Multinational Enterprises and their hosts: An 'impact' assessment on the United States of America

Contents

1. Introduction

2. Descriptive base of foreign direct investment into the United States

3. The impact of Multinational enterprises in theoretical and empirical terms
3.1 Balance-of-Payments effects
3.2 Employment effects
3.3 Technological effects
3.4 Sovereignty

4. Policy implications

B. Bibliography

C. Appendix

1. Introduction

The role of multinational companies in the world economy has expanded rapidly over the last decades. Multinationals both react to and a major driving force within the changing world economy^[1]. The globalisation of markets is responsible for the increase in worldwide foreign direct investments. International inflows of foreign direct investment (FDI) amount for around $560 billion in 2003, representing an increase of around 130 per cent over 1990 levels.

In terms of its share of global FDI, the United States of America are a major source country worldwide with a share of five per cent of total global FDI inflows in 2003. Furthermore, the United States of America were the last 25 years on position one of the Inward FDI Potential Index published by the UNCTAD^{[2] [3]}.

These foreign direct investments may play a significant role in helping to transfer leading-edge skills, technologies, management styles and other important practises to host economies^[4].

This report is based on secondary research and will assess the impact of Multinational Enterprises on the U.S. economy and is divided into three parts.

First of all, I am going to give in my report a brief overview about foreign direct investments into the United States in order to give a good descriptive base for the main part. In the major part I will point out the costs and benefits of foreign direct investments for the United States both in theoretical and empirical terms. After this analysis my report will suggest policy implications based on the assessment of the costs and benefits.

2. Descriptive base of foreign direct investment into the United States

The term foreign direct investment^[5] is important to distinguish between the flow of FDI and the stock of FDI. The flow of FDI refers to the amount of FDI undertaken over a year into a country. The stock of FDI refers to the total accumulated value of foreign-owned assets at a given time^[6].

The largest share of FDI is traditionally accounted for developed countries such as the United Kingdom, Japan and Canada. In order to analyse the “impact” of the USA in the major part I am going to present a descriptive base about inward FDI flows, the investment position into the USA for the last years in several diagrams.

Total global inflows of FDI declined over the last years and the share of the United States as well.

Illustration 1

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Source: UNCTAD, 2004

After the lowest-level of foreign direct investment flows over the last ten years to $29.8 billion in 2003 the FDI flows increased to 104.9 billion in 2004. The following figure shows the development of FDI flows over the last ten years into the USA.

Illustration 2

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Source: U.S. Department of Commerce, 2004

The FDI flows into the USA are mostly from developed countries. Around 50% of all investments flows are from Europe in 2004. In comparison with 2003 it is an increase from $6.6 billion to $52.7 billion. The biggest FDI inflows in 2004 came from Canada, the United Kingdom, Japan, France, the Netherlands and Germany.

Illustration 3 Illustration 4

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Source: U.S. Department of Commerce, 2004

The main industry type for the investment flows was the service sector in 2003 and 2004. This sector increased by 137% to $52.7 billion in 2004. The manufacturing sector rose by $25.4 billion to $25.8 billion in 2004. The trade sector increased to $25.8 billion in 2004 after disinvestments of $5.1 billion in 2003. The top sector in 2004 was financial and insurance services with $27.4 billion.

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Illustration 5 Illustration 6

Source: U:S: Department of Commerce, 2004

In 2003 the foreign direct investment position of all countries in the USA was $1378.0 billion and in comparison with the previous year an increase of $38.0 billion or 2.8%. Europe has with 73.3% the most significant investment position and the UK is the biggest single investor country with 16.7%. The following two figures show the international investment position by region and the top eight investor countries in the USA:

Illustration 7 Illustration 8

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Source: Bureau of Economic Analysis, 2003

Source: U.S. Department of Commerce, 2003

The manufacturing is still the most significant sector, but it lost in relevance over the last ten years towards the service sector and other industries. The following illustration shows the percentage development for the four sectors:

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Illustration 9

Source: U.S. Department of Commerce, 2003

3. The impact of Multinational enterprises in theoretical and empirical terms

“Any attempt to evaluate MNE impact is fraught with difficulties. The problem of type or impact is surmounted by focusing only on economic effects, while accepting that there are other potentially important political, social and cultural influences”^[7]. Furthermore, difficulties emerge from the fact that MNE activities involve conflicts of interest, because some groups gain and some are likely to lose. The range of impact issues is extremely with potentially negative effects areas being compensated by positive impacts in others^[8]. Stewart identifies two major points which make a precise assessment of costs and benefits difficult. ”First, there is the difficulty to identify the most appropriate criteria for assessing the contribution FDI makes to an economy”^[9]. The criteria may vary and therefore it is necessary to constitute a set of criteria which is appropriate for assessment purpose. The second point is the “counterfactual problem” of assessing the effects of FDI, because it is impossibly to recognize what happened if for example a U.S. company has used the resources of the country instead of foreign company and both companies have been probably differently employed^[10]. This fact makes it difficult to reach firm conclusions regarding overall impact on the economy.

With regard to these difficulties, the aim of the following four points is to analyse the costs and benefits of foreign direct investment on the USA.

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^[1] Young, St., Hood, N., Hamil, J. (1988)

^[2] UNCTAD (2004)

^[3] See Appendix

^[4] South Centre (1997)

^[5] See Appendix

^[6] Hill, C. W. L. (2002)

^[7] Young, St., Hood, N., Hamil, J. (1988), page 63

^[8] Young, St., Hood, N., Hamil, J. (1988)

^[9] Stewart, G. (1989), page 79

^[10] Stewart, G. (1989)