A global good, not an enemy within?

Multinational Firms in the World Economy
October 14, 2005

Multinational enterprises get a bad press. Monsanto tried to force genetically modified crops on an unwilling world. McDonald's brought the world "McJobs", along with junk food and obesity. Multinationals displace local industry and extract profits; employment decisions become the whim of distant executives with no interest in the welfare of the economies in which they operate. When multinationals move employment out of their home economy - shifting production abroad as the British appliance-maker Dyson did - they are hollowing out domestic industry. They have become the target of the anti-globalisation movements. But at the same time, governments often compete with each other to entice multinationals to locate in their country by offering subsidies and other inducements.

Many of the issues surrounding these firms are emotive, highly politicised and not the subject of rational analysis, except among small numbers of specialists. This book aims to bring clarity to the debate. It is intended for a readership of undergraduate and postgraduate economics students and for policymakers "with a good background in economics". The book draws on a great deal of recent research, factual and theoretical, to survey the issues and arguments surrounding multinationals. The largely non-technical exposition gives a lucid summary of a vast body of research and points the reader to the sources of data and more detailed material.

Multinationals are everywhere, having grown rapidly in recent years, faster even than world production and world trade. Most multinationals, and the foreign direct investment (FDI) through which they grow, originate in advanced countries. The bulk of this investment goes to other advanced countries, though the share that developing countries claim is rising.

Multinationals grow largely through mergers and acquisitions as firms in one country buy firms in others. Most of this activity takes place in skilled and technology-intensive industries.

Multinationals tend to be larger and more productive than national firms, and they increasingly spread production processes across several different countries. The issues surrounding them are grouped under five headings. Why do firms become multinational? Why do they go to some countries and not others? What are their effects on the host country, which receives investment from outside? What are their effects on the home country, from which the firm originates? And what are the implications for public policy?

The question of why firms become multinational is addressed in two chapters. One deals with horizontal FDI, when firms seek access to markets in other countries, such as Japanese car manufacturers setting up plants in Europe and North America. Another chapter deals with vertical FDI, by which firms disperse production processes among several countries to benefit from lower costs of labour, capital and other inputs into the production process. Examples are oil companies extracting oil in the Middle East and refining it in Europe, or Western banks shifting their call centres and other support activities to India.

Ireland in the 1990s is offered as a case study of rapid development and the part that multinationals might play in it. FDI fuelled the employment boom, and half of Irish manufacturing jobs are in foreign-owned firms. Many of the big international pharmaceutical companies and electronics firms such as Dell, IBM and Microsoft have operations there. The book singles out the favourable corporate tax regime and the Industrial Development Agency as having been instrumental in attracting FDI to Ireland. It also explores the role of education in providing a skilled workforce and considers economies of agglomeration. It points to the dangers for Ireland posed by tax harmonisation in the European Union and greater competition for inward FDI from the Eastern European countries now joining the EU.

A chapter is devoted to the public policy implications of multinationals.

But there is little in it for the conspiracy theorists who suspect the US Administration of being in the pocket of the oil industry and promoting its interests through opposition to environmental measures.

The book is on the whole very positive about multinationals.

"Multinationals," the authors conclude, "are a fundamental and efficient component of a globalised world, not an enemy within." They find that "multinationals invariably perform better than national firms in home and host countries alike". Such companies do not increase instability of employment. Typically, they do more research and development, they employ more skilled workers and they often pay better than local firms. And the benefits are not confined to the multinationals themselves; the spill-over effects on their home and host economies are beneficial.

This lucid, authoritative and comprehensive book will be of great value to anyone interested in the role of multinational enterprises in the modern world.

John Driffill is professor of economics, Birkbeck, University of London.

Multinational Firms in the World Economy

Author - Giorgio Barba Navaretti, Anthony J. Venables et al
Publisher - Princeton University Press
Pages - 325
Price - £29.95
ISBN - 0 691 11920 1

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