With the dramatic increase of MNC expansion into international markets, much attention has been focused on the economic benefits of private sector FDI. The perceived advantages of global integration, access to new technologies, employment opportunities and greater industrial efficiencies arising from MNCs’ cross border expansions has led both individual nations and international agencies, such as UNCTAD and the WTO, to affect political changes to facilitate free trade and open world markets to investment. For these reasons, FDI has been increasingly viewed as a critical driver of economic development, particularly for developing countries. Yet, after decades of MNC expansion, a clear relationship between FDI and a country’s GNP has not been established. The objective of a company’s decision to enter a foreign market is to gain a competitive advantage for itself. Foreign market entry and maintenance of foreign markets vary as MNC make strategic decisions, causing shifts in global economic development patterns. MNCs do not promote economic development but seek to develop new markets or reduce operating costs to become more competitive and increase market share. MNC‘s foreign market entry is based on individual needs. The question then becomes what drives companies to enter foreign markets; by understanding this, countries can better tailor trade policy to enhance economic growth. These articles explore the components of FDI.
Reiter and Steensma (2010) postulate that FDI’s relationship to economic development cannot be accurately defined for multiple reasons. One reason is that inadequate empirical methods produce mixed results even after changes in methodology had been implemented. Other reasons are all related to the fact that focusing on FDI’s role in both economic and social development is too narrow of a spectrum for proper analysis. Studying FDI solely excludes other national factors contributing to development such as government policies and population characteristics. Other aspects such as health, education and civil liberties needed for human development are also unaccounted for. Corruption in countries negatively impacts the benefits of FDI and rates of economic development.
Reiter and Steensma’s (2010) examination of FDI in developing nations shows mixed results. The benefits of foreign firms’ entry into local markets varied with policy actions taken by individual governments. Reiter and Steensma (2010) note that foreign firms are motivated by profit, not by local industrialization. MNCs’ expectation is that by brining superior technology and techniques to less efficient marketplaces, large market shares can be realized. There is therefore a need in developing countries for government intervention and direction. Rather than rely on spillover benefits from FDI, Asian nations such as Taiwan and Korea directed FDI to underdeveloped markets their respective governments wished to grow. Revenues from targeted FDI were used to fund R&D and education in order to expand domestic expertise for a more favorable outcome than was experienced in Argentina or Mexico who relied on spillovers.
Another issue in measuring FDI is the downside of diminished or eliminated local competition. MNC domination of a local economy may actually hinder the economic development of a country. Government policy again determines the outcome. Reiter and Steensma (2010) find that results are not certain, reiterating that MNCs are concerned with profit and not national development.
Another type of business model utilized to enter foreign markets is the International New Venture (“INV”), described by DiGregorio et al. (2008) as the entrepreneur’s tool for international expansion. DiGregorio et.al (2008) includes not only MNCs selling in international markets but MNCs that enter or expand operations to foreign markets while selling product in their home country only. In the…