Ashleigh Lezard
The report, New Horizons: Multinational Company Investment in Developing Countries, also found that popular incentives to attract foreign investors such as tax holidays and free land “have negative and unintended consequences”. It states that these incentives “serve only to detract value from those investments that would be likely to be made in any case”, resulting in more bureaucracy, particularly, direct fiscal and administrative costs as well as indirect costs, particularly reduced productivity. It gives an example showing how government incentives in Brazil’s automotive industry contributed to over-investment and therefore low capacity utilisation.
Incentives are not a good strategy for attracting investment, the report argues, dismissing them as expensive and largely ineffective. Even in cases where incentives appeared successful in attracting FDI, the report found that they were “not the most important factors driving location decisions of multinational companies”.
Evidence from the report shows that the most value from FDI can be achieved through strengthening the foundations of economic development ensuring macroeconomic stability, promoting a competitive environment, evenly enforcing laws, taxes and other regulations, and building a strong physical and legal infrastructure.
An improved standard of living was regarded as the biggest effect of investment by multinational firms, according to the study. MGI attributed this to the “lower prices, higher-quality goods, and more choice” that are available to consumers in developing nations as a result of new investments. Meanwhile, the impact of multinational investment on employment, a common concern associated with FDI, was “either neutral or positive” in two-thirds of the cases considered.
The report emphasised that the motive for a given investment was seen to have an influence on the investment’s impact. For example, cost-seeking investment (low-wage), such as the business process outsourcing sector in India, “consistently improved sector productivity, output, employment, and standards of living in the host countries, all without much downside”. Meanwhile, market-seeking FDI had a “generally positive economic impact” despite having mixed impacts on employment – as benefits often came at the expense of less competitive domestic firms. Foreign investment in the banking sector was found to have no clear positive impact on consumers or competition, although it was seen as important to sector capitalisation and contributed to productivity.
Although the report draws broad conclusions, the MGI study was based on a set of case studies from four large developing countries, China, India, Brazil and Mexico, focusing on five sectors: automotive, consumer electronics, retail, retail banking and information technology/business process outsourcing.
For multinationals wanting to make investments, the report states: “Success requires good strategy and execution against new trade-offs in market environments. Finding the optimal location and choice of capital and labour inputs in each production step, effectively balancing a company’s global capabilities with local knowledge of markets, and shifting to more nuanced global management, are just some of the new challenges facing companies.”

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