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 The tools to measure linkages and spillovers are increasingly outdated, as we cannot estimate non-equity engagements or knowledge flows, and this means we are unable to objectively judge if foreign investments have a net positive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