Who benefits from Foreign Direct Investment by Multinational Corporations?
A ‘multinational’ is a company which owns or controls production or service facilities in more than one country. They are likely to be public limited liability companies owned by shareholders whose underling purpose is to maximise their shareholders’ wealth. The purpose of this essay is to discuss the benefits of foreign direct investments (FDI) by multinational corporations (MNCs). First the growth of FDI will be examined. This is followed by the benefits to owners of MNCs and finally the benefits to the host country
The growth of FDI
Over the last 40 years, there has been immense body of literature to explain the rapid growth of FDI. Many theories have been proposed and tested. Each theory typically explains why foreign direct investment occurs in certain industries or in particular types of firms.
To prolong the product life cycle is more in line with Vernon’s classic product life cycle theory which is the more acceptable one as to why firms invest abroad. It states that “firms invent and develop a product where technology is abundant and incomes are high. The market then expands to other high-income countries - making them trans-national because they will be setting up sales offices and distribution facilities and part produce over there. At this point the technology becomes standardised to the point where production can be cheaper in a newly industrialised country. This is when (they engage in FDI) production moves out of their home country as they proceed to protect their market share” (Vernon & Veseth).
However, no one theory has been able to explain FDI for all types of industries, firms and countries. Nevertheless, it is important to examine the various strategic, behavioural and economic theories that have been proposed and tested over the past four decades in order to assess their likely benefits. Hogue (1967) suggests that strategic motives drive the...