Multinationals: Heroes or Villains of the Global Economy?

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CentrePiece Spring 2005

Multinational firms are demonised by anti-globalisation campaigners. Yet according to a new book by Tony Venables and colleagues, the evidence is that they are generally a force for prosperity in the world economy.

Multinationals:
heroes or villains of the global economy?

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oreign-owned multinationals employ one worker in every five in European manufacturing and one in seven in US manufacturing. They sell one euro in every four of manufactured goods in Europe and one dollar in five in the United States. Yet policy-makers and the public around the world have mixed feelings about multinationals: they see them either as welcome bearers of foreign wealth and knowledge or as unwelcome threats to national wealth and identity. Policy-makers want multinationals to invest in their country, but are unhappy when national firms close down domestic activities and open up foreign ones or when foreign brands compete successfully with national ones. This Jekyll and Hyde perception of multinationals stems more from ambiguous feelings about large market players with no national identity than from rigorous economic analysis. Indeed, the debate on multinationals is rarely grounded on economic arguments and there is little understanding of what multinationals are, or of what costs and benefits they bring to local economies. Multinationals are often different from

purely national firms and some concerns are legitimate. They are relatively large and they do have competitive power in the market place and bargaining power in the policy-making arena, particularly in smaller developing countries. They are global players that can circumvent local regulations and policies more easily than national firms. They are footloose, able to move activities between their plants at relatively low cost, removing benefits as rapidly as they deliver them. And they do mass-produce standardised products, jeopardising product variety. Yet other features of multinationals also explain why countries compete fiercely to attract them. They often bring scarce technologies, skills and financial resources. They are fast in taking advantage of new opportunities and contributing to national wealth creation. They are bound by international standards and market competition and they often offer better employment conditions and product qualities than national firms. Moreover, multinationals are not just giant corporations like Microsoft or Coca Cola. Many small and medium-sized enterprises, firms with limited market power in domestic and foreign markets, have one or more foreign subsidiaries. Investing abroad and thus becoming a

multinational is a strategy open to many types of firms. Our book addresses concerns about multinationals and brings clarity to the debate. It provides a thorough assessment of what multinationals are, why and where they arise and their impact on home and host economies. We conclude that although none of these concerns have straightforward answers, the argument favours multinationals: they are a fundamental feature of modern economies and there is no evidence that they are less beneficial to home and host economies than national firms.

What are multinationals?
Multinationals are firms that own a significant equity share – typically 50% or more – of another company operating in a foreign country. They include modern corporations like IBM, General Motors, Intel and Nike, but also small firms like Calzaturificio Carmens, a shoemaker employing 250 workers divided between Padua (Italy) and Vranje (Serbia). The activities of multinationals are best measured by firm-level data like sales or number of employees. Unfortunately, these data are not widely available. Instead, researchers rely on data on flows

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CentrePiece Spring 2005

The facts on foreign direct investment
Fact 1: the recent growth of FDI has far outpaced the growth of trade and income The past 20 years has seen an enormous growth of activity by...
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