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Philipp Fink, Microeconomic Effects in:

Philipp Fink

Late Development in Hungary and Ireland, page 108 - 109

From Rags to Riches?

1. Edition 2009, ISBN print: 978-3-8329-4173-4, ISBN online: 978-3-8452-1720-8 https://doi.org/10.5771/9783845217208

Series: Nomos Universitätsschriften - Politik, vol. 168

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108 trade partners. An appreciated currency can reduce the debt servicing requirements of loans in foreign currencies (Stephan 1999: 214). Depending on demand elasticities, currency appreciation can reduce inflationary pressure by lowering the price of imports. This mechanism can not only offset the negative effects of appreciation-related export price increases by lowering production costs, but it can also contribute to reducing general inflation. This in turn leads to a reduction in interest rates, prompting increased investment, as the interest rate falls below the rate of return on investment allowing capital accumulation (Stephan 1999: ibid; Murphy 1998: 7). Interest rates are also further reduced by TNCs contributing to state revenues, as the increased tax intake can contribute to lowering budgetary finance requirements. Likewise positive fiscal effects can also arise through the direct employment effects of foreign investments, amounting to increases in income taxes as well as to rising contributions to pension, social welfare and health funds. Similarly, demand effects on the host economy stemming from goods and services sourced by TNCs can produce indirect positive results. TNC internal demand can stimulate investment, production and employment by indigenous firms and additionally create positive fiscal results (Murphy 1998: 7). 3.1.2 Microeconomic Effects Microeconomic effects characterise the envisaged impact of FDI on the production structure of the economy. TNCs are regarded to be sources for modern technologies and management techniques. They can be transferred to the economy via backward and forward linkages between foreign and indigenous firms. The diffusion of these assets into the rest of the host economy can raise the international competitiveness of indigenous firms. Hence, they can enable indigenous industry to overcome its barriers to entry to international economic participation (UNCTAD 1999: 317). The transmission of technology via FDI allows the creation of hitherto non-existent hightech industries in a country. This poses the possibility for indigenous firms in a peripheral country to “leapfrog” development stages, enabling the country to catch-up with technologically advanced countries (Klein et al. 2001: 5). FDI-related gains to the production structure of the host economy can again be of direct and indirect nature and result from the entry of TNCs into the factor and product markets of the host economy. Enderwick (2005: 103-105) mentions a total of 4 direct effects resulting from links between TNCs and the host economy. The first set of envisaged gains pertains to the industrial structure. FDI can induce the development of entirely new industries previously not present in the host economy. Furthermore, TNC engagement can lead to higher value-added production and support industrial diversification. This can enable a backward country to overcome previous barriers to entry and participate on the world market by producing high technology products (Enderwick 2005: 103). 109 Secondly, FDI can also lead to the increased efficiency of resource use in the host economy. They can, therefore, additionally contribute to decreasing inflationary pressure and to increase productivity. This is linked to competition effects of TNCs entering the factor and product markets and competing for resources and goods. Furthermore, industrial upgrading via TNC entry can also create efficiency gains by improving productivity as well as the servicing the host economy with cheaper final and intermediary products (Enderwick 2005: 104; Markusen/Venables 1999: 346- 347). Thirdly, indigenous firms acting as suppliers can benefit from TNC demand for their products or their involvement in TNC production process through the integration of indigenous firms into global TNC production and value chains. These direct linkages can lead to increased profits and investments as well as technological upgrading (Enderwick 2005: 105). Finally, the host economy’s production structure can also gain from the technological upgrading of indigenous firms bought by TNCs. Depending on the market influence of the firm, this in turn can benefit an industrial cluster or even an entire industrial sector (Enderwick 2005: ibid.). Indirect benefits accruing from TNC engagement in the host economy follow the premise of Endogenous or New Growth Theory (Romer 1986; Romer 1990). It attempts to display the role of the diffusion of intangible assets in the form of knowledge in an economy via spillovers or positive externalities in order to explain the role of knowledge or human capital in capital accumulation (Mankiew 1997: 109; Kottaridi 2005: 82). In fact, TNCs are seen as one of the key institutions in the diffusion of knowledge and technology into an economy (Ozawa/Castello 2001: 3; Moran 2001: 45-46). The aggregate diffusion of technological progress is the result of the import of technological spillovers via the attraction of TNCs. Technological progress is transmitted throughout the whole economy via its internalisation through competition, learning and education effects. This diffusion is guaranteed by the co-operation between indigenous and foreign firms, the existence of demonstration effects of best-practice in marketing, production methods and knowledge (Enderwick 2005: 106; Fink 2006: 49-50). Similarly, knowledge diffusion can also take place through the unleashing of agglomeration economies. This effect describes the unintentional spillover of skills and know-how in industrial clusters between indigenous and foreign firms. Likewise, skills can be transferred by employees changing their workplace from TNCs to local firms (Enderwick 2005: 107). 3.2 Preconditions However, the sustainability of such a capital-import strategy depends on certain preconditions. These requirements are interrelated and refer to aspects of monetary, industrial and trade policy. The first issue is concerned with the construction and implementation of an attraction strategy in order to locate export-oriented TNCs in the host economy. The rationale to devise an attraction strategy stems from the na-

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Zusammenfassung

Irland und Ungarn verfolgen eine Entwicklungsstrategie, die in bewusster Abhängigkeit von Globalisierungsprozessen in Form von ausländischen Direktinvestitionen steht und sich als Paradigma in der Peripherie durchgesetzt hat. Doch dieser Entwicklungspfad hat zu einer ungleichen und abhängigen Entwicklung geführt. Dies ist laut dem Autor das Resultat des mangelnden Gestaltungswillens beider Staaten, für einen gleichgewichtigen Wachstumsprozess zu sorgen. Die historische Analyse zeigt, dass eine auf ausländische Firmen fußende Entwicklungsstrategie nicht ausreicht, um traditionelle Peripheralität zu überwinden. Der Autor fordert eine Reform des Entwicklungsparadigmas, um eine gleichgewichtige Entwicklung zu ermöglichen.