International business is a scientific discipline that is rapidly evolving in parallel with the efforts of most firms to engage themselves in foreign operations. It researches business activity in an international context at the country, firm, or consumer levels. In particular, the international activity of firms presupposes the transfer of production mechanisms and/or market practices from one country to another. Local corporations that eventually go international may build a manufacturing plant or assembly lines in a foreign country, they may be supplied with raw materials and resources, or they may establish an office of business associates who are responsible for the successful marketing of products in their respective countries of operation. These foreign countries that host production, sourcing, or market activities of internationalizing firms are referred to as “host countries” in the international business literature.
Especially, countries with high rates of unemployment or less developed countries (LDCs) compete intensively to make their national contexts a more promising ground for foreign direct investments (FDI) by international firms. Means through which prospective host countries compete to attract FDI include tax incentives, fair competition, skilled labor, or the elimination of bureaucracy. Thus, governance structures and regulatory schemes in both the private and public sectors must be aligned in such a way as to offer transparency and equal treatment within host countries.
Apart from LDCs, almost all countries in the world try to achieve a certain status of hosting international firms’ activities. This is because the benefits for local economies’ welfare and societies’ well-being are well documented and have a lasting effect. The most apparent and much-wanted implication for a host country is the generation of employment through the creation of local marketing subsidiaries or opening of factories. Equally important are the increased cash flows to the host country through tax payments by foreign firms.
Another major advantage is the transfer of technical and managerial know-how from the home to the host country. Firms that choose to operate in a host country often collaborate with local corporations for such reasons as becoming acquainted with the local market’s specificities or granting access to valuable resources and raw materials. As a result of this collaboration, firms learn from each other and have access to bits of knowledge, which would otherwise be impossible to get. In particular, Japan and Korea benefited greatly as host countries from such exchanges of technological know-how between local companies and Western counterparts; part of the last century’s Japanese miracle is attributed to such fruitful collaborations.
Increasing competition between host and home firms also increases learning potential and the competitive stance of the host country. Local firms must increase their learning capacity and become even more proactive and competitive against an often more sophisticated foreign firm. Such an increase in local firms’ competitiveness results in better servicing and needs-fulfilling products for the local population. A closed local market that does not encourage foreign competition may not provide the environmental inducements for economic growth and corporate sophistication.
Moreover, firms that want to invest in a host country are sometimes legally obliged to collaborate with a local business or they cannot assume a majority of ownership. Such collaborations also increase learning benefits for local firms that do not possess the resources to acquire knowledge elsewhere. An example of such a positive implication for the host country is the case of the Philippines. Major shipping firms that invest in that country for reasons of crew recruitment for their ships must collaborate with a Philippine business if they want to establish a branch there. In this way, local firms of the host country have been greatly advantaged through increased cash flows and managerial know-how.
Apart from the aforementioned benefits (corporate growth, seats of employment, financial inflows, and knowledge generation), international operations also generate disadvantages that may inhibit societal welfare in the host country. For example, many resource seeking firms exploit local raw materials for their own benefit and, thus, significant natural resources become extinct without apparent benefits for the host country. The depletion of the rain forest in the Amazon basin is a characteristic example of unilateral foreign investment in a host country. Foreign timber or oil corporations have largely benefited while the turnover for the local economy is disproportional.
Additional drawbacks of FDI for the host country include the worsening of the balance of payments due to the repatriation of profits or the competitive pressures on local firms. Host country’s business units may not afford to compete with often larger, market-seeking foreign corporations. As a result, an increasing number of local businesses cease to exist due to their inherent inability to compete against a multinational giant. Hyper-retailers, in particular, have been rightfully or not accused of destroying local retailing structures and are held accountable for the closure of many local small and medium enterprises (SMEs).
Summarizing, we can claim that a significant body of the international business literature suggests that governments should strive to make their countries host countries for FDI. However, benefits are not generated without establishing a proper platform of policies for hosting international activities. Knowledge sharing and dialogue with experienced host countries must be facilitated if countries want to alleviate poverty or reap aforementioned benefits as host countries. Otherwise, the drawbacks of being a host country will prevail and national competitiveness and well-being may be in jeopardy.
- Arjun Bhardwaj, Joerg Dietz, and Paul W. Beamish, “Host Country Cultural Influences on Foreign Direct Investment,” Management International Review (v.47/1, 2007);
- E. Haskel, S. C. Pereira, and M. J. Slaughter, “Does Inward Foreign Direct Investment Boost the Productivity of Domestic Firms?” Review of Economics and Statistics (v.89/3, 2007);
- Holger and D. Greenaway, “Much Ado About Nothing? Do Domestic Firms Really Benefit from Foreign Direct Investment?” World Bank Research Observer (v.19/2, 2004);
- Arijit Mukherjee and Kullapat Suetrong, Privatisation, Strategic Foreign Direct Investment and the Host Country Welfare (University of Nottingham, 2007);
- Jasjit Singh, “Asymmetry of Knowledge Spillovers Between MNCs and Host Country Firms,” Journal of International Business Studies (v.38/5, 2007);
- UNCTAD Secretariat, The Emerging Landscape of Foreign Direct Investment: Some Salient Issues: Note (United Nations, 2007).
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