The Political Economy of

Foreign Investment
Rizki Rahmadini Nurika, S.Hub.Int., M.A.
Week 14
Introduction: TNC=MNC?
 MNC  the foreign
operations were managed
and controlled from the
headquarters of firms
located in their home
countries.
 TNC  more or less
borderless because they
do not consider particular
country as their base.
 MNC and TNC deals with economic efficiency.
 Their branches migrate from those countries which have strict
regulations about corporations to other countries with a
permissive legislation.
 The developing countries are forced to reduce the restrictions
connected with taxes, labor, and environment protection.
Political Interest of Transnational
Corporation (TNC)
 Past  TNC came from colonizer
(Europe).
 TNCs were given monopoly trading
rights by their respective
governments.
 E.g. Royal African Company was
given a monopoly over the slave
trade by England.
 Today  TNC appeared along with the
industrial capitalism in the 19th century
(Industrial Revolution).
 The development of the factory
encourage the emergence of
manufacturing-oriented TNCs.
 TNC are investing abroad to gain access
to natural resources, markets, skills, and
technology.
 Politicization by TNC.
 TNCs exert power over political entities once they are
established, through their control over technical and intellectual
property.
 Adidas holds patents on shoe designs.
 Microsoft benefits from software patents.

 These patents often allow TNC to exercise a monopoly in the local

economy, preventing local enterprises from developing, and also to
keep labor costs low, sometimes exploitatively so.
  Because of their size, TNC can also
have a significant impact on
government policy through the threat
of market withdrawal.
 Motives behind politicization by TNC
 race to the bottom.
 Trade tariffs and capitals control
decreased.
 Decrease of taxes and wages in other
countries in order to attract branches
of international corporations.
 Decrease of input prices and the
relaxation of restrictions against MNC.
FDI and Preferential Trade
Agreement (PTA)
 PTAs attract FDI because they may have not just economic
but also political effects.
 Hold commitments to open markets and liberal economic policies.
 E.g. by joining the WTO, a country commits not only to reduce tariffs
but also more generally to liberal economic policies in the sense of
foreign investment.
 Each member state makes this commitment to all other member states,
which could therefore punish the country if it break the commitment.
 PTA is a means to lock in liberalization, in which FDI is
inevitable.
 If a country is a member of GATT/WTO, it will experience higher
inward FDI.
 The greater the number of PTAs to which a country is a party, the
greater will be the inward FDI that it experiences.
Problems Caused by FDI
 The activity of TNC supports economic globalization. But their
impact on developing economies isn’t a positive every time.
 What is good for a particular TNC may not be good for the
host country.
 If TNC is merely acquiring existing, locally owned ones, not
creating new asset then the benefits of such investments are
almost negligible to the host country.
 Corporate objectives >< government objective.
 In contrast to transnational capital with its single-minded pursuit of profit
maximization, government undertakes diverse social, economic, and
political tasks to meet the needs of their citizens.
 Role of FDI on economic growth?
 FDI is not an automatic route to economic growth.
 There is growing evidence suggesting that FDI does not play a
catalytic role in the growth process.
 Direct linkages between FDI and economic growth should
considerate other factors such as competition policy,
performance requirements, labor skills, employment
requirements, and comprehensive regulatory frameworks.
 Role of FDI on transfer of technology?
1. TNCs employ the technology that best suits their strategic
needs, rather than the development needs of host countries.
2. Much of the research and development by TNCs is carried out
in their home countries rather than in host countries.
 Role of FDI in solving unemployment problem?
1. TNCs usually employ highly-skilled labor that do not create
large-scale employment opportunities.
2. Instead of creating jobs, TNCs activity has contributed to
massive job losses due to its largely-concentrated activity.
 Role of FDI on environmental and
social matter?
1. Industrial activity involves
environmental and social costs, such
as forest loss and the eviction of
people from their land.
2. The rise of sweatshop.
THANK YOU