How Foreign Investment Affects Host Countries

45 Pages Posted: 20 Apr 2016

See all articles by Magnus Blomstrom

Magnus Blomstrom

Stockholm School of Economics - Department of Economics; National Bureau of Economic Research (NBER), at New York; Centre for Economic Policy Research (CEPR)

Ari Kokko

Stockholm School of Economics; National Bureau of Economic Research (NBER)

Date Written: December 1996

Abstract

Foreign direct investment may promote economic development by helping to improve productivity growth and exports in the multinationals' host countries. But the exact nature of the relationship between foreign multinational corporations and their host economies seems to vary between industries and countries. Foreign direct investment may promote economic development by helping to improve productivity growth and exports in the multinationals' host countries, conclude Blomstrom and Kokko, after reviewing the empirical evidence. But the exact relationship between foreign multinational corporations and their host economies seems to vary between industries and countries.

Multinational corporations mainly enter industries where barriers to entry and concentration are relatively high, and at first they increase the number of firms in the host country market. In the long run, they may contribute to a more concentrated market, although efficiency may improve, especially if protection does not guarantee an easy life for the multinational affiliate. However, most available evidence has to do with multinationals' entry into host countries' industries rather than with their presence - the dynamic aspects of multinationals' relationship to their competition in host country markets. Most evidence on multinationals' effects has to do with effects in industrial countries, and it is impossible to disregard the risk that the multinationals` entry into developing countries may replace local production and force local firms out of business, rather than force them to become more efficient.

This paper - a product of the International Trade Division, International Economics Department - is part of a larger effort in the department to study regionalism and development.

Suggested Citation

Blomstrom, Magnus and Kokko, Ari, How Foreign Investment Affects Host Countries (December 1996). World Bank Policy Research Working Paper No. 1745. Available at SSRN: https://ssrn.com/abstract=620572

Magnus Blomstrom (Contact Author)

Stockholm School of Economics - Department of Economics ( email )

P.O. Box 6501
Sveavagen 65
S-113 83 Stockholm
Sweden
+46 8 736 9265 (Phone)
+46 8 342 818 (Fax)

National Bureau of Economic Research (NBER), at New York

365 Fifth Avenue, 5th Floor
New York, NY 10016-4309
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ari Kokko

Stockholm School of Economics ( email )

P.O. Box 6501
Stockholm
Sweden
+46 8 736 9365 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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