Topic 4: International Investment and Financial Flows

1
Topic 4 International Investment and Financial
Flows

• Multinational Corporations (MNCs)
• MNCs can be defined as all enterprises which
  control assets factories, mines, sales offices
  and the like in two or more countries (UN,
  1973).
• MNCs are large corporations with branches in many
  countries, headquarters in industrialised states,
  and huge investments throughout the world, e.g.,
  General Motors, Pepsi, Shell, IBM, Sony, etc.
• MNCs are usually of three types those in
  extractive industries, Manufacturing and
  services.

2

• Theories of MNCs
• Several theories that try to explain the growth
  and behaviour of MNCs have emerged over the year.
• The first theory is that of the oligopolistic
  nature of US industries which were tending
  toward saturation product cycle theory.
• Economic and geographical factor theories focus
  on the need for foreign direct investment to take
  advantage of lower production costs
  location-specific factor relating to costs and
  ownership-specific factors.
• Organisational theory in which case vertical
  integration and coordination lead to economies of
  scale and reduction in risks internalisation.
• OLI (organisation, location and internalisation)
  paradigm John Dunning (1983).

3

• Contributions of MNCs to Host Economies
• There are two opposing views on the contributions
  of MNCs to host economies beneficial and
  harmful effects arguments.
• Beneficial effect argument
• MNCs enhance the flow of capital, FDI, to host
  countries.
• MNCs fill resource gaps and improve quality of
  factors of production.
• They aid technology transfer.
• Because of access to huge financial resources,
  they help in the development of extractive and
  manufacturing and exports sectors in southern
  host economies Oil in the Middle East West
  Africa Copper in Chile and Zambia Bauxite in
  Jamaica and Guyana.

4

• They affect economic efficiency, growth and
  welfare in host Southern countries.
• Harmful effect argument
• Although host countries have the power to
  regulate excessive MNCs activities, they are
  often incapacitated by the bargaining power of
  the MNCs.
• Though host countries usually want to regulate
  the activities of MNCs in order to maximize
  national benefits and minimize national cost,
  regulation prevents investment flows
• Activities of MNCs often result in labour
  exploitation, environmental contamination etc.
• MNCs often engage in manipulation of host
  countries domestic political process for
  corporate interest.
• They aid capital outflow disguising profit and
  tax evasion.

5

• Pattern and determinants of FDI
• FDI flows have large been concentrated in Asia,
  Latin America and Eastern Europe.
• Direction of FDI flows is determined by LOC
  (locational advantage, ownership of capital,
  costs), uncertainty and risks.