• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

"Spill-overs from multinational companies to the rest of the developing country are a dangerous myth" Discuss.

Extracts from this document...

Introduction

"Spill-overs from multinational companies to the rest of the developing country are a dangerous myth" Discuss. By Scott Crawford Introduction: The last 20 years has seen a large shift in the consensus of developing countries regarding their domestic markets. Whereas the preferred policy of government couple of decades ago would undoubtedly been that of protectionism - shielding their markets from any foreign influence, it now stands for many as that of active encouragement of FDI (foreign direct investment). Many governments will now offer incentives for potential foreign investors such as tax holidays, import duty exceptions and subsidies. In fact, in the 1990's, FDI became the largest single source of external credit for developing countries, with 50% of all private, and 40% of all total capital inflows to developing countries accounted for by FDI (Aiken & Harrison, 1999). Even though the degree of protectionism employed by developing countries will vary vastly between nations, these figures still represent a huge change in the perception of the role multinationals can play in domestic economies. Why has this change occurred? One of the reasons for this shift is the presence of perceived "spill-overs" from multinationals into the domestic economy. In this essay I will analyse the varying effects of these spillovers in an attempt to come to a conclusion as to the overall net effect that they have on an economy. ...read more.

Middle

However, the greater the technological advantage of the foreign firm, the greater the possibility any possible economies of scope can be exploited, and this may well lead to a market stealing effect where the multinational increase its market share at the expense of domestic firms in the short run as it will take some time for the domestic firms to adjust their working practices in order to become efficient enough to compete with the multinational firm. Aiken & Harrison, (1999) show that the initial reduction in the quantity produced by domestic firms will force many onto a higher average cost curve, due to the presence of fixed costs. This will prolong the "catch-up" period that it takes domestic firms to increase efficiency in order to remain competitive in the sector. The question to be asked now is which effect will dominate, and therefore what will be the net effect of the spill-overs from the multinational firm be? Empirical Evidence: Before looking at the empirical evidence given, it is important to note the following identification problem that econometricians have when attempting to capture the effects of a multinational on labour productivity in the domestic sector. The problem lies in the fact that foreign investors will naturally gravitate towards the more productive industries. Therefore, any attempts to model a relationship between foreign presence in a developing economy and labour productivity will overstate the effect that it has. ...read more.

Conclusion

As has been seen, different estimating techniques will yield differing results, there is the identification problem to be controlled for, and always the possibility of omitted variable bias within the regressions. Even at best, the variables used in the regressions are proxies for the actual unobservable variables that we wish to model. Due to the relative infancy of the fad of widespread FDI there is, unfortunately, no great volume of past research that present models can be judged against. We know neither which models give us the most "realistic" results, nor the appropriate time-length to base our judgements on. What has been shown is that, in the three studies looked at, the overall net effect of spill-overs is minimal, and that it many instances spill-overs are completely internalised by joint-ventures. In addition, it seems that any increase in domestic productivity caused by FDI seems to not be a result of technological or knowledge based spill-overs but rather of increased competition. Of course, there is no general rule - spill-overs may tend to be more prominent in export-orientated economies (firms competing on the world market will naturally be assumed to be more competitive than those competing solely domestically. The technology gap between multinationals and domestic firms is therefore more likely to be breechable), but the effects will vary country to country and firm to firm. Unfortunately, I have found no compelling evidence for or against the net impact of spill-overs on developing economies, but enough evidence to show that the perception of only positive spill-overs arising from multinational companies is indeed a misconception. Scott Crawford ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. Onset Ventures.

    Two thrids of the capital raised had been already invested in seed financing and follow on investments. The remaining $22 million was to be used in funding later rounds of investments for companies already in ONSET's portfolio. However the question now is how much extra money the investors should seek to raise in their fourth round for ONSET 3.

  2. The Quest for Optimal Asset Allocation Strategies in Integrating Europe.

    Industries, Cyclical Consumer Goods (CCG), Non-Cyclical Consumer Goods (NCCG), Cyclical Services, Non-Cyclical Services, Utilities, Information Technology (IT) and Financials. The sample period is from 1979:3 to 2004:3. In order to capture the process of integration in the European stock markets, I wish to perform the analysis over four subperiods, each

  1. What makes a country wealthy.

    Capital formation helps in providing machines, tools and equipment for the rising labor force. The provision for social and economic overheads like transport, power, education etc in the country is possible though capital formation. It also leads to the exploration of natural resources, industrialization and expansion of markets which are assented for economic progress.

  2. China or India? Many companies ask themselves this question. Due to saturated markets, increasing ...

    You also have to deal with delays and unprofessional practices. It is also hard to set up relationships with partners and agents. Joint Ventures and Strategic Alliances have the disadvantage that the Indian partners might exploit them to get access to the sophisticated technology of the partner company.

  1. Corporate strategy of Arcelor: how to penetrate the Chinese market?Second world largest steel maker, ...

    This means that the group wants to improve its stock market valuation which will give him the necessary financial leverage to realize mega-mergers. So far, Arcelor is the result of a mega-merger that will go on to give a real giant in the industry.

  2. An Empirical Investigation into the Causes and Effects of Liquidity in Emerging

    way of earning higher rates of return than those available from investment-grade bonds, or investing in issuer's stock. Livingston (2003) also considers Collateralised Bond Obligations (CBOs); these are debt instruments that use a pool of high-yield bonds, diversified by issuer and industry, as collateral for an investment-grade style product.

  1. Understand the reasoning and rational of the "Keiretsu" families.

    To recoup the losses, the auto parts supplier sells the parts in auto parts stores in Japan at above market price (gouging the consumer). One might then wonder why foreign businesses don't undercut the Japanese prices and sell to consumers.

  2. How is it possible that a tiny, carbon based stone could effect the lives ...

    Operated in strict compliance with UN Resolution 1173 relating to the sale of diamonds by the UNITA rebel movement in Angola... 2.) Ceased buying diamonds in Angola from the informal sector of the economy... 5.) Consistently and publicly urged the trade to avoid buying any diamonds originating from areas controlled by rebel movements."

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work