Exploring the Link between Foreign Direct Investment, Multinational Enterprises and Spillover Effects in Developing Economies

Abstract

<p>Multinational enterprises exist because they hold certain competitive advantages over their local counterparts<br />and affect local economies through their spillover effects. Research streams exploring the raison d’ etre and<br />consequences of MNEs are quite distant and remote. This paper analyzes and integrates these two streams of<br />literature, i.e. the competitive advantages that MNEs hold and their spillover effects in developing countries. The<br />paper proposes a relationship and predicts the nature of spillover effects on the basis of competitive advantages<br />of MNEs. This paper can guide the policymakers of developing countries to differentiate between the FDI that is<br />good for their countries and FDI that weakens the already fragile economies of developing countries. The paper<br />also opens a new avenue for the researchers by pointing towards a potential connection between MNEs’<br />competitive advantages and their spillover effects for the local economies. The relationship between FDI and<br />competitive advantages of MNEs has rarely been researched previously and thus this paper contributes<br />significantly to the existing literature.</p

Productivity spillovers from foreign direct investment in the Brazilian processing industry

“…The evidences show that FDI benefits depend on industry absorptive capacity and that not all industries should be expected to benefit equally from foreign presence spillovers. According to the literature, host industries must possess high absorptive capacity to obtain the advantages from foreign presence (Blomström, Globerman, & Kokko, 1999;Castellani & Zanfei, 2003;Girma & Gorg, 2005;Haddad & Harrison, 1993;Hale & Long, 2011;Kathuria, 2000;Kokko, 1994;Malik, Rehman, Ashraf, & Abbas, 2012). The entry of MNCs in industries with high absorption capacity may lead to an increase in the competition level between companies, forcing them to become more efficient.…”

Taxes, institutions, and innovation: Theory and international evidence

“…Even though the host country implements incentive schemes to attract the MNC to invest and innovate in the host country, it should be noted that it may not guarantee the creation of positive externalities as expected (see, Narula, 2002 ). The superior technology of the MNC may not always create the full extent of the nonmonetized social benefit B H which may require a positive spillover effect (see, Malik, Rehman, Ashraf & Abbas, 2012 ). The ability of the host country to capitalize the full extent of the positive externality may depend on its “absorptive capacity”, a concept developed and advocated by Cohen and Leventhal ( 1990 ).…”

Foreign Capital Investment into Developing Countries: Some Economic Policy Issues

“…Also Ray and Venaik's (2008) study on the contribution of foreign firms to the development of host countries through the development of export orientation and royalties, finds that the contributions of foreign firms to the increase in exports and royalties in the host countries are much lower when compared to the contribution of domestic firms to the developing countries. Malik et al (2012) discuss the link between FDI and foreign companies and spillover effects in developing countries. Their study found that competitive advantages available to the foreign companies, if compatible with the local industry structure, results in either spillover effects or negative competition effects.…”