The Nature, Benefits, and

Costs of Foreign Direct

Investment
Ardeña, Jan Erickson
Valenzuela, Bea
Iturralde, Elaine 1
 Transnational
Corporations, Environment
and Development

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Transnational ◉ Affect new trends in international business

Corporations ◉ Play a central role in organizing production process internationally

(TNCs) ◉ About 60000 being spread all over the world

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 Transnational Corporations’ Major Impacts

◉ May Affect Economic & Industrial development positively

◉ Create adverse effects on Less Developed Countries (LDCs)

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 Transnational Corporations Four Distinctive
Perspective
◉ Neo-classical Perspective

◉ Global Reach Perspective

◉ Radical Perspective

◉ Ecological Perspective

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Neo-Classical Perspective TNCs are seen as an engine of growth.

Macroeconomic Theory Microeconomic Theory

FDIs are analyzed globally in terms of location. Based on owner’s specific advantage.

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Global Reach Perspective
TNCs are seen to employ double environment set of standards.

◉ Highly Intrusive

◉ Focuses on adverse effects of corporates

◉ Stresses negative externalities by Transnational Corporations

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Radical Perspective
TNCs are analyzed based on the structure of int’l. Politics and
Economic System.

◉ Dependency School
Emphasizes on Internationalization of Changing of division of labour
to the disfavor of LDCs.

◉ Internationalization of Capital School

TNCs’ FDI may spur uneven developement rather than dependency
development.

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Ecological Perspective
TNCs are seen as Main factor in Environmental destruction.

◉ Exhausting Key Resource

◉ Global Environmental Degradation
◉ Role of Transnational Corporation in the Global Economy
should be kept at minimum
◉ Securing the sustainability of Earth’s Carrying Capacity

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Technology Transfer
Definition

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Technology Transfer Channels

1. Trade
2. Foreign Direct Investment (FDI)
3. Licensing

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ITT through Foreign Direct Investments (FDI) diffusion

1. Horizontal Home Host

2. Vertical Parent Firm Subsidiary 1 Subsidiary 2

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Types of Technology Transfer Cost

1. Direct Cost

2. Indirect Cost

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Classification of hidden cost of FDI

1. Transfer pricing
2. Export Clauses
3. Import Clauses
4. Production Clauses
5. Management Clauses
6. Intra-firm Loan Clauses
7. Grant-back Clauses
8. Technological Dependence

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Hidden cost of FDI
Positive
1. Domestic employment
2. Foreign currency inflow
3. Increased production
capacity
4. Access to “new” superior
productive knowledge
5. Tax revenues
Negative
1. loss of tax revenues
2. higher consumer prices
3. deteriorated foreign
exchange reserves
4. loss of export earnings
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 Technology
Spillover from FDI

Image Reference:
https://blogs.iadb.org/efectividad-desarrollo/en/innovation-policy-spillover-effects-the-unaccounted-benefit/ 18
Technology Spillover

“The beneficial effects of new technological

knowledge on the productivity and innovative
ability of other firms and countries.”

(Reference: https://www.igi-global.com/dictionary/technology-spillovers/48092)

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Reference:
https://data.worldbank.org/indicator/BX.KLT.DINV.WD.GD.ZS?end=2017&locations=PH&name_d
esc=false&start=1970&type=shaded&view=chart
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 Consequences of Rising FDI

1. Increasing Share of Countries’ Output

2. Industrial Development

Reference:
Gachino (2007), “Technological Spillovers from Multinational Presence: Towards a Conceptual
Framework” 21
Emerging Issues

1. Single Factor Exponentiation

2. Exogeneity Problem
3. Presence of Supportive and Systemic
Infrastructure

Reference:
Gachino (2007), “Technological Spillovers from Multinational Presence: Towards a Conceptual
Framework” 22
Results from Studies with Strong Spillover Analysis

◉ Foreign firms caused local firms to exit the industry

◉ Foreign firms caused local firms to lower output
◉ Foreign presence in an industry negatively affects
local firms without foreign linkage.

Reference:
Gachino (2007), “Technological Spillovers from Multinational Presence: Towards a Conceptual
Framework” 23
Analytical Framework: Cluster and Network Dynamics

◉ Close proximity = Greater division of labor and

collective efficiency
◉ Common set of culture and social values

= Transaction Cost Framework + Social Capital

Reference:
Gachino (2007), “Technological Spillovers from Multinational Presence: Towards a Conceptual
Framework” 24
Reference:
Gachino (2007), “Technological Spillovers from Multinational Presence: Towards a Conceptual
Framework” 25
Determinants of Spillover Analysis

1. Absorptive Capacity
2. Systemic Infrastructural and Institutional Support
Structure
3. Systemic Embeddedness - Firm Interactions
a. Vertical Linkage
b. Horizontal Linkage

Reference:
Gachino (2007), “Technological Spillovers from Multinational Presence: Towards a Conceptual
Framework” 26
Reference:
https://www.researchgate.net/publication/313704284_Spillovers_from_Foreign_Direct
_Investment_in_Bulgarian_Automobile_Parts_Industry

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Determinants of Spillover Analysis

4. Firm Size - Scale Factor

5. Industrial Specificity
6. Firm Strategy
7. Trade Orientation - exports and imports

Reference:
Gachino (2007), “Technological Spillovers from Multinational Presence: Towards a Conceptual
Framework” 28
 Channels/Mechanisms of the Indirect Effects of MNC Activities

1. Competition
2. Labor Turnover
3. Linkages
4. Demonstration Effects

Reference:
Gachino (2007), “Technological Spillovers from Multinational Presence: Towards a Conceptual
Framework” 29
 Technological Capabilities

1. Investment Capabilities
2. Production Capabilities
3. Linkage Capabilities
4. Complementary Capabilities

Reference:
Gachino (2007), “Technological Spillovers from Multinational Presence: Towards a Conceptual Framework”
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 SPILLOVER ANALYSIS

Before: Re-Conceptualization
Productivity Gains Learning
Capability Building
Range of Other Factors

Reference:
Gachino (2007), “Technological Spillovers from Multinational Presence: Towards a Conceptual
Framework” 31
THANK YOU!
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