Page 236 - DMGT401Business Environment

Unit 10: Foreign Trade

cannot be withdrawn quickly if the volatile environment goes through an economic downturn Notes
such as the exchange rate crises in Mexico in 1995, East Asia in 1997 or Russia in 1998.
FDI in infrastructure and business services has a direct impact on productivity on its customers.
In industries such as telecommunication foreign investment leads to substantial improvement
of services required by businesses; in other cases, such as accounting or IT services, foreign
investors provide services previously not available locally.
For instance, foreign investment in telecom leads to major improvements in technology and
competition in the sector. This ultimately reduces firms' communication costs and thus increases
productivity. Similar effects arise from FDI in other utilities such as energy distribution or
motorway and airport projects.

Forward and Backward Linkages

Foreign firms often purchase intermediate goods (backward integration) from domestic suppliers.
These backward linkages create several effects on the domestic supplier. Foreign investors may
transfer knowledge directly to local suppliers by training and even joint product development.
MNEs improve the productivity of indigenous firms by providing technical assistance and
training of employees to increase the quality of suppliers' products by helping in management
and organization, by assisting them in purchasing of raw materials.
Moreover, the FDI may increase demand for intermediate goods, thus allowing local suppliers
to realise scale economies.

Example: In India almost all the MNCs like McDonalds, Pepsi, Coco-Cola, Suzuki,
Hyundai, Samsung, etc., have transferred technology and imparted training to personnel so that
they can supply products of international standards. McDonalds has even appointed an agriculture
engineer to help farmers improve their crop.
Foreign-owned customers (forward integration) may set higher requirements regarding product
quality and service-aspects of the supply relationships such as just in time delivery, thus providing
incentives for improving product quality and production processes.

Increases Employment

MNCs generates new opportunities of employment in the host country. MNCs transfers their
routine jobs and non-core jobs to the destination where labour is cheap, which is the reason that
lot of jobs from Europe and the US have been transferred to India in the last decade. MNCs also
transfer their operations to new and economical destination which also increases the opportunity
for employment. MNCs play a critical role in economic development and in raising the income
level of people in turn increasing the level of employment. In the last decade, directly or
indirectly, MNCs have created millions of jobs in India in almost all the sectors such as
infrastructure, software, hardware, old economy industry, entertainment, media, etc.

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