Page 235 - DMGT401Business Environment

Business Environment

Notes Promote Small Scale/Ancillary Industry

MNCs often catalyse the export of complex, technology-intensive products made by small- and
medium-size firms (SMEs) located in host countries.

Example: Approximately two-thirds of consumer electronic products made in Korea
and Taiwan are sold to MNCs such as GE, IBM and Toshiba on an "original equipment
manufacture" basis. In India too companies like Maruti Suzuki, Hyundai, Samsung, LG, etc., do
most of their purchases from India itself as it promotes ancillary industry.

Knowledge Transfer

Host countries, especially developing economies, aim to create an indigenous technological
capability, that is, "skills - technical, managerial and institutional" – that allow productive
enterprises to utilise equipment and technical information efficiently. Foreign investors are a
potential source for knowledge at the technical and systemic level. They can contribute not only
by transferring information, but also by stimulating directly or indirectly the generation of new
knowledge in the host country.
Multinational firms possess some firm-specific advantages that can be profitably combined
with locational advantages at a site outside their home country. Knowledge transfer raises the
productivity of the subsidiary in the host economy and thus contributes to tax revenues, national
income and possibly creates spillovers to the local economy.

Improves the Level of Technology of Local Firms

In the era of globalised capital markets, where overseas borrowing can be used to supplement
domestic savings, the importance of FDI perhaps lies less on the quantity of capital inflow and
more on its ability to transfer technology and business best practices to the domestic firms in the
host country.
Transfer of technology and business best practices significantly improves the productivity of
domestic firms in the recipient countries. These firms would improve their international
competitiveness and the impact of this spillover effect on the economy of the recipient country
is arguably much greater than the impact of the FDI itself. To maximise such benefits to local
firms, governments in many developing countries have stipulated that foreign firms set up
business operations in these countries in the form of joint ventures (JVs), assuming that such
cooperation among multinational enterprises and their local partners would facilitate the transfer
of technology and business practices.
Technology and business best practices are equally likely to be transferred from MNEs to
domestic firms in developing countries by way of migration of labour from the former to the
latter. The Indian software industry is a well-proven example of this. Labour and executive
mobility can thus enhance productivity throughout the economy by transferring tacit knowledge
that could not be other wise transferred through informal contacts between firms.

Development of Infrastructure and Economic Development

FDI is a transfer of capital across borders, which allows the receiving economy to increase
investment beyond its own savings rate. Traditionally, developing economies focused on this
addition to the capital stock as core contribution of foreign investment to economic development.
FDI is a source of capital because it has a more long-term character than portfolio investment. It

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