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Multinational Corporations and Foreign Direct Investments - by Gianluca Cimini

Economists have always stressed the crucial link between investments and economic growth. In a nutshell, since investments’ final result is to raise the level of goods production, in so doing, they have a positive impact on the Gross Domestic Product (GDP) and, finally, on the overall economic growth of a country. 

Traditionally, investments are considered as an economic measure implemented by the State. However, public investment mainly supports the delivery of key public services, such as the construction of schools, hospitals, economic infrastructures for citizens (airports, seaports, highways, railways, electricity networks). Furthermore, low levels of public capital stock and high levels of public debt could threaten public investment efficiency. In this last scenario, private investments play a crucial role since they fulfill the investments gaps of public investment. Nevertheless, it can happen that domestic private investments are paralysed due to a lack of liquidity or companies difficulties to access credit. In this case, Foreign Direct Investments (FDIs) are of utmost importance, along with their main promoters, i.e. Multinational Corporations. 

FDIs are one of the most important aspects of globalization. Both the movement of factors of production and international production fragmentation are at the basis of the increase in investment fluxes among countries. Both economists and facts and figures show the positive impact of FDIs on economic growth and confirm Multinational Corporations as top performers for their contribution to the global FDI growth.  


At this point, it could be very interesting to investigate into what determines the attractiveness of a country when a Multinational Corporation assesses the potential of FDIs. There is the need to resort to the economic theory in order to get some insights. More specifically, Dunning’s so-called OLI Approach (Ownership, Location and Internalisation, 1977) describes the reasons why Multinational Corporations opt for FDIs. Dunning’s OLI Approach states that, during the ex-ante assessment of FDIs, Multinational Corporations verify that they can benefit from three advantages simultaneously: 1. Ownership advantages (i.e. ownership-specific competitive advantages) for the Multinational Corporation; 2. Advantages related to the position of destination countries (i.e. location advantages); 3. Internalization advantages, i.e. advantages deriving from the fact that production process does not takes place in a foreign enterprise.

Therefore, if a country is characterised both by public investment inefficiency and lack of domestic private investment, its Institutions should work in order to increase the appeal of the economic system according to Dunning’s guidelines, thus boosting attractiveness for FDIs. In so doing, a country has to bear in mind that FDIs bring advantages not only to the investors, but also to the destination countries. From this perspective, we refer to the so-called “spillover effects” throughout the territory of the destination countries, e.g. 1. increase in competition; 2. increase in human capital; 3. spread of new technologies. Last but not least, if we consider green field investments (building of a company in a foreign country from the ground up), it is proved that FDIs affect positively both exports and employment rates, thus decisively contributing to national the economic growth. 

Gianluca Cimini

 

Multinational Corporations and Foreign Direct Investments - Gianluca Cimini