Strategies 2

Multinational competition

Companies that have established a presence has productive units in more than one country.

Multinational corporation

One that has business operations in two or more countries.

Foreign direct investment (FDI)

Long-term investment where MNCs establish a presence in another country. It may refer to establishing a new firm or acquiring a controlling percentage of the shares in an existing local company.

AD

• Increase sales and revenues. Some developing countries have large or rapidly growing markets (for example, China, India and countries in Latin America)
• Bypass trade barriers. Producing in countries with trade barriers allows MNCs to bypass these and secure access to local markets.
• Lower costs of production. Developing countries generally have lower labor costs than in developed countries.
• Use locally produced raw materials.
• Further their activities in natural resource extraction. Some MNCs specialize in the extraction of natural resources (oil, aluminum, bauxite, etc.)

For LEDC countries

• Supplement insufficient foreign exchange earnings.

Investment funds flowing into a country from abroad appear as credits in the financial account, and can help offset a current account deficit.

Multinational corporations are usually export oriented, the country’s exports are expected to increase.

• Supplement and improve upon local technical skills, management skills and technology
• Supplement insufficient domestic savings and increase investment and new capital formation.
• Lead to greater tax revenues in the host country.
• Promote local industry. When MNCs buy local produced goods and services as inputs into their production, they promote the development of local industries.
• Increase local employment and help lower unemployment in the host country.
• Lead to higher economic growth in the host country. Increased levels of investment, improved technology and increases in human capital as well as the promotion of local industry and greater tax revenues, can lead to higher economic growth in the host country.

DIS

• Environmental degradation. MNCs often pursue activities that cause serious environmental degradation. They prefer to invest in.
• May use government resources to build infrastructure needed by MNCs rather than for poverty alleviation.
• Promote inappropriate consumption patterns in developing countries. (through advertising, create new consumption needs and promote inappropriate consumption patterns. Examples include consumption of soft drinks, sweets, fast food, white bread, expensive brand name goods, and many others.)
• To pursue policies that are in their own interest, but against economic development.
• Competition between developing countries to host MNCs (for example: sacrifices of needed development, lower government tax revenues, and use local resources for infrastructure instead of merit good provision, and too much economic and trade liberalization) and the race to the bottom. But MNC’s demands may conflict with what is in a country’s best interests.

Foreign Aid

The transfer of funds or goods and services to developing countries with the main objective to bring about improvements in their economic, social or political conditions.

• Be concessional: means that the transfers involve more favorable conditions than could be achieved in the market.
• Be non-commercial, meaning that they must not involve buying and selling or other activities concerned with making a profit.

Official development assistance

It comes from government funds, forms the largest part of foreign aid. Most ODA funds take the form of grants.

Through

• Bilateral aid, funds go directly from donor governments to developing country recipient.
• Multilateral aid, going indirectly from donor governments to international organization.
• NGOs, transfer ODA funds to NGOs which spend them in developing countries.

Reasons

• Political and strategic motives (US restrict communism)
• Economic motives (Keep strong trade and investment links, tied aid)
• Humanitarian and moral motives (assist countries which have famines, wars.)