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.”





