Much ado about nothing, or sirens of a brave new world? MNE activity from developing countries and its significance for development

This paper examines the evidence on developing country MNEs and outward FDI activity. We do not find evidence of an across-the-board growth in outward FDI from developing countries, either in magnitude, or geographically. Such growth is a narrow phenomenon, limited to a small group of home countries with relatively well-developed knowledge infrastructure, as well as innovation and business systems. These ‘new’ MNEs have been spurred by greater competition through liberalisation, and have sought to survive by upgrading of their firm-specific assets and one means to do so has been by internationalisation. Broadly speaking, much of the rapid expansion of DC MNE activity from countries such as India is not sustainable. We also discuss the effect of outward FDI on the knowledge base of the home countries of DC MNEs, as well as the role of DC MNEs in promoting South-South capital and knowledge flows. We argue that DC MNEs are not a superior option to conventional MNEs, as there are few differences in their modus operandi. Besides, MNE-assisted development still depends upon the capacity of the host country to efficiently utilise the spillovers and linkages potentially made available. Many of the DC host countries have endemic political instability, poor transport links and infrastructure, little skilled manpower and are distant from the most important markets. If developing countries are to attract more sophisticated projects they must provide stability, human capital, infrastructure and reliability.

Keywords: FDI, MNEs, developing countries, development, absorptive capacity, knowledge flows, south-south, emerging markets.

JEL codes: F23, L52, O14, O19

UNU-MERIT Working Papers ISSN 1871-9872