criticism of Stanley Works' movement of some tool production abroad was that it took place at the expense of domestic factory improvement, which might have made U.S. output more competitive.7 Critics also cite many examples of highly advanced technology, which has been at least partially developed through governmental contracts and then transferred abroad. In fact, U.S. MNEs are now moving their most advanced technologies abroad and are even, in some cases, producing abroad before they do so in the United States. An example is General Dynamics' transfer of aerospace technology to Japan to produce fighter planes. According to critics, if General Dynamics did not transfer the technology, Japan would purchase the products in the United States, thus increasing employment and output. Furthermore, they argue that the technology transfer (mainly to Mitsubishi) will speed the process for Japan's seizing control of future global aircraft and electronics sales. On the other hand, Japan might have developed the technology itself had General Dynamics not made the sale, even though this would have delayed Japan's acquisition of aircraft.8 Although the cases cited are few and may not be typical, there may nevertheless be instances of donor-country losses and simultaneous gains to recipient countries.
Recipient Country Gains Most observers agree that an inflow of foreign resources by international firms can initiate increased local development through a more optimum combination of production factors and the utilization or upgrading of idle resources. The most common types of resource
transmission are capital and technology, which investors may transfer simul- taneously. A firm is motivated to move these resources because of the higher
potential return in an area of shortage than in an area of abundance.
International firms may enable idle resources to be used. The mere existence of resources is no guarantee they will contribute to output. Oil production, for instance, requires not only the underground deposits, but also the knowledge of where to find them and the capital equipment to bring the oil to the surface. Production is useless without markets and transport facilities, which an international investor may be able to supply. The access to foreign markets, particularly the investor's home market, may be particularly important to developing countries that lack the knowledge and resources necessary to sell there. An example is the sale of Mexican asparagus in the United States under the recognized Green Giant label. U.S. consumers associate the brand with known quality; it might be prohibitively expensive for Mexican producers to gain the same brand recognition on their own.9 Another less tangible aspect of this relationship may lead to greater resource utilization: Through exposure to new consumer products, the local labor force may develop new wants, encouraging them to work longer and harder to acquire the new goods and services.
The upgrading of resources by the international firm may be brought about through the education of local personnel to utilize equipment, technology, and modern production methods. Even such seemingly minor programs as those promoting on-the-job safety may result in a reduction of lost worker time and machine down time. The transference of work skills increases efficiency, thereby freeing time for other activities.
Recipient countries may Recipient Country Losses Some critics have claimed that there are examples in which MNEs have made investments that domestic firms otherwise would have undertaken. The result may be the displacement of local entre- preneurship or the bidding up of prices without additional output.
Observers argue, for example, that by its ability to raise funds in various countries, the foreign firm can reduce its capital cost vis-a-vis local firms and apply the savings either to attracting the best personnel or to enticing customers from competitors through added promotional efforts. However, evidence of these arguments is inconclusive. Frequently, international firms do pay higher salaries and spend more on promotion than local firms; however, it is uncertain whether this results from external advantages or a required added cost of attracting workers and customers when entering new markets. Added compensation and promotion costs may negate any external cost advantages from access to cheap foreign capital. Additionally, in many instances, the local competition also has access to cheap capital.
Critics also contend that foreign investment destroys local entrepreneur-ship drives, which have an important effect on development. Since expectation of success is necessary for the inauguration of entrepreneurial activity, the collapse of small cottage industries when confronted with the consolidation efforts of large foreign enterprises may make the local population feel incapable of competing. However, the presence of multinational firms may either increase or decrease the level of competition in host-country markets.10
First, the foreign firm may itself serve as a role model that local talent can imitate. Furthermore, foreign enterprises buy many services, goods, and supplies locally and may thus stimulate local entrepreneur ship. For example, the Bougainville Copper Limited (BCL) in Papua New Guinea established a development foundation to help set up new businesses. BCL has used local sources of goods and services and has contracted out many things that had formerly been done by company personnel." In fact, the real entrepreneur will find areas in which to compete; consequently, in any country there are success stories that can be emulated.
Finally, it is frequently contended that the international firm absorbs local capital, either by borrowing locally or by receipt of investment incentives. This raises the cost of funds and/or makes insufficient funds available to local firms. Although subsidiaries have borrowed heavily in local markets and have exploited investment incentives, this link to the ability of local firms to finance expansion is unclear. In order for international firms to have a noticeable effect on the ability of local firms to secure capital, the amount of funds diverted to foreign investors would have to be larger in relation to the size of the capital market than is probably the case. Furthermore, there are few examples of international firms that acquire all resources locally; thus the additional resources brought in should usually yield a gain for the economy.
Host countries have at times not only prohibited the entry of foreign companies that were believed to inhibit local firms, but they have also restricted local borrowing and have provided incentives for firms to locate in depressed areas where resources are idle rather than scarce.
Of particular concern to many countries are foreign investments involving the purchase of local companies. The employment effects continue to be debated because of assumptions about what would have happened had the acquisition not taken place, particularly when the takeover is of a company that is not doing well. Consider Bridgestone's acquisition of Firestone. Firestone was already laying off workers, and Bridgestone reduced employment more through its restructuring. However, Bridgestone invested heavily to make the company competitive. It is impossible to say for certain whether there was more or less employment because of the acquisition. For this reason, the employment effects of recent foreign direct investment in the United States have been evaluated as both negative and positive. Canada's Foreign Investment Review Act and its Investment Canada Act, discussed in the opening case of this chapter, typify the policies of many countries in that they treat acquisitions more carefully than foreign investments started from scratch.
General Conclusions Clearly, not all MNE activities will have the same effect on growth in either the home or host country, nor are the effects easily determined. While there are dangers in attempting to categorize, the following generalizations are helpful in understanding the circumstances under which foreign investment is most likely to have a positive impact on the host country.
1. Developed versus LDCs. Developed areas such as Western Europe or Canada are more likely than LDCs to have domestic firms capable of undertaking investments similar to those in which foreign investors engage. Foreign investment in developed countries is therefore more likely to be merely a substitute for domestic investment, thus yielding less growth than in developing countries.
2. The degree of product sophistication. When the foreign investor undertakes production of highly differentiated products or process technologies, it is less likely that local firms in the host country could undertake similar production on their own. The differentiation may derive from product style, quality, or brand name in addition to technology.
3. Access to resources. When the foreign investor has access to resources that firms in the host country cannot easily acquire, it is more likely to generate growth rather than just to substitute for what local firms would otherwise do. Some of the resources would be capital, management skills, and access to external markets.
4. Degree of development of a developing country. Foreign investors are more likely to transfer technology and serve as role models for growth in the more economically advanced of the developing countries. In the least developed LDCs, the investment may have a negative impact on growth if the investment merely exploits cheap labor that would otherwise be subsisting.
Unlike balance of payments, the growth and employment effects of MNEs are
not necessarily a zero-sum game among countries. Early economists assumed
production factors were at full employment; consequently, a movement
OI anY °f these factors abroad would result in an increase in output abroad
and a decrease at home. Even if this assumption were true, the gains in the recipient country might be greater or less than the losses in the donor country.
The argument that both the donor and the recipient country may gain from direct investment is premised partly on the assumption that resources are not necessarily fully employed and partly on the industry-specific and complementary nature of capital and technology. A farm-machinery manufacturer may, for example, be producing maximally for its domestic and export market. This firm may not move easily into other product lines or use its financial resources to effect domestic productivity increases. By participating in the establishment of a foreign production facility the firm may be able to develop foreign sales without decreasing the employment of resources domestically. In fact, the firm may hire additional domestic personnel to manage the international operations. The firm may receive dividends and royalties from its capital and technology being used abroad, thus further increasing domestic income. The foreign facility may even stimulate export sales because of a need for components and replacement parts and because of the ability of the foreign operation to sell the companies' related products.
Donor Country Losses As the largest donor country for foreign licensing and direct investment, U.S. policy understandably arouses some of the major critics of outward movements. One such critic is organized labor, which argues that foreign production often displaces what would otherwise be U.S. production. For example, a criticism of Stanley Works' movement of some tool production abroad was that it took place at the expense of domestic factory improvement, which might have made U.S. output more competitive.7 Critics also cite many examples of highly advanced technology, which has been at least partially developed through governmental contracts and then transferred abroad. In fact, U.S. MNEs are now moving their most advanced technologies abroad and are even, in some cases, producing abroad before they do so in the United States. An example is General Dynamics' transfer of aerospace technology to Japan to produce fighter planes. According to critics, if General Dynamics did not transfer the technology, Japan would purchase the products in the United States, thus increasing employment and output. Furthermore, they argue that the technology transfer (mainly to Mitsubishi) will speed the process for Japan's seizing control of future global aircraft and electronics sales. On the other hand, Japan might have developed the technology itself had General Dynamics not made the sale, even though this would have delayed Japan's acquisition of aircraft.8 Although the cases cited are few and may not be typical, there may nevertheless be instances of donor-country losses and simultaneous gains to recipient countries.
Recipient Country Gains Most observers agree that an inflow of foreign resources by international firms can initiate increased local development through a more optimum combination of production factors and the utilization or upgrading of idle resources. The most common types of resource
transmission are capital and technology, which investors may transfer simul- taneously. A firm is motivated to move these resources because of the higher
potential return in an area of shortage than in an area of abundance.
International firms may enable idle resources to be used. The mere existence of resources is no guarantee they will contribute to output. Oil production, for instance, requires not only the underground deposits, but also the knowledge of where to find them and the capital equipment to bring the oil to the surface. Production is useless without markets and transport facilities, which an international investor may be able to supply. The access to foreign markets, particularly the investor's home market, may be particularly important to developing countries that lack the knowledge and resources necessary to sell there. An example is the sale of Mexican asparagus in the United States under the recognized Green Giant label. U.S. consumers associate the brand with known quality; it might be prohibitively expensive for Mexican producers to gain the same brand recognition on their own.9 Another less tangible aspect of this relationship may lead to greater resource utilization: Through exposure to new consumer products, the local labor force may develop new wants, encouraging them to work longer and harder to acquire the new goods and services.
The upgrading of resources by the international firm may be brought about through the education of local personnel to utilize equipment, technology, and modern production methods. Even such seemingly minor programs as those promoting on-the-job safety may result in a reduction of lost worker time and machine down time. The transference of work skills increases efficiency, thereby freeing time for other activities.
Recipient countries may Recipient Country Losses Some critics have claimed that there are examples in which MNEs have made investments that domestic firms otherwise would have undertaken. The result may be the displacement of local entre- preneurship or the bidding up of prices without additional output.
Observers argue, for example, that by its ability to raise funds in various countries, the foreign firm can reduce its capital cost vis-a-vis local firms and apply the savings either to attracting the best personnel or to enticing customers from competitors through added promotional efforts. However, evidence of these arguments is inconclusive. Frequently, international firms do pay higher salaries and spend more on promotion than local firms; however, it is uncertain whether this results from external advantages or a required added cost of attracting workers and customers when entering new markets. Added compensation and promotion costs may negate any external cost advantages from access to cheap foreign capital. Additionally, in many instances, the local competition also has access to cheap capital.
Critics also contend that foreign investment destroys local entrepreneur-ship drives, which have an important effect on development. Since expectation of success is necessary for the inauguration of entrepreneurial activity, the collapse of small cottage industries when confronted with the consolidation efforts of large foreign enterprises may make the local population feel incapable of competing. However, the presence of multinational firms may either increase or decrease the level of competition in host-country markets.10
First, the foreign firm may itself serve as a role model that local talent can imitate. Furthermore, foreign enterprises buy many services, goods, and supplies locally and may thus stimulate local entrepreneur ship. For example, the Bougainville Copper Limited (BCL) in Papua New Guinea established a development foundation to help set up new businesses. BCL has used local sources of goods and services and has contracted out many things that had formerly been done by company personnel." In fact, the real entrepreneur will find areas in which to compete; consequently, in any country there are success stories that can be emulated.
Finally, it is frequently contended that the international firm absorbs local capital, either by borrowing locally or by receipt of investment incentives. This raises the cost of funds and/or makes insufficient funds available to local firms. Although subsidiaries have borrowed heavily in local markets and have exploited investment incentives, this link to the ability of local firms to finance expansion is unclear. In order for international firms to have a noticeable effect on the ability of local firms to secure capital, the amount of funds diverted to foreign investors would have to be larger in relation to the size of the capital market than is probably the case. Furthermore, there are few examples of international firms that acquire all resources locally; thus the additional resources brought in should usually yield a gain for the economy.
Host countries have at times not only prohibited the entry of foreign companies that were believed to inhibit local firms, but they have also restricted local borrowing and have provided incentives for firms to locate in depressed areas where resources are idle rather than scarce.
Of particular concern to many countries are foreign investments involving the purchase of local companies. The employment effects continue to be debated because of assumptions about what would have happened had the acquisition not taken place, particularly when the takeover is of a company that is not doing well. Consider Bridgestone's acquisition of Firestone. Firestone was already laying off workers, and Bridgestone reduced employment more through its restructuring. However, Bridgestone invested heavily to make the company competitive. It is impossible to say for certain whether there was more or less employment because of the acquisition. For this reason, the employment effects of recent foreign direct investment in the United States have been evaluated as both negative and positive. Canada's Foreign Investment Review Act and its Investment Canada Act, discussed in the opening case of this chapter, typify the policies of many countries in that they treat acquisitions more carefully than foreign investments started from scratch.
General Conclusions Clearly, not all MNE activities will have the same effect on growth in either the home or host country, nor are the effects easily determined. While there are dangers in attempting to categorize, the following generalizations are helpful in understanding the circumstances under which foreign investment is most likely to have a positive impact on the host country.
1. Developed versus LDCs. Developed areas such as Western Europe or Canada are more likely than LDCs to have domestic firms capable of undertaking investments similar to those in which foreign investors engage. Foreign investment in developed countries is therefore more likely to be merely a substitute for domestic investment, thus yielding less growth than in developing countries.
2. The degree of product sophistication. When the foreign investor undertakes production of highly differentiated products or process technologies, it is less likely that local firms in the host country could undertake similar production on their own. The differentiation may derive from product style, quality, or brand name in addition to technology.
3. Access to resources. When the foreign investor has access to resources that firms in the host country cannot easily acquire, it is more likely to generate growth rather than just to substitute for what local firms would otherwise do. Some of the resources would be capital, management skills, and access to external markets.
4. Degree of development of a developing country. Foreign investors are more likely to transfer technology and serve as role models for growth in the more economically advanced of the developing countries. In the least developed LDCs, the investment may have a negative impact on growth if the investment merely exploits cheap labor that would otherwise be subsisting.
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