MULTINATIONALS AND PRODUCTIVITY OF FIRMS

The Effects of Multinationals on the Productivity of Firms



The Effects of Multinationals on the Productivity of Firms

Introduction

Multinational corporations play the role of foreign direct investments in domestic or host countries. These corporations also play a significant role in the economic development and growth of the host countries in terms of productivity and employment generation along with diffusion of technology and knowledge. In general, attracting foreign direct investment or multinationals, related technology, energy, and management skills support modification of the production methods of domestic firms. However, it is essential to stimulate the flow of direct investment, as without them the transfer of such technologies would be simply impossible. Purchase of the technology itself is something expensive and often unavailable for a number of developing countries and countries with economies in transition. As a result, multinationals can increase the package available to local firms of technology.

Discussion

There are two approaches for identifying the effect of multinationals on the economy of the host country. The first approach is typical of the traditional theories of foreign trade, which determine the direct impact of multinational corporations in terms of foreign investment in material and material factors (Dimelis 2002, Pp. 449-469). The main condition for this approach lies in the fact that multinationals increases the marginal product of labor and reduce the marginal product of capital.

The second approach is associated with the theory of industrial organization, which focuses on the effect of indirect or external investments. At the same time, the supporters of this theory try to find out why firms invest abroad rather than produce similar goods or services in their country. In their view, multinationals can promote economic development in the host country by promoting the growth of labor productivity and export expansion. However, the true relationship between multinationals and host countries vary somewhat between countries and industries. An important criterion for the benefits provided by multinationals is characteristic of the host economy and its investment climate (Connoly 2003, Pp. 31-55).

There are a number of theories of multinationals, which are based on the belief that overseas production and trade are substitutable. The inflow of foreign direct investments entails the transfer of technology, energy, and stimulates the effect of its transfer to local firms, thus facilitating a more efficient use of available resources. However, it not always taken into account the effect of technology transfer. It is external and, in particular, promotes the growth of competition in the domestic market of the host country (Blalock 2008, pp. 402-421). There are three types of effect of technology transfer, which results from investments and operations of multinationals.

Demonstration and exemplary effect - national firms can utilize the technology transferred by copying the technology.

Staff turnover workforce - the workers and employees that increase the production within the relevant multinationals can bring information to local firms, or organize their own companies, which can contribute toward the spread of technology.

Establishment and expansion of production and other behind-the links between watershed and national firms, due to the ...