Multinational enterprises and economic development in host countries: What we know and what we don't know
Rajneesh Narula & André Pineli
#2016-020
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increasingly outdated, as we cannot estimate non-equity engagements or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.
Keywords: multinational enterprises, foreign direct investment, economic
development, developing countries, externalities, spillovers, linkages
JEL Classification: D62, F23, O14, O19, O24