STRATEGY INFLUENCES FOR MNE & FDI

Strategy & influences for an ethical multinational enterprise (MNE) Foreign Direct Investment (FDI)



Strategy & influences for an ethical multinational enterprise (MNE) Foreign Direct Investment (FDI)

Introduction

FDI is the largest single source of external finance for the developing countries and almost equals half of the total capital flows to the developing countries (Aitken & Harrison, 1999, p605). Foreign direct investment (FDI) is prized by most of the developing countries and many countries put intentional efforts to attract FDI (Agosin & Machado, 2005, p149). It is generally believed by these countries that FDI is inherently good for their economies and it brings valuable assets, both tangible and intangible for them (Kosova, 2010, p861).

Jakobsen and Jakobsen (2011, p61) found that FDI is welcomed in developing countries, except for the countries with high economic nationalism, whereas Buthe & Milner (2008) found that all countries that are members of trade agreements such as GATT (General Agreement on Tariffs and Trade) and WTO (World Trade Organization) receive more FDI than the non members. FDI is not only considered as a healthy sign for the over all national economy but also a positive indication for the local industry considering its positive spillover effects. The proposed positive effects of FDI have generated a lot of research interest in studying the determinants of FDI into a country, so that it can be enhanced (Adams, 2010, p201). In this paper we suggest that the actual picture of FDI and its benefits is not that simple.

The effects of FDI are not always positive and it is difficult to predict with certainty about the spillover effects of FDI in advance. Recent trends such as sharp increase in the FDI flows in emerging economies from other emerging economies (Gammeltoft, Pradhan & Goldstein, 2010) and even differences in MNEs coming from a single country such as state and private MNEs (Lin, 2010, p366) has made the picture more complex. Though the spillover effects of FDI has gained a lot of research interest, little research efforts have been diverted towards studying the negative effects of FDI. There are few researchers who have worked in this direction and there are limited examples of the negative spillover effects of FDI. Wells (1998, p 102) noticed, “Some FDI is good, almost certainly some is harmful. But exactly what kind of investment falls in each category is frightfully difficult to determine, even if the effects are measured against only economic criteria”.

Similarly, Caves (1996, p 237) suggested that “…relationship between a less developed country's stock of foreign investment and its subsequent economic growth is a matter on which we totally lack trustworthy conclusions”. Driffield & Hughes (2003, p277) in their study, conducted in different parts of the United Kingdom, shared an interesting finding. They reported that the regions that suffered greatest from the negative effects of FDI are the ones which spent large amounts of public money and policy efforts on attracting FDI as part of their regional development ...