Many governments across the world have liberalized their policies in order to attract foreign multinational corporations to invest in their countries. Additionally, many governments across the globe have participated in the process of lowering various entry restrictions and opening of new sectors to investment by the foreign multinational corporations (Zarsky, 2005). Also, most governments of the host countries offer different forms of generous incentives to encourage the foreign multinational corporations to invest in their countries jurisdiction. These may include, offering of low taxes and tax holidays to foreign investors, market preferences and in some cases monopoly rights. Through this initiative, most governments are able to induce foreign multinational corporations to invest in the local market with low tax payments. Most governments introduce this policy with the expectation that foreign multinational corporations will increase tax revenues in their countries (Sornarajah, 2010).
Other than obtaining income from the foreign corporations, most governments get concerned with the fact that these companies can lead to an increase in the local employment as well as contributing to the growth rate during times of cynical downturns. On the other hand, most governments are highly optimistic that foreign investments can result to knowledge spillovers (Rudolf Dolzer, 2008). This means that, the knowledge and technological techniques applied by the foreign companies can benefit the domestic companies even if the foreign multinational corporations perform their operations in wholly-owned affiliates. This is because, companies in the domestic market can be able to enhance their productivity due to forward and backward linkages with the foreign multinational corporation affiliates. Also, most governments offer generous incentives to foreign investors since they believe that local companies can emulate the new technologies applied by foreign multinational corporations in performing their operations. Also, local companies can employ workers trained by the foreign corporations (Morsink, 1998). These employees can apply the knowledge they have on how the foreign corporations carryout their operations to improve the operations of the local companies. This approach can make the local companies highly competitive in the market.
On the other hand, the competition that arises as a result of entry of foreign multinational corporations in the country can be beneficial since it compels the companies in the domestic country to work harder and apply new technologies in their operations. This enhances the effectiveness of the domestic companies, which in the long run translates to high productivity.
Reasons why most governments offer generous incentives to foreign investors
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Another vital reason that encourages the government offer generous incentives to the foreign investors is the fact that these companies play a key role increasing exports; foreign companies operating in the host country local market facilitate the exportation of various products. This enables the host governments to earn much income from those exports (Hunya, 2000). These companies are able to facilitate exportation of products because of their highly effective and efficient channels of distribution compared to local companies, which may lack effective channels of distribution of their products. Therefore, most government especially in developing countries decides to give generous incentive to the foreign multinational corporations in order to increase its exports. This is because, companies in the local market may not be able to increase the exports of the country, since their distribution channel may be weaker than those of foreign multinational corporations.
Additionally, most governments across the globe offer generous incentives to the foreign investor because foreign multinational corporations grant many advantages to the host country in terms of export market access that arise from economies of scale in marketing of foreign corporations or from their ability to gain access to the market abroad (Assaf Razin, 2008). On the other hand, foreign corporations may serve as catalysts in helping the local companies to export their products to the international markets. This is because, companies in the host countries can use or imitate the distribution techniques applied by the foreign corporations in marketing their products in the international market.
On the other hand, most governments across the globe offer generous incentives to foreign investors because, foreign investments play a vital role in bridging foreign exchange gap of the host country. This is because, growth of any economy necessitates investments (Kline, 1992). On the other hand, investments require saving regardless of whether domestic or foreign. Therefore, two gaps may arise in the country’s economy; these may include inadequate foreign exchange to transform the domestic to foreign resources and inadequate saving to support capital accumulation to attain a certain growth target. If the investments necessitate imported inputs, it means that the domestic saving may not warrant growth if the saving cannot be transformed to foreign exchange to obtain imports. Capital inflows play a key role in ensuring that foreign exchange purchase imports for investment (Woodford, 1999).
Nevertheless, capital inflows do not at all times lead to increase welfare in the host country. For instance, in a situation where capital flows to an industry in which an existing company enjoys monopoly in the global market, any increase in output due to new competition lowers the price of the exportable, leading to reduction in terms of trade as well as lowering welfare in the host country. In addition, the benefits from foreign investment get evaluated with regard to the assumption that host countries can attract large capital inflows without massive declines in its return rate (Mankiw, 2011). Therefore, foreign investors play a key role in bridging the two gaps in the host countries.
Knowledge and modern technology
Most governments attract foreign multinational corporations hoping that foreign investors may bring adequate knowledge and new skills that can be applied by the domestic corporations or firms, to improve their operations in the economy, as well as enabling the country to have highly skilled and competitive labor force (Wells, 2001). Foreign Corporation brings new knowledge and skills that can be applied by other organizations in the domestic country in improving their operations. These skills and knowledge may be technological advancements that can help many local companies to enhance their efficiency and effectiveness in the execution of tasks. Additionally, most governments attract these investors because they feel that the local corporations can develop by learning the techniques that the foreign corporations apply in their operations. This can make the domestic companies equally competitive in the market.
As a way of attracting foreign investors, most government across the world offers generous incentives to foreign investors with the aim of acquiring modern technology from these companies to enhance their operations and productivity. These technologies may include process, product and distribution technology, as well as marketing and management skills (Barclay, 2002). The host country induces foreign multinational corporations hoping that they can gain access to new technologies and adequate skills that they do not posses. By attracting foreign multinational corporations, host governments benefit from these corporations even if they run their foreign operation independently. This is because technology is to some extent public good. These benefits can be referred as productivity spillovers. For example, companies in the host country can be able to enhance their productivity and operations due to both forward and backward linkages with the foreign multinational corporations’ affiliates.
These companies may imitate the new technologies applied by the foreign corporations (Dept, 1985). On the other hand, local companies may employ the employees trained by the foreign multinational corporations in the host country. These workers may play a crucial role in enhancing the operations of the local firms in the host country. This s because, they possess abundant knowledge and skills on how the foreign corporations carryout their operations in order to prosper and to gain a competitive advantage over other companies.
In developing countries, most governments face hard economic times, making it hard for them to fund all the programmes that can improve people’s living standards, for example, provision of quality education and quality healthcare. In addition, such governments may not able to improve their infrastructures due to their low income. In a situation like this, the government decides to offer generous incentives to foreign investors as a way of attracting them to venture in the domestic market (Easson, 2004). The aim of the government is getting extra income from foreign multinational corporations, through taxes imposed on their operations. This enhances the financial stability of the government and enables the government to support many development projects in the country, as well as programmes that can improve the standards of living of citizens at all levels.
The fact that income that the host government generates from local corporations may not be sufficient to support all the operations of the country, makes such countries less developed. Sometimes governments from these countries depend on the developed countries in getting grants and loans to fund various projects in the country as well as sponsoring various programmes in the country. For example, in many developing countries especially African countries, development projects such as construction of roads and other infrastructures are sometimes boosted by grants from the developed countries. Additionally, such countries also receive support from the foreign investors from developed countries in supporting many programmes that may vital in supporting the country economy. Such programmes may include education programmes, health and medical services, research projects among others. All these programmes play a crucial role in the economic stability of any country.
As a result, most governments in especially in developing country offer generous incentives to foreign multinational corporations with the aim of earning more income through the tax that the foreign multinational companies pay to the government. This revenue gets used by the government in the to improve the standards of living in the country. Income from foreign investors enables the government to get income that can be used to sponsor various development projects in the country. These projects may include development of infrastructure for the benefit of all citizens in the country, for example, construction of roads, electricity supply, and water supply just to name a few. Additionally, the income that the governments get from these corporations gets used to sponsor programmes such as education, health care, agriculture and many other programmes.
Other than offering generous incentive to the foreign multinational corporations, the host government must ensure the local environment is investments friendly in order to encourage foreign investors in the country. This means that the host government must ensure that the country is safe in terms of political stability and security. This is because, foreign investor may not be attracted to invest in countries that experience political instability or countries with insecurity. Therefore, before the host government offer generous incentives, it ensures that the environment is secure to foreign investors. This means that the host government assures the foreign multinational corporations that their operations in the host country would be safe and free from vandalism.
Market access spillovers
Another main reason as to why most government offers generous incentives to foreign investors can be as a result of market access spillovers. Many multinational corporations have extremely strong competitive advantage in entering various market segments in the global markets. This may be a result of their knowledge and experience of international distribution networks, international marketing as well as lobbying power in their home countries (Mehmet Ö%u011Fütçü, 2003).
As a result of foreign multinational corporations export operations, they can pave the way for companies in the host country to gain access to the same export market. This can be possible because, the foreign corporations either propagate information on foreign markets or create appropriate transport infrastructure that can be used by the companies in the host countries. As a result of the benefits that may accrue as a result, attracting foreign multinational companies in the host countries, most governments endeavor to encourage foreign investors to invest in the country by offering them generous incentives.
In many counties across the world, unemployment has been one of the greatest problems that affect the economic stability of a country (Arnold, 2010). This is because, many countries have high unemployment levels, because government and private sector in the domestic country have limited job opportunities, which cannot absorb all jobless people in the entire country. Unemployment has resulted to low living standards of many people in many countries, and it has also contributed to many issues of insecurity in many countries. This is because unemployed people engage may engage in unlawful issues as a way of earning income. Additionally, the issues of unemployment increase the burden to many governments because, unemployed people may become dependent to the government due to their low living standards (William J. Baumol, 2010). Although some of the jobless people in the host countries posses adequate skills and knowledge and willing to work, job opportunities are limited. This can result to an increase in the government spending since unemployed citizens may not be productive to the host country economy.
Although most government endeavors to create more job opportunities to their citizens, the economic stability of most government cannot support the employment of all jobless people in their countries since job opportunities created in both public and private sectors are limited. In most cases, this problem affects most developing countries. These countries may be obliged to offer generous incentives to the foreign investors, hoping that the foreign multinational companies can absorb many unemployed citizens in the host countries. This is because, unemployment may be one of the most problematic issues that make the host government work under pressure since it affects the political stability of the host country. This is because, unemployed people are more vulnerable to engage in issues that can affect the national security, since they may engage themselves criminal activities to get their daily bread rather than depending on the government.
Therefore, most governments give generous incentives to foreign companies as a way of inducing them to invest in the domestic country so as to create job vacancies for the jobless people in the job market and reduce the unemployment levels. After foreign multinational corporations invest in the host country market, the government requires these companies to employ a certain percentage of domestic employees rather that importing all its labor force. Through this initiative, many citizens in the host country get jobs and become independent from the government. This is always a positive approach for any government because unemployment levels get reduced in the domestic country since many job opportunities get created. Creation of various jobs by foreign investors enhances the living standards of citizens in the host country. Additionally, the levels of poverty in the host countries may decrease as a result of creation of more job opportunities by foreign multinational companies.
Is this a sensible strategy?
If generous incentives granted to foreign investors get designed appropriately, this strategy can be extremely beneficial to the host countries. This is because, by attracting foreign multinational corporations to invest in the host countries jurisdiction, many job opportunities can be created, and this can lead to a reduction of unemployment levels in the host country. In the long run, creation of these job opportunities improves the living standards of people in the host country. Additionally, this strategy may be extremely vital because, employees from various local firms gain vital skills and knowledge on how various operations in the company can be executed more efficiently and effectively. The knowledge that employees from the local companies gain from foreign multinational corporations can be technical knowledge as well as technological knowledge. This enhances the operations of the local companies and productivity of the host country, which eventually translates to the improvement of the host countries’ economy.
Another aspect, that makes this strategy beneficial to the host country, is the fact that these countries generate a lot of income from the foreign multinational corporations induced to invest in the country. The income obtained by the government from this strategy gets used by the host governments in funding various development projects and programmes. Through this strategy, the host governments also increases the exports since the foreign investor have strong distribution channel and gain easy access to the international market. Increase in the country’s exports means that the host countries earn extra income. Also, an increase in the country’s export helps in reducing the balance of payment deficits of the host country.
In contrary, this strategy may not be effective in some cases since it can create an opportunity for corruption. This is because some government officials in the host countries may engage in corruption, in the process of determining the foreign investors to be granted generous incentives by the host government. As a result of corruption, some investors receive a favor from officials in the host government, and locking out the foreign investors who may be most favorable to receive generous incentives.
Also, despite the fact that the strategy of most government to offer generous incentives to the foreign investor may be an advantageous strategy, such incentives can be ineffective in a situation where the investment climate happens to be weak. Also, in a situation where incentives become effective in attracting investment, they still have significant costs. In the situation where incentives become ineffective, political considerations in many cases drive their continued use.
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