1. Multinational firms are producers of knowledge
Multinationals have, and continue to be, heavily involved in creating new knowledge by engaging in research and development (R&D) activities. In 2018, the top 100 global companies invested more than $350 billion in R&D, representing over a third of business-funded R&D worldwide (UNCTAD 2019). This knowledge forms part of a multinational’s "ownership advantages" - intangible assets such as management techniques and well-established brand names - and enables them to compete successfully in foreign markets.
2. Multinational firms transfer knowledge to their overseas operations
Studies on FDI in Indonesia, China, India, and Turkey find evidence of knowledge transfers from foreign headquarters to acquired firms in host countries, which can result in cost savings and improvements in product quality that benefit both acquired firms and consumers. Foreign ownership can also increase target firms’ exports, output, employment, and wages. Firms that undergo domestic ownership changes do not experience similar gains, suggesting that these beneficial effects are due to foreign ownership rather than any other ownership change.
3. Foreign affiliates benefit from continuous injections of knowledge from headquarters
The benefits of foreign ownership are driven by a continuous supply of headquarter services from the foreign parent: divestment (sale of foreign affiliates to local investors) is associated with a drop in total factor productivity accompanied by a decline in output, markups, and export and import intensity.
4. Productivity spillovers associated with FDI mostly benefit the supplying industries
Within the target industry, there are two types of externalities associated with FDI: knowledge spillovers and pecuniary externalities (which include changes in the market structure or level of competition due to FDI presence). These effects work in opposition, so the overall effect of intra-industry spillovers from FDI depends on which effect dominates. Studies find that manufacturing plants acquired by foreign investors increase competition by lowering output prices, which, as expected, is associated with higher physical productivity and lower prices at domestic plants in the same industry. Firms that share suppliers with foreign affiliates or have owners who previously worked for multinationals also experience productivity increases. Considering inter-industry spillovers, FDI presence is associated with higher total factor productivity, more innovation, greater product diversification, and improved product quality in input-supplying industries.
5. FDI inflows facilitate integration into global value chains and affect the composition and the quality of exports
Multinational investment can boost export growth and fundamentally restructure sectoral export patterns. Targets of foreign acquisitions become more integrated into global value chains, which increases their export intensity and reliance on imported inputs. There is also evidence that the presence of foreign affiliates increases exports of local producers through knowledge spillovers about export markets.
6. Foreign affiliates tend to create good jobs
Foreign affiliates generally pay higher wages relative to domestic firms in developing countries, with a wage differential ranging from around 10-70%. One explanation for this wage premium is that multinational firms are more productive, so they earn higher profits and can therefore pay higher wages. Compared to domestic firms, foreign affiliates spend more on worker training and provide greater job stability (are less likely to shut down).
7. FDI inflows may help improve environmental performance
Studies have not found much support for the pollution haven hypothesis, which refers to the possibility that multinational firms, particularly those engaged in highly polluting activities, relocate to countries with weaker environmental standards. In contrast, foreign ownership is associated with reductions in energy intensity and the implementation of environmental management systems.
8. Investment promotion works
Investment promotion efforts aim to reduce the costs of FDI by providing information on business conditions and helping foreign investors deal with bureaucratic procedures. These activities are an effective way of attracting FDI to developing countries, especially in settings where obtaining information and complying with bureaucratic requirements is more difficult. However, successful investment promotion requires professionalism, effort, and commitment to customer service.
