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• Globalization and Society: Impact of FDI world wide and the issues faced by MNE locally and globally.
• Pressure groups try and push to restrict activities of MNEs, as quite a few MNEs come with political strings attached,
however, all the developed, developing and least developed countries have tried to welcome FDIs through
deregulating markets, privatizing government owned enterprises, liberalizing private ownership and creating regional
trade blocs with specific privileges for trade among the members. While most FDIs still go to developed countries,
others like China, Vietnam and India are also benefiting immensely. The emerging countries are now driving global
growth. However, success for FDIs requires a better understanding of the culture and issues of the home country,
specially the analysis by the government or the industries of the host country on the cost and benefits of allowing
FDI.
• The logic of FDI: difficulty is in balancing the perceived benefits with the perceived negatives of FDI. Need to consider
the decisions of those making the FDI and the possible effects on the countries receiving the FDI in three specific
areas: stakeholder tradeoffs (benefits to shareholders, employees, the society and the customer and tradeoffs have
to be made as investors will be looking at profits, customers at product quality and price, regulators at the impacts of
environment and the society. A company needs to address and balance these mutually exclusive issues). Cause and
effect relationships (effects on employment, on local industries, tax revenues and export and innovation
opportunities, etc. There can be conflicting repercussions of FDI and very difficult o establish direct cost and benefit
relationships. EG: FDI and new technology, improves efficiency and gives better products but also affects local industry
in the form of competition but at the same time encourages competitors to also improve). Individual and aggregate
effects ( as each MNE operates under different values and cultures, evaluation of impact can be made on a case by
case basis or in an aggregate on the benefits or negatives effects on the country’s economy.
• Economic Impact of MNEs: can impact in the form of economic growth, employment, balance of payment, etc.
• BOP: two extremes, one MNC buys a company in a host country, and profits etc are to be repatriated, then this can
cause a drain in currency reserves, and vice versa MNC’s operation can create jobs and uses resources to import
substituting products, reinvesting their profits in home country, etc. can raise currency reserves. Most FDI falls
somewhere between these two idealistic extremes.
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• Net import and export effect: BOP effect is positive if the FDI results in import substitution and negative if it results in an
increase in imports. Similarly on the export side, BOP effect positive if the FDI results in generating export increases and
negative if it produces only for the local markets. The effect of FDI is usually at two levels initially loss to home country and
benefit to the host and later positive to the home and loss to the host.
• MNE and FDI has growth and employment effects: unutilized or under utilized resources can be used and benefit both
countries and secondly, there could be ways to transfer capital and technologies in the emerging global economic
environment. Home country claim losses because of manufacturing transfers to other countries may affect the job scenario
at home. Host country gains through better resource utilization and overcoming production barriers in the form of cash or
skills or technology or even upgrading of these resources through better access. Host country losses may accrue due to
replacement of local companies and dampen local entrepreneurship, decrease local R n D and even take away the best
resources human or other wise.
• The Foundations of ethical behavior: essential because appreciating local values makes the companies seem more
responsible and therefore provides competitive advantage. Values differ from country to country in the way employees and
companies see each other and ethical truths or practices varies according to groups in other countries even though there
maybe some common universal standards (normativism or relativism). The trick is to walk that fine line but exhibit
adequate decency and fair play so as to create a positive image in the minds of the customer and the general public as being
responsible. Respect for local cultural identity is a must, even though they may or may not affect a company’s performance,
EG: France fined Body Shop for writing in English when selling in French stores, and Finns don’t like non-Finnish architecture.
• Legal justifications for ethical behavior: Not everything unethical would necessarily be illegal, however, the law is a good
place to start because it embodies local values. With globalization and increase in economic activity through travel and FDI
in different parts of the world increasing, similarity in behavior and ethics will start emerging faster.
• Ethics and Corporate Bribery: corruption and bribery are major faces of doing business in many countries to get
government contracts, or to get favorable decisions and payments in cash or kind is made. This erodes a country’s
competitiveness in attracting FDI and is sometimes an outcome of excessive red tapism. There are plenty of laws
promulgated in different parts of the world, including multi-lateral agreements with the OECD , the International Chamber
of Commerce, the World Economic Forum and even the UN, but then implementing the same is not an easy task.
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• Ethics and the environment: companies extracting natural resources or manufacturing which releases
pollutants in the environment need to be more concerned with the impact on the environment. All should try
and ensure sustainable development so that future generations are not deprived of the planet’s resources.
Climate changes, global warming issues, hydrocarbon emissions etc. are issues that need special attention. The
Kyoto protocol, the Doha rounds and the Paris climate summit all set greenhouse emission reduction targets to
be 5.2 % below 1990 levels, even though major countries like US, India, China haven’t yet agreed and the US
reneged. Pharma companies face the challenges of profits versus making available critical drugs mainly to the
poorer countries.
• Carrying out business in countries that insist on compliance with the Paris summit can be cost issue to
companies. Many companies now have strict guidelines on environment issues even going abroad so as not to
destroy the local environment. Some companies take factories abroad to take advantages of the more relaxed
implementation of these protocols. Supply chain issues on raw material, child labor, working conditions etc., are
some major issues that need attention.
• Some ethical dilemmas: specially applicable in pharmaceutical industry, where tiered pricing is applied
depending on where the drugs are sold. When patents expire then these same drugs turn generic and anyone
can manufacture at lower costs. There are some commonly faced labor issues for MNEs when purchasing from
independent manufacturers or when taking industries abroad in terms of labor laws, fair wages, child labor
issues, working conditions, working hours, unionism etc. which have to be considered.
• Relative behavior implies we act according to the norms of the host country whereas normative behavior refers
to universally accepted international codes. The law is the guiding principle but ethics go beyond that socially.
• CSR: companies respond to local pressures for CSR by establishing and/or following codes of conduct and also
getting involved in training programs to educate labor, carry out audit programs to ensure and assure that local
values, cultures and local CSR is effectively carried out. Legal and statutory compliances must be ensured through
effective training and audit programs.
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• International trade and factor mobility: should government control trade? Influence trade and industry patterns or
allow laissez-faire treatment?
• Interventionists: mercantilism (export more than import and bring in gold as far as possible to use for armies and other
national institutions, supported by government policies to restrict import of a variety of goods, colonialization for supply
of raw materials, labor using home based technologies, finance and protection to flourish . Balance of trade favorable or
unfavorable: China and the US, shows that positive BOP does not necessarily be advantageous . Surplus country would
be holding debt by granting credit and that cannot be paid, then trade would be hit. Neo-mercantilsm (increasing
production and export to provide local employment and also to send goods to favored countries at a lower cost).
• Free Trade: implies specialization meaning the country produces and sells what they excel in as per demands of
customers local or global and use the money to buy what they need from local or global markets. Adam Smith proposed
that if trade is unrestricted, then each country would produce goods and services for which it is best suited, the labor
efficiency would increase because of repetition and the lack of needs to switch jobs. FT brings in efficiency, specialization
and higher outputs. Self sufficiency may sound like the utopic goal but we cannot ignore the theory of comparative
advantage. (US and European companies shifting production to China or Japanese automobile companies coming to
India).
• Countries have natural advantages because of climate, natural resources, availability of skilled labor. Costa Rica produces
coffee, pineapple, bananas, taking advantage of climate and lower labor costs, while other countries like US will have to
divert resources from other areas to create similar situation. Russia, GCC and OPEC for oil and gas. Australia in minerals,
even North Korea in coal can have advantages which can be exploited. There can be acquired advantages can accrue
through product and process technology. Japan exports steel despite importing iron ore and coal, Danish silver, robotics
have changed auto production, computer technology advantage can be a major tool in trade, AI in China, IT and software
from Silicon valley.
• Absolute and comparative advantage: absolute by virtue of natural or acquired advantages or comparative advantage
by virtue of specialization.
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• Basic assumptions of the absolute or comparative advantage can be flawed because it assumes full employment, perfect
labor efficiency in outputs, there is no transport cost factored in, and that resources do not flow freely across borders but
remain in-country. Large country size geographically or demographically leads towards self sufficiency, but competition
and free trade movement can negate this advantage.
• Production factors dictate cost of production (land, labor, capital) of any country and give competitive advantage based
on efficient use of these resources.
• Country similarity theory stipulates that trade occurs among similar income countries more mainly because earnings and
consumption is higher and production processes are equally advanced enhancing reliability of the products. Physical
distances and cultural similarities also lead to more inter-lateral between countries if geographical and ethnic/ cultural
proximities, hence the formation of economic trade zones EU, ASEAN, BIMSTC, etc.
• While manufactured products comprise most of the trade between developed countries because of better R and D
facilities, innovation, and quality of manufacture and the customer is more likely to buy the goods even at higher costs,
service industries like transportation, banking, insurance are also increasing also from the developing/emerging
countries.
• The PLC (product life cycle theory) stipulates that product introduction usually happens in the country of development,
mostly the developed countries. Over the life cycle production will shift to other locations, like the developing ones
usually through the maturity and decline stages so as to reduce costs of transportation, costs of production and also to
facilitate market diversification whence newer products will enter the introduction stages in the home country. (Apple to
China and India, Toyota to Thailand and Malaysia and now India).
• The Porter diamond theory shows that competitive superiority are dependent on demand conditions, factor conditions,
related ancillary and support industries, and the existence of competitive rival firms.
• Even though theoretically production factors or the finished are mobile, the costs involved in manufacture and
transportation will determine whether manufacture and trade is better than shifting manufacture to host country.
• Factor mobility stimulates the development of support and complementary industries.
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• Production factors like Capital, people are mobile and customer and markets are shifting also: capital moves
mainly in short term on expectation of higher returns, considering host country risks. Long term capital
doesn’t move as much because of repatriation and exit issues. Risk perceptions are based on investor
perceptions of politics, and economic growth expectations, ease of doing business, etc. Government and bi-
lateral or multi-lateral agencies also give funds. People move for economic reasons and as a result of political
conflicts and sometimes because of skill demands. EG: Nepali labor movement, expat employees in China,
etc., refugee movement Syrians to Europe, Rohingyas from Myanmar, etc.
• Labor movements can cause brain drain in the migrating countries, but at the same time lead to increase in
remittances (Nepal). In the US migrant labor can be seen at both ends of the spectrum, more than 35% of all
PhD scholars in the US are foreigners just as a similar amount below high school levels are migrants. Labor
movement impacts endowments (costs) to businesses and also can impact social harmony.
• Typically factors in abundance in some countries move to areas of scarcity. (US from Mexico, etc. skilled labor
to Nepal from India.
• Both finished goods and production factors are partially mobile. If mobility occurs through FDI, trade is
stimulated, need for components, hence opportunity for ancillary industry, trade in equipment and
technology, improves economic relations with the investing countries, etc.