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Introduction - George Mason University

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Chapter 22: International Production and Development
An Introduction to International Economics: New Perspectives on the World Economy
© Kenneth A.Reinert, Cambridge University Press 2012
Analytical Elements
CountriesSectorsTasksFirmsFactors of production
© Kenneth A. Reinert, Cambridge University Press 2012
Introduction
What makes a developing country attractive to multinational enterprises (MNEs) as a potential destination for international production in the form of contracting or FDI?We know from Chapter 10 and our discussion of the OLI framework thatlocation advantagesmatter for MNE choicesSo we can rephrase our question in terms of what types of location advantages matter for developing countries to be able to attract international productionDomestic or adjacent markets for market seeking FDIParticular types of resources for resource seeking FDI
© Kenneth A. Reinert, Cambridge University Press 2012
Patterns of FDI in Developing Countries
Natural resource or resource-based FDIThe MNE wants access to the resource and the host country government needs to manage this so as to share in the income for the benefit of the countryDomestic market serving FDI and export processingInstitutional quality can matter, including democracy, good governance and lack of corruptionIntellectual property protection can matter in order for MNEs to avoid dissemination riskBilateral investment treaties (BITs) and regional investment treaties (RITs) can also help facilitate FDI inflowsBITs have grown rapidly over time, from approximately 400 in 1990 to approximately 2600 in 2008
© Kenneth A. Reinert, Cambridge University Press 2012
Benefits and Costs
It is helpful to have a sense of the potential benefits and costs of hosting MNEsTable 22.1 gives a sense of these, for each of the following dimensionsEmployment and wagesCompetitionEducation and trainingTechnologyBalance of paymentsHealth and the environmentCulture
© Kenneth A. Reinert, Cambridge University Press 2012
Table 22.1: The Benefits and Costs of Inward FDI
Sources: Adapted from Dunning andLundan(2008) and Hill (2009)
© Kenneth A. Reinert, Cambridge University Press 2012
Table 22.1: The Benefits and Costs of Inward FDI
Sources: Adapted from Dunning andLundan(2008) and Hill (2009)
© Kenneth A. Reinert, Cambridge University Press 2012
Policy Stances
Given the information in Table 22.1, it is natural to consider how to minimize the costs and maximize the benefits of the FDIAttempts to achieve this are usually made through policy stances towards the MNE that can be grouped intoownership requirementsandperformance requirementsOwnership requirements may be absolute as in the case of foreign firms being excluded from certain sectors on national security grounds, or they may simply limit foreign ownership to a maximum specified amountPerformance requirements place controls on thebehaviorof the foreign firm in a number of areas, including local content requirements, training, technology transfer, exports, local research and development, and the hiring of local managers
© Kenneth A. Reinert, Cambridge University Press 2012
Trade-Related Investment Measures (TRIMs)
The Marrakesh Agreement on Trade in Goods (see Chapter 7) included an Agreement on TRIMs, which prohibits some types of TRIMs in the case of goods (Table 22.3)These include domestic content, trade balancing, foreign exchange balancing, and domestic sales requirementsExport performance requirements werenotprohibitedInvestment related policies in services are covered under the General Agreement on Trade in Services (GATS)Controversially, Some international economic policy experts are now calling for policies that would go beyond TRIMs to require the abandonment ofall policiesthat discriminate between domestic and foreign firms
© Kenneth A. Reinert, Cambridge University Press 2012
Table 22.3: Types of Trade-Related Investment Measures
Sources: Low and Subramanian (1996) and UNCTAD (2003)
© Kenneth A. Reinert, Cambridge University Press 2012
Table 22.3: Types of Trade-Related Investment Measures
Sources: Low and Subramanian (1996) and UNCTAD (2003)
© Kenneth A. Reinert, Cambridge University Press 2012
Export Processing Zones
Another policy stance towards hosting MNEs is to set up anexport processing zoneorEPZAn EPZ is an area of the host country in which MNEs can locate and in which they enjoy, in return for exporting most or the whole of their output, favorable treatment in the areas of infrastructure, taxation, tariffs on imported intermediate goods, and laborcostTable 22.4 gives a sense of the number and extent of EPZs, with 3,000 of them in existence in2006Inmost cases, EPZs involve relatively labor-intensive, “light” manufacturing such as textiles, clothing, footwear, andelectronics
© Kenneth A. Reinert, Cambridge University Press 2012
Table 22.4: Export Processing Zones
Source:SingaBoyenge(2007)
© Kenneth A. Reinert, Cambridge University Press 2012
Export Processing Zones
A number of studies have tried to assess EPZs from the benefit and cost framework of Table22.1Thesestudies show that in many (but not all) cases, the benefits do outweigh thecostsSome studies have shown that EPZs are animportant source ofemploymentIn some cases, infrastructurecosts of setting up the EPZ were too high for a net positivebenefiIn some cases, EPZswerehelpfulin diversifying the industrial structure of the country and attractingFDI
© Kenneth A. Reinert, Cambridge University Press 2012
Promoting Linkages
It is possible for MNEs to leave some parts of the upstream components of the GPN to other firms, but chose to buy from local firms in the country in which it islocatedThisis known asbackward linkagesto domesticsuppliersHistorically, backward linkages have beenweakThe increased role of MNEs in an economy without significant backward linkages results in what are termedenclaveswith little connection to the rest of the economy and little contribution beyond direct employmenteffects
© Kenneth A. Reinert, Cambridge University Press 2012
Promoting Linkages: Traditional and New Approaches
Traditionally, the means to avoid enclave FDI was via the local content requirements discussed in the previous section, but these are no longer allowed for WTOmembersNewthinking in the area of facilitating backward linkages suggests that local content requirements should be replaced by efforts to support local suppliers in their efforts to secure contracts with foreignMNEsIfa foreign MNE can be induced to source inputs locally rather than by importing them, the host country can gain a number of importantbenefits
© Kenneth A. Reinert, Cambridge University Press 2012
Promoting Linkages: Potential Benefits
The potential benefits of promoting backward linkages from MNEs to domestic firms includeEmployment can increase since the sourced inputs are newproductionThebalance of payments can improve since the inputs will no longer beimportedProductiontechnologies can be better adapted to localconditionsTangibleand intangible assetscanbe, to some degree at least, passed from the foreign MNE to the local, host-countrysuppliers, and localsupplierscancoalesce into a spatial cluster that supports innovation and upgrading
© Kenneth A. Reinert, Cambridge University Press 2012
Promoting Linkages: How To Do It
The key policy question for developing countries ishowto foster backward linkages between foreign MNEs and potential localsuppliersTherole governmentis one ofcoordination, attempting to bridge the “information gaps” among theplayersThegovernment can do this in a number ofwaysProvidea matching service between MNEs and localsuppliersProvidesupport in standards formation, materials testing, and patentregistrationProvidetechnical training and managerialtrainingRemove small firms’ obstaclesto accessto financial resources
© Kenneth A. Reinert, Cambridge University Press 2012
Transfer Pricing
Transfer pricingpractices reflect thefact that MNEs areglobal,whereas tax systems are locallydefinedMNEscan therefore adjust theinternalpricing of their intra-firm trade to shift declared profits of subsidiaries to low-taxcountriesThegoal is to maximize the post-tax profits of thefirmPolicy options to address transfer pricing abuses are multifacetedInternationalguidelines and codes of conduct, international standardization of invoicing and customs procedures, global tax harmonization, negotiating and concluding international conventions, and the establishment of international arbitrationprocedures
© Kenneth A. Reinert, Cambridge University Press 2012
Governance of International Production
Policy postures towards MNE behavior involveConstrainingthe policies of host countries towards MNEsConstrainingthe behavior of the MNEsthemselvesIn the realm of the former,theOrganization for Economic Cooperation and Development (OECD) haspromotedmultinational approachestoFDI governanceIn 1995,the OECD promoted aMultilateral Agreement on Investment orMAIThepurpose of the agreement was to liberalize the cross-border flows of foreign directinvestmentItwould have required host countries to apply “national treatment” to all foreignfirmsThis effort failed due to a lack of support
© Kenneth A. Reinert, Cambridge University Press 2012
Governance of International Production
The second issue is the multilateral regulation of MNEconductA number of guidelines exist such as the World Bank’s Equator Principles, the Extractive Industries Transparency Initiative, and Publish What YouPayButthe most general guidelines are the OECD’s Guidelines for MultinationalEnterprises, developedin 1976, revised in2000 and currently under revision againSee the appendix to this chapter for a list of the OECD Guidelines
© Kenneth A. Reinert, Cambridge University Press 2012

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Introduction - George Mason University