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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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ture of FDI, which is defined as the result of international market imperfections and
impurities. Secondly, attraction policies have to be combined with an industrial
policy aimed at reaping the maximum benefits for the host country’s economic
structure.
Finally, FDI and especially high tech FDI is by definition a long term investment
and hence requires a stable political and social environment (Paus 2005: 22). This,
therefore, necessitates a long term political commitment and vision in terms of policy-making and implementation towards guaranteeing a stable environment in which
a foreign firm can effect its investment (Dunning 1992a: 25). Especially in the case
of democracies, a long term vision and commitment require consent in both the
political and social spheres to the development strategy. This necessitates on the one
hand a broad consensus on the political and administrative level towards FDI. On
the other hand, commitment also presupposes the general acceptance of the development regime by relevant non-state actors such as the social partners and other
relevant interest groups (Paus 2005: ibid).
3.2.1 Attraction Strategy
The validation of an attraction strategy is closely linked to the nature of FDI. As
Kindleberger (1969), Hymer (1960/1976) and Hirsch (1976) show, FDI is justified
by the existence of international market imperfections. On the one hand, these constitute barriers-to-entry, as the internationally operating firm is faced with an atmosphere of uncertainty and high risk. These barriers-to-entry are defined by three factors: information costs, administration costs and costs of possible discrimination by
host governments and consumers (Hymer 1976: 35).
On the other hand, the same market imperfections can also allow TNCs to overcome their competitive disadvantages in foreign markets, as firms choose FDI instead of seeking contractual relations with domestic firms in the host economy or
trade (Kindleberger 1969: 14). The apparent costs of international operations are
mitigated by the internalisation or internal exploitation of firm-specific tangible and
more importantly intangible advantages (Buckley 2006: 146). These advantages are
firm-specific and are, hence, unequally distributed amongst all firms (Hymer 1976:
72-73).
They, therefore, constitute individual competitive advantages, as they act as barriers to entry for other firms. Hence, they can resemble monopolistic or oligopolistic
gains for the individual firm (Kindleberger 1969: 11; Hymer 1976: 25, 86; Dunning
1992b: 4). Furthermore, these intrinsic advantages may be greater for the foreign
firm in the host economy than in its home economy (Hymer 1976: 31). Accordingly,
FDI “is driven by the desire to control foreign operations” (Buckley 2006: 141).
Consequently, FDI poses the possibility to exploit or defend transnational firmspecific monopolistic or oligopolistic advantages by reducing competition (Buckley
2006: ibid).
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The barriers to entry for foreign firms are defined by transaction and production
costs. Following Hirsch (1976: 263), FDI will only be a substitute for a foreign
firm’s exports to the host economy, if the costs of exporting are higher than the costs
involved with setting up and running productive facilities and producing in the host
economy in comparison to the firm’s rivals. States can, therefore, be favourable
locations for FDI, if they can successfully lower these cost factors via locational
policies (Dunning 1992a: 20; Oxelheim/Ghauri 2004: 16).
In line with Dunning’s (2006: 192, 201; 1993: 66-95) eclectic OLI-paradigm, a
foreign firm will invest if the firm can reap the benefits from the ownership of specific assets (O) and locational advantages (L) via the internalisation of the host
economy’s assets (I-advantages) into the productive network of the TNC (UNCTAD
1998: 89). Locational advantages influence O-specific advantages (UNCTAD 1998:
ibid) and are defined by location-specific assets (Paus 2005: 18). These encompass
institutional, educational, infrastructural, fiscal and geographical aspects, which
enhance the competitive position of the investing firm (UNCTAD 1998: 90).
In practice, attraction policies entail a multilevel approach. They are defined by
the ability of the state to implement a successful package of instruments to attract
FDI. The policies ensure and enhance the intrinsic assets of a firm, thereby allowing
the TNC to continue to reap its intrinsic oligopolistic or monopolistic rents. If in
contrast to neoclassical assumptions, production factors are not immobile, factor
mobility results in the relative scarcity of capital. Therefore, capital has to be lured
into the economy via an attraction programme (Moran 1998: 38).
Such a programme attempts to remedy information deficits causing imperfect
competition, thereby resembling an important barrier to entry for the foreign firm to
the host economy. One instrument is the provision of business-facilitation services.
This includes the promotion of an investment location, the sourcing of a suitable
investor and the gathering of relevant information for the investor and on the prospective TNC in order to accurately estimate the investor’s specific requirements
and attempt to meet them (Lall 2002: 78; UNCTAD 1998: 99, 101).
Furthermore, transaction costs are additionally targeted by offering investmentfacilitation services, designed to lower the administrative burden and to further
minimise information deficits (Lall 2002: 77). Finally, post-investment facilitation is
aimed at constantly looking after the investor once the investment has been effected.
The aim is to attain a sequential investment by an affiliate in order to thwart a potential disinvestment, reduce the amount of repatriated profits and to attain the reinvestment of earnings (UNCTAD 1998: 101).
A further important element is the provision of pecuniary and non-pecuniary investment incentives designed to reduce the production costs and to increase the rate
of return on the investment. Pecuniary incentives refer to fiscal and financial instruments. Non-pecuniary incentives refer to specialised exemptions for the foreign
investor to rules and regulations governing the firm’s operations in the host economy. These measures include special legislation for specific policy fields, specific
strategies and sectors. They can award foreign investors certain market preferences
(Oman 2000: 20-21; UNCTAD 1998: 102).
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3.2.2 Macro and Micro-Coordination
Essentially, attraction instruments are discriminatory in nature (UNCTAD 1998:
102). International rules on trade related investment measures (TRIMS) as stipulated
by the WTO (Wade 2003: 627-628) and by regional accords, such as those laid out
in the Treaty of Rome, concerning the issue of “State Aids” in the EU, effectively
rule out specific discriminatory measures to the detriment or to the benefit of TNCs
(Oman 2000: 67-68).
Consequently, attraction policies are combined with the state’s industrial policy.
As the development strategy is centred on the generation of exports, polices to promote export orientation are a central feature of the development strategy and, therefore, equally apply to indigenous and foreign firms (Stephan 1999: 215). Hence, the
creation of an attraction strategy only implies one feature of the FDI-led development regime. Industrial policy is the other. Both should be combined by a holistic
approach of state policies (Dunning 1992b: 42). Accordingly, the spheres of governance, which define the realm of state capacity, are characterised by a dichotomy in
order to unleash the envisaged macro and microeconomic effects. They are designed
to complement the TNC’s locational strategy of reducing both production and transaction costs (Dunning 1992a: 15-16). They are also aimed to reap the maximum
benefits from TNC engagement.
The first level, macro-coordination, is associated with the macroeconomic management of the economy. This governance sphere encompasses policy areas concerning aggregate demand and supply, fiscal, budgetary and monetary issues. These
determine the economic stability and the running of the host economy, thereby constituting a possible locational determinant for both indigenous and foreign firms by
influencing inflation and interest rates, taxes and exchange rates (UNCTAD 1998:
97-98; Dunning 1992a: 22).
Therefore, income and monetary issues are closely related to industrial policies,
as they determine an industry’s cost structure and its international competitiveness.
They are an integral feature of a state’s locational attractiveness, which is characterised by guaranteeing low production costs to prospective investors through ensuring
competitive wage levels. The latter point is important within the context of the import sensitivity of consumption in small and open economies (Stephan 1999: 192-
193; O’Malley 1989: 83). In order for such an economy to produce sufficient export
surpluses, it is necessary for income policies to be stability oriented. Wage rises
above the productivity rate can fuel inflation and accordingly lead to interest rate
rises, harming entrepreneurial investment and competitiveness. Furthermore, they
can incur balance of payments difficulties; wage-fed consumption increases can
induce additional imports (Stephan 1999: 215).
Similarly, state expenditure should be balanced to avoid extra consumption above
the absorptive capacity of the economy. In this case, extra consumption could lead
to import surpluses and an increase in foreign indebtedness due to a balance of payments deficit and ultimately culminate into a deterioration of the country’s monetary
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References
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.