Answer to Question #236371 in Economics for KAT

Question

Under what conditions large and powerful multinational corporations should be encouraged to invest in the economies of poor nations?

Answer 1

The main motives for foreign direct investment by TNCs at the micro-level are motives combined into the following groups.

1. Market factors:

- the volume of the foreign market, i.e. his state at a given moment in time;

- growth of the market volume, i.e. dynamics of its growth in the short, medium, and long term;

- maintaining its share in this foreign market;

- expanding its share in this foreign market;

- dissatisfaction with the available foreign markets;

- small volume of its own domestic market;

- creation of an export base for the export of their goods and services to third countries;

- "following clients";

- “following competitors”.

Let us briefly comment on the last two motives. The so-called “following customers” means a firm making a decision to invest abroad following the relocation of production abroad by the client firm. Thus, the "chain" of partnerships stretches to new countries, which become objects of investment not only for the investing company, but also for its suppliers, subcontractors, and other business partners.

Following competitors is often found in oligopoly industries, where there are a limited number of large firms - manufacturers of these products, for example, in the automotive industry, in the oil industry, etc. When making an investment decision on foreign production, in this case, the company proceeds not from the expected profits, but from the desire to avoid losses that may arise as a result of similar actions of competitors.

It should be noted that almost all market factors have developed long ago, but have not lost their importance at the beginning of the 21st century. On the contrary, in an increasingly competitive environment, these motives for FDI are becoming increasingly important.

2. Factors of production costs:

- access to certain types of natural, scientific and technical, labor and other resources;

- savings on various types of production costs;

- the possibility of more efficient use of various factors of production.

This group of factors is often reduced by some authors to savings on various types of costs (for example, labor costs, land lease, etc.). However, no less important is access to various types of resources of a certain quality and in sufficient quantities, for example, to specific types of raw materials (including rare ones), energy carriers, to unique technologies, to labor resources of the required educational and professional qualification level and so-called On the one hand, each state, within the framework of its national policy, has the right to restrict the use of strategically important types of resources (natural, scientific and technical, land, etc.). In this case, the host country has complete control over access to its available resources. On the other hand, the legal use of any kind of resources in an open market economy is perfectly acceptable. But here the problem of competition for resources arises, which the host country can “direct in the right direction”.

In different countries - objects of investment, there is also a different degree of efficiency in the use of certain factors of production. For example, in the production of certain types of products, higher indicators of capital productivity, labor productivity, material, and energy efficiency can be achieved, which, of course, affects the overall profitability of production. Thus, the investing firm can develop foreign investment with the expectation of obtaining competitive advantages of this type.

Of this group of factors that may motivate FDI, the role of the “access to resources” factor is growing in modern conditions. At the same time, access is of paramount importance not to any resources available in a given host country for opening foreign branches of TNCs there, but to a highly qualified workforce, specific types of raw materials, new technologies, as well as other types of intangible assets.

Increasingly, FDI is motivated by the possibility of more efficient use of certain factors of production. As noted above, in different recipient countries there are also different indicators of the efficiency of the use of certain factors of production. Critical in the 21st century acquire the so-called “intensive factors” of growth (labor productivity, capital return, material, and energy efficiency, efficiency of investments in R&D). This is due to both the relative exhaustion of the use of extensive factors of economic growth and the formation of an innovative development model. Now for TNCs one of the most important strategic tasks is the task of increasing the efficiency indicators for the use of all types of available resources. Those foreign investment projects that solve these problems are a priority for TNCs.