MNEs contribute to the national income of both the countries. It has been observed that MNEs perform better than national firms. In a study, it was pointed out that average labour productivity in foreign subsidiaries of MNEs is between 30 and 70% higher than in national firms and for the home activities of MNE it is approximately 30% higher.
They perform better not because they are MNEs, but because MNEs also have many other features, combining bundles of inputs and other features which national firms do not have. Even if an MNE goes in for Brownfield FDI, it picks up the best performer. MNEs are certainly never found to be doing worse than national firms.
With regard to employment and output effects in home country, it has been found that vertical FDI (VFDI) generally complements domestic activities, whereas Horizontal FDI (HFDI) sometimes substitutes for them. VFDI, by fragmenting the production chain, is found to enhance exports from home plants. In contrast, HFDI reduces exports from home plants. VFDI reduces production costs for the MNE as a whole, therefore, raising output and employment of complementary activities at home or at least preventing from declining.
Table 3.2: The Impact of MNEs on Host Countries:
i. Transfer of technical know-how, managerial skills and marketing techniques
ii. Result in spill over benefits.
iii. Local firms networking with MNE result in improvements in productivity.
iv. Capital into host countries ushering in necessary reforms and modernisation of financial services.
v. Production into host country income and employment directly and regional and sectoral development.
vi. To reduce local monopoly to stimulate domestic competition and encouragement of growth of local entrepreneurs provided MNE makes green investment.
vii. Positive contribution to host country’s trade balance.
viii. Quality of goods produced and consumed locally. Convergence of global tastes and preferences.
i. A sinister threat to the sovereignty of host country may lead to neo-colonialism.
ii. Inferior / ill-suited technology transfer.
iii. Industrial dominance obtaining concessions from the government in the early stages.
iv. Cultural impact / invasion.
v. May go out with a bang.
vi. In some cases mergers / acquisitions may stifle domestic competition.
vii. If produces only for sale in host country market then no contribution to balance of trade.
viii. Transfer of modern technology dependency by host country.
Are MNEs good or bad employers? It has been observed that MNEs pay higher wages than national firms, both in developing and developed countries. In a sample of UK establishments that change ownership status, it was found that wages increase by3.24% after the acquisition of national firms by foreign investors, and decline by 2.1% after the acquisition of foreign owned companies by domestic investors.
It has also been observed that skill intensity at home increases as a consequence of foreign investments, particularly when firms invest in developing countries. It has also been seen that the gap in skill intensity between MNEs and national firms is larger in developing countries, like Mexico, than in advanced countries.
Are the jobs more secure in MNEs than the national firms? MNEs are more volatile in terms of employment than the national firms, because MNEs have a different degree of exposure to international shocks than that of national firms. Secondly, by being organised to operate several plants, they have lower costs of relocation than national firms. Lower cost of relocation makes MNEs less accountable to national authorities and regulations than fully national firms.
In addition to their own better performance in host countries, MNEs do make an impact over the performance of local firms. The impacts can be made through markets (product and labour, and knowledge and technology market); or market transactions; or pure technical externalities (unintended knowledge spillovers between firms). The spillover impact depends upon a host of country- and industry-specific conditions.
Spillovers are larger in industries where MNEs are widely present and when local firms are able to interact with them. The input suppliers to MNEs are likely to benefit. MNEs are found deliberately support suppliers in various ways: by helping them in setting up production facilities; by providing technical assistance to raise product quality; by assisting them in purchasing raw materials; and by training employees and managers.
MNEs are bound to hot up competitive scenario in the host country market. If it happens to be the best performer, it could force the best among national firms to increase efficiency and the worst ones to leave the market. However, if the market becomes more concentrated there is likelihood of charging higher prices to the customers. One thing is sure that the entry of MNEs dampens the profit margins of national firms in the short turn, but it then generates long-term gains in efficiency and therefore, a long- term reversal of the decline in profit margins.