IDEAS home Printed from https://ideas.repec.org/p/unm/unumer/2016020.html
   My bibliography  Save this paper

Multinational enterprises and economic development in host countries: What we know and what we don't know

Author

Listed:
  • Narula, Rajneesh

    () (Henley Business School, University of Reading)

  • Pineli, André

    () (Henley Business School, University of Reading)

Abstract

The attraction of multinational enterprises (MNEs) has become a key component of development policies. Generous incentive packages are offered by governments to attract foreign direct investment (FDI), although few countries perform proper cost/benefit analyses. MNEs can have a decisive influence on the development path of countries, although the effectiveness of an FDI-assisted development strategy depends on a variety of factors. Net benefits depend not only on quantity, but also on the quality of FDI. Quality has to do with the MNE's investment motivations, the affiliates' mandate and autonomy, which in turn determine the potential for linkages and spillovers. These effects also depend on the capacity of domestic firms to absorb, internalise and upgrade their knowledge assets. A sound FDI policy must not be exclusively concerned with attracting capital investment, but must prioritise enhancing the local embeddedness of the MNEs. Globalisation and subsequent changes in economic organisation require both policy makers and scholars to reconsider their understanding of FDI and development. "FDI" and "MNEs" are no longer synonyms, as MNEs are increasingly able to control value chains without ownership through equity. Poor data and weak methodologies mean making realistic estimations of development effects is also increasingly fraught with difficulty. The tools to measure linkages and spillovers are increasingly outdated, as we cannot estimate non-equity engagements or knowledge flows, and this means we are unable to objectively judge if foreign investments have a net positive or negative effect, and whether such effects persist or attenuate over time.

Suggested Citation

  • Narula, Rajneesh & Pineli, André, 2016. "Multinational enterprises and economic development in host countries: What we know and what we don't know," MERIT Working Papers 020, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  • Handle: RePEc:unm:unumer:2016020
    as

    Download full text from publisher

    File URL: https://www.merit.unu.edu/publications/wppdf/2016/wp2016-020.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Kugler, Maurice, 2006. "Spillovers from foreign direct investment: Within or between industries?," Journal of Development Economics, Elsevier, vol. 80(2), pages 444-477, August.
    2. Girma, Sourafel & Gong, Yundan & Görg, Holger & Lancheros, Sandra, 2015. "Estimating direct and indirect effects of foreign direct investment on firm productivity in the presence of interactions between firms," Journal of International Economics, Elsevier, vol. 95(1), pages 157-169.
    3. Rajneesh Narula & Nigel Driffield, 2012. "Does FDI Cause Development? The Ambiguity of the Evidence and Why it Matters," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 24(1), pages 1-7, February.
    4. Balasubramanyam, V N & Salisu, M & Sapsford, David, 1996. "Foreign Direct Investment and Growth in EP and IS Countries," Economic Journal, Royal Economic Society, vol. 106(434), pages 92-105, January.
    5. Fosfuri, Andrea & Motta, Massimo & Ronde, Thomas, 2001. "Foreign direct investment and spillovers through workers' mobility," Journal of International Economics, Elsevier, vol. 53(1), pages 205-222, February.
    6. Paul Krugman, 2000. "Fire-Sale FDI," NBER Chapters,in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 43-58 National Bureau of Economic Research, Inc.
    7. Salvador Barrios & Holger Görg & Eric Strobl, 2016. "Spillovers through backward linkages from multinationals: Measurement matters!," World Scientific Book Chapters,in: MULTINATIONAL ENTERPRISES AND HOST COUNTRY DEVELOPMENT, chapter 11, pages 213-226 World Scientific Publishing Co. Pte. Ltd..
    8. Blomstrom, Magnus & Sjoholm, Fredrik, 1999. "Technology transfer and spillovers: Does local participation with multinationals matter?1," European Economic Review, Elsevier, vol. 43(4-6), pages 915-923, April.
    9. Blomström, Magnus & Kokko, Ari, 2003. "The Economics of Foreign Direct Investment Incentives," EIJS Working Paper Series 168, Stockholm School of Economics, The European Institute of Japanese Studies.
    10. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, vol. 64(1), pages 89-112, October.
    11. Miao Wang & M. C. Sunny Wong, 2009. "Foreign Direct Investment And Economic Growth: The Growth Accounting Perspective," Economic Inquiry, Western Economic Association International, vol. 47(4), pages 701-710, October.
    12. Robert Pearce, 2001. "Multinationals and Industrialisation: The Bases of 'Inward Investment' Policy," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 8(1), pages 51-73.
    13. Chen, Zhihong & Ge, Ying & Lai, Huiwen, 2011. "Foreign Direct Investment and Wage Inequality: Evidence from China," World Development, Elsevier, vol. 39(8), pages 1322-1332, August.
    14. Holger Görg & Eric Strobl, 2005. "Spillovers from Foreign Firms through Worker Mobility: An Empirical Investigation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(4), pages 693-709, December.
    15. Lall, Sanjaya, 1980. "Vertical Inter-Firm Linkages in LDCs: An Empirical Study," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 42(3), pages 203-226, August.
    16. Ann E. Harrison & Brian J. Aitken, 1999. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," American Economic Review, American Economic Association, vol. 89(3), pages 605-618, June.
    17. Markusen, James R. & Venables, Anthony J., 1999. "Foreign direct investment as a catalyst for industrial development," European Economic Review, Elsevier, vol. 43(2), pages 335-356, February.
    18. Iršová, Zuzana & Havránek, Tomáš, 2013. "Determinants of Horizontal Spillovers from FDI: Evidence from a Large Meta-Analysis," World Development, Elsevier, vol. 42(C), pages 1-15.
    19. Marin, Anabel & Sasidharan, Subash, 2010. "Heterogeneous MNC subsidiaries and technological spillovers: Explaining positive and negative effects in India," Research Policy, Elsevier, vol. 39(9), pages 1227-1241, November.
    20. Rajneesh Narula & John Dunning, 2010. "Multinational Enterprises, Development and Globalization: Some Clarifications and a Research Agenda," Oxford Development Studies, Taylor & Francis Journals, vol. 38(3), pages 263-287.
    21. Noorbakhsh, Farhad & Paloni, Alberto & Youssef, Ali, 2001. "Human Capital and FDI Inflows to Developing Countries: New Empirical Evidence," World Development, Elsevier, vol. 29(9), pages 1593-1610, September.
    22. Theodore H. Moran & Edward M. Graham & Magnus Blomstrom, 2005. "Does Foreign Direct Investment Promote Development?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 3810.
    23. Lorentzen, Jochen, 2005. "The absorptive capacities of South African automotive component suppliers," World Development, Elsevier, vol. 33(7), pages 1153-1182, July.
    24. Laura Alfaro & Andrés Rodriguez-Clare, 2004. "Multinationals and Linkages: An Empirical Investigation," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Spring 20), pages 113-169, January.
    25. Paola Criscuolo & Rajneesh Narula, 2008. "A novel approach to national technological accumulation and absorptive capacity: aggregating Cohen and Levinthal," The European Journal of Development Research, Taylor and Francis Journals, vol. 20(1), pages 56-73.
    26. Nair-Reichert, Usha & Weinhold, Diana, 2001. " Causality Tests for Cross-Country Panels: A New Look at FDI and Economic Growth in Developing Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(2), pages 153-171, May.
    27. Aitken, Brian & Harrison, Ann & Lipsey, Robert E., 1996. "Wages and foreign ownership A comparative study of Mexico, Venezuela, and the United States," Journal of International Economics, Elsevier, vol. 40(3-4), pages 345-371, May.
    28. Jiangyan Yu & James P Walsh, 2010. "Determinants of Foreign Direct Investment; A Sectoral and Institutional Approach," IMF Working Papers 10/187, International Monetary Fund.
    29. Carlo Altomonte & Enrico Pennings, 2009. "Domestic plant productivity and incremental spillovers from foreign direct investment," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 40(7), pages 1131-1148, September.
    30. Globerman, Steven & Shapiro, Daniel, 2002. "Global Foreign Direct Investment Flows: The Role of Governance Infrastructure," World Development, Elsevier, vol. 30(11), pages 1899-1919, November.
    31. Daniel Chudnovsky & Andres Lopez & Gaston Rossi, 2008. "Foreign Direct Investment Spillovers and the Absorptive Capabilities of Domestic Firms in the Argentine Manufacturing Sector (1992-2001)," Journal of Development Studies, Taylor & Francis Journals, vol. 44(5), pages 645-677.
    32. Caves, Richard E, 1974. "Multinational Firms, Competition, and Productivity in Host-Country Markets," Economica, London School of Economics and Political Science, vol. 41(162), pages 176-193, May.
    33. Renáta Kosová, 2010. "Do Foreign Firms Crowd Out Domestic Firms? Evidence from the Czech Republic," The Review of Economics and Statistics, MIT Press, vol. 92(4), pages 861-881, November.
    34. Anabel Marin & Martin Bell, 2006. "Technology spillovers from Foreign Direct Investment (FDI): the active role of MNC subsidiaries in Argentina in the 1990s," Journal of Development Studies, Taylor & Francis Journals, vol. 42(4), pages 678-697.
    35. Robert E. Lipsey & Robert C. Feenstra & Carl H. Hahn & George N. Hatsopoulos, 1999. "The Role of Foreign Direct Investment in International Capital Flows," NBER Chapters,in: International Capital Flows, pages 307-362 National Bureau of Economic Research, Inc.
    36. Jindra, Björn & Giroud, Axèle & Scott-Kennel, Joanna, 2009. "Subsidiary roles, vertical linkages and economic development: Lessons from transition economies," Journal of World Business, Elsevier, vol. 44(2), pages 167-179, April.
    37. Havranek, Tomas & Irsova, Zuzana, 2011. "Estimating vertical spillovers from FDI: Why results vary and what the true effect is," Journal of International Economics, Elsevier, vol. 85(2), pages 234-244.
    38. Buckley, Peter J., 2011. "The theory of international business pre-Hymer," Journal of World Business, Elsevier, vol. 46(1), pages 61-73, January.
    39. Jennifer P. Poole, 2013. "Knowledge Transfers from Multinational to Domestic Firms: Evidence from Worker Mobility," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 393-406, May.
    40. Abdur Chowdhury & George Mavrotas, 2006. "FDI and Growth: What Causes What?," The World Economy, Wiley Blackwell, vol. 29(1), pages 9-19, January.
    41. Ha, Yoo Jung & Giroud, Axèle, 2015. "Competence-creating subsidiaries and FDI technology spillovers," International Business Review, Elsevier, vol. 24(4), pages 605-614.
    42. Tomas Havranek & Zuzana Irsova, 2012. "Survey Article: Publication Bias in the Literature on Foreign Direct Investment Spillovers," Journal of Development Studies, Taylor & Francis Journals, vol. 48(10), pages 1375-1396, October.
    43. Lall, Sanjaya, 1978. "Transnationals, Domestic Enterprises, and Industrial Structure in Host LDCs: A Survey," Oxford Economic Papers, Oxford University Press, vol. 30(2), pages 217-248, July.
    44. Alvaro Cuervo-Cazzura & Rajneesh Narula, 2015. "A Set of Motives to Unite Them All? Revisiting the Principles and Typology of MNE Motives," John H Dunning Centre for International Business Discussion Papers jhd-dp2015-03, Henley Business School, Reading University.
    45. Rajneesh Narula & John Dunning, 2000. "Industrial Development, Globalization and Multinational Enterprises: New Realities for Developing Countries," Oxford Development Studies, Taylor & Francis Journals, vol. 28(2), pages 141-167.
    46. Ronald Findlay, 1978. "Relative Backwardness, Direct Foreign Investment, and the Transfer of Technology: A Simple Dynamic Model," The Quarterly Journal of Economics, Oxford University Press, vol. 92(1), pages 1-16.
    47. Alguacil, M. & Cuadros, A. & Orts, V., 2011. "Inward FDI and growth: The role of macroeconomic and institutional environment," Journal of Policy Modeling, Elsevier, vol. 33(3), pages 481-496, May.
    48. Li, Xiaoying & Liu, Xiaming, 2005. "Foreign Direct Investment and Economic Growth: An Increasingly Endogenous Relationship," World Development, Elsevier, vol. 33(3), pages 393-407, March.
    49. Javorcik, Beata Smarzynska & Spatareanu, Mariana, 2008. "To share or not to share: Does local participation matter for spillovers from foreign direct investment?," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 194-217, February.
    50. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages 115-135, June.
    51. Oliver Morrissey, 2012. "FDI in Sub-Saharan Africa: Few Linkages, Fewer Spillovers," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 24(1), pages 26-31, February.
    52. Cohen, Wesley M & Levinthal, Daniel A, 1989. "Innovation and Learning: The Two Faces of R&D," Economic Journal, Royal Economic Society, vol. 99(397), pages 569-596, September.
    53. Klaus E Meyer & Evis Sinani, 2009. "When and where does foreign direct investment generate positive spillovers? A meta-analysis," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 40(7), pages 1075-1094, September.
    54. Miao Wang & M. C. Sunny Wong, 2009. "What Drives Economic Growth? The Case of Cross-Border M&A and Greenfield FDI Activities," Kyklos, Wiley Blackwell, vol. 62(2), pages 316-330, April.
    55. Filip Abraham & Jozef Konings & Veerle Slootmaekers, 2010. "FDI spillovers in the Chinese manufacturing sector," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 18(1), pages 143-182, January.
    56. Nigel Driffield & James H Love, 2007. "Linking FDI motivation and host economy productivity effects: conceptual and empirical analysis," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 38(3), pages 460-473, May.
    57. Rodriguez-Clare, Andres, 1996. "Multinationals, Linkages, and Economic Development," American Economic Review, American Economic Association, vol. 86(4), pages 852-873, September.
    58. Nigel Driffield & Björn Jindra, 2012. "Challenging the Production Function Approach to Assess the Developmental Effects of FDI," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 24(1), pages 32-37, February.
    59. Giroud, Axèle, 2007. "MNEs vertical linkages: The experience of Vietnam after Malaysia," International Business Review, Elsevier, vol. 16(2), pages 159-176, April.
    60. Lipsey, Robert E. & Sjoholm, Fredrik, 2004. "Foreign direct investment, education and wages in Indonesian manufacturing," Journal of Development Economics, Elsevier, vol. 73(1), pages 415-422, February.
    61. Gorg, Holger & Strobl, Eric, 2001. "Multinational Companies and Productivity Spillovers: A Meta-analysis," Economic Journal, Royal Economic Society, vol. 111(475), pages 723-739, November.
    62. Garrick Blalock & Daniel H Simon, 2009. "Do all firms benefit equally from downstream FDI? The moderating effect of local suppliers’ capabilities on productivity gains," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 40(7), pages 1095-1112, September.
    63. V N Balasubramanyam & M Salisu & David Sapsford, "undated". "Foreign Direct Investment and Growth: New Hypotheses and Evidence," Working Papers ec7/96, Department of Economics, University of Lancaster.
    64. Antonello Zanfei, 2012. "Effects, Not Externalities," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 24(1), pages 8-14, February.
    65. Herzer, Dierk & Klasen, Stephan & Nowak-Lehmann D., Felicitas, 2008. "In search of FDI-led growth in developing countries: The way forward," Economic Modelling, Elsevier, vol. 25(5), pages 793-810, September.
    66. Peter J Buckley & Jeremy Clegg & Chengqi Wang, 2007. "Is the relationship between inward FDI and spillover effects linear? An empirical examination of the case of China," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 38(3), pages 447-459, May.
    67. Joze Mencinger, 2003. "Does Foreign Direct Investment Always Enhance Economic Growth?," Kyklos, Wiley Blackwell, vol. 56(4), pages 491-508, November.
    68. Davide Castellani, 2012. "In Praise of Pecuniary Externalities," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 24(1), pages 15-19, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:agr:journl:v:xxiv:y:2017:i:2(611):p:263-276 is not listed on IDEAS

    More about this item

    Keywords

    multinational enterprises; foreign direct investment; economic development; developing countries; externalities; spillovers; linkages;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:unm:unumer:2016020. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ad Notten). General contact details of provider: http://edirc.repec.org/data/meritnl.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.