Does Direct Investment by Multinational Corporations Benefit Developing Economies? McKinsey Study Marshals Evidence
January 27, 2004
by McKinsey Global Institute
Who benefits from multinational company activity in the developing world, and how? Few topics are more intensely debated or create more contrasting emotions than the merits and costs of global economic integration. And few topics demonstrate a greater need for a robust set of facts on which to base an assessment. McKinsey & Company's Global Institute recently completed a major research project, which finds that the overall economic impact of multinationals' investment on developing economies has been overwhelmingly positive, despite the persistence of host-country policies that can lead to negative, unintended consequences. Moreover, companies have only started to capture the large cost savings and revenue gains possible from operating in emerging markets.
The study's findings result from a year-long project studying the activities of multinational companies in large developing countries spanning China, India, Brazil, and Mexico across five key sectors -- autos, consumer electronics, food retail, retail banking, and IT/business-process offshoring, such as programming teams and customer-service lines.
A total of 14 in-depth sector cases form the fact base for findings that have important implications for global company strategy and economic-development policy.
The sector case studies form the basis of more general conclusions that broadly answer two sets of questions:
* How has multinational company investment impacted the economies of the developing world? Which meaningful implications do these experiences hold for governments and policymakers?
* How has multinational company investment in the developing world impacted industry structure and competition globally? What do these effects mean for companies making decisions about global sourcing, investments, and expansion?
Some of the study's major findings include:
* Multinational company investment improves living standards in developing economies, as consumers benefit from lower prices, higher quality goods, and broader selection. Increasing competition serves as the main vehicle for these broadly distributed benefits.
* Most economies clearly benefit from multinational investment and the impact on host countries depends on whether multinational investment seeks lower-cost locations or new markets.
* Commonly-employed policy incentives to foreign investment do not primarily drive multinational-company investment and instead have negative and unintended consequences for host economies.
* Companies have only scratched the surface of the large cost savings and revenue gains possible from operating in developing-country markets.
Link: http://www.mckinsey.com/knowledge/mgi/newhorizons/ [32 KB HTML]
Keywords: foreign direct investment, FDI, multinational corporations, MNCs, development, developing country