Page 234 - DMGT401Business Environment

Unit 10: Foreign Trade

Notes
Example: In the late 1970, when the US imposed some non-tariff restrictions on the
automobile import of Japan, Japanese firms began establishing their units in the US so that in
terms of taxes they could be treated at par with US firms, Soon, America became the playground
of Japanese firms.
7. Technology Expertise: One reason for becoming an MNE is to take advantage of
technological expertise by manufacturing goods directly (by FDI) rather than allowing
others to do it under a license. Many MNCs feel it unwise to give another firm access to
proprietary information such as patent, trademarks or technological expertise.

8. Access to Economical Human Resources: Many times companies cross borders to have
access to economical human resource. Organizations which used to earlier import Human
Resource from our country are now establishing their operations in India itself, only to
take advantage of economical human resource. Various companies are crossing borders
because the cost of human resource is rising.

10.2.3 Impact of MNCs

Multinational firms play a pivotal role in the global economy, linking rich and poor economies,
and transmitting capital, knowledge, ideas and value systems across borders. Their interaction
with institutions, organizations and individuals is generating positive and negative spillovers
for stakeholders in host countries. As a consequence they have become focal points in the
popular debate on the merits and dangers of globalisation, especially when it comes to developing
countries. MNE are profit maximising, thus naturally not interested in creating benefits for
others without obtaining a good price for it.

Impact on the Trade Balance

The macroeconomic effect of FDI is their impact on the trade balance. MNEs have a competitive
advantage in both, accessing global markets in importing their products to local markets. The
ability to produce at central locations with large economies of scale and supply markets in
several countries is a core strategy of many manufacturing MNEs. Hence, they frequently export
more than domestic firms, but also import a larger share of their inputs. A large share of both
exports and imports is typically to or from affiliated companies, i.e., intra-firm international
trade. Any analysis of trade impact of FDI has to consider their impact on both exports and
imports.

Table 10.1: Impact on Balance of Payment of Selected Items

Capital Outflows Capital Inflows
Imports Exports
- Intermediate goods for local assembly and sale - Final goods for global markets
- Machinery for local production facilities - Intermediate goods for global markets
- Investors’ global products for local sale
Service Exports
Service Imports - Tourism and business travel receipts
- Fees for licenses and other services
Capital Export
Capital Import - Profit remittance
- Initial equity investment - Interest payments
- Loans from parent to affiliate - Repayment of loans

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