FDI and Multinational Corporations
Syllabus: Describe the nature of foreign direct investment (FDI) and multinational corporations (MNCs).
Foreign direct investment is mainly undertaken through multinational corporations (MNCs). An MNC is a firm that has productive capacity in a number of countries. The profit and income flows that they generate are part of the foreign capital flows moving between countries.
An MNC is a company which possesses and controls production or services outside the country in which it was established. Although MNCs operate in different countries, most of such corporations are controlled from a national base from which a global system of integrated production, sales, research, marketing and finance is facilitated.
The total value of MNC investment worldwide is over $1 trillion ($1,000,000,000,000), of which around one third is in the developing world. Given low levels of GDP in the developing world, this foreign direct investment (FDI) can mean that the MNCs can hold a disproportionate amount of power over the countries in which they operate.
A rough estimate suggests that the 300 largest MNCs own or control at least one-quarter of the entire world's productive assets, worth about US$5 trillion.
Read the article Multinational Corporations & Their Effects on Developing Countries.
Syllabus: Explain the reasons why MNCs expand into economically less developed countries.
As countries adopt more open, outward-oriented approaches to economic growth and development, the role of MNCs or transnational corporations becomes more important. As local markets throughout the world are being deregulated and liberalized, foreign companies look to locate part of the production process in other countries, where there are cost advantages:
cheaper sources of labour,
raw materials and components or
preferential government regulation.
Although developing countries may present high levels of risk, they also present the potential for higher levels of profit.
Many developing countries, with growing economies and
increasing incomes, may provide future growth markets and they will
often offer significant incentives to try to attract the MNCs to locate
there. (Volkswagen in Northern Brazil)