In this globally spanning network of communication and trade, global capitalism has become a next-door phenomenon. In modern terms, we can term global capitalism tendency for the dominant forces of multi-faceted capitalism to interact with the forces of globalisation to produce a global social system of wealth, prosperity and cultural exchange. These extensive decentralisation and fragmentation of the production process have taken place alongside the centralisation of command and control of the global economy in the transnational capital.
This concept of living in a global village has also shown its essence in Bangladesh economy in widespread terms. From being a bottomless basket, Bangladesh is now booming in all aspects of the economy with impressive growth rates. Within the realms of globalisation, Bangladesh has been trying to bring structural changes in her economy by increasingly expanding the contributions of industries in terms of GDP, trade liberalisation, boosting up exports, exporting more manpower abroad, encouraging them in sending remittances, and alluring the investors, both foreign and non-resident Bangladeshis, to come up with their foreign direct investment (FDI). The regional connectivity, which is under active consideration of various adjoining countries, has already been made, and in some cases, operations are underway for bringing big opportunities for Bangladeshi products in those countries.
This amalgamation of global capitalism into the realms of the local economy is only possible through foreign direct investment. This is because FDI plays a pivotal role in contributing to capital savings and production capacity of the host country instead of the standard theory of international trade which saw investment abroad by private enterprises as arbitrating capital.
In the neoclassical model for economic growth, increases in capital stock and labour force contribute to higher economic growth. Therefore, the flow of FDI, by increasing the domestic capital stock, will accelerate the growth of the economy. More significantly, it has often been argued that FDI contributes to growth beyond the direct effect of increasing the capital stock. That is, FDI is also seen to bring to the host country a basket of benefits such as new technology, accessibility to foreign markets and managerial know-how opportunities. Expectations of these extra benefits are part of the reason why our government is providing special incentives to attract FDI.
Economic theory suggests that FDI can generate positive spillover effects on domestic firms in the host country. Since multinational corporations (MNCs) are an important source of international capital and technology, their entry can ease the transfer of technical and business know-how resulting in productivity gains and competitiveness among local firms, especially small and medium enterprises (SMEs). These effects develop through best practice demonstration and diffusion, or through the creation of linkages with foreign and domestic firms becoming either suppliers or customers, or through the movement of experienced workers from foreign to local firms. The entry of MNCs may also increase competition and force domestic firms to imitate and innovate.
In addition, the impact of MNCs on economic growth can be greater if the types of FDI that the country receives stimulate domestic investment activity. Having firm-specific assets, such as production technology and know-how, marketing and management techniques among others, foreign-affiliates (FAs) of MNCs are expected to be more productive than local plants. With these firm-specific assets, multinational corporations start to generate technological externalities on local plants, once they invest in a country. It is this technological spillover that has encouraged local FMCGs to become giant conglomerates to compete hand in hand with the MNCs. Not only that, adopting technical efficiency our FMCGs are conquering global markets namely the UAE and neighbouring South Asian economies. With increasing gross domestic product (GDP), the sectoral composition is also shifting from primary to manufacturing hub, with other plastic and other manufacturing items joining the export journey of garments industry.
With the expectation that foreign MNCs will raise employment, exports, or tax revenue, or that some of the knowledge brought by the foreign companies may spill over to the host countries' domestic firms, the government has lowered various entry barriers and opened up new sectors to foreign investment. An increasing number of the host governments, like that of the government of Bangladesh, also provide various forms of investment incentives to encourage foreign-owned companies to invest under their jurisdiction. These include fiscal incentives such as tax holidays and lower taxes for foreign investors, financial incentives such as grants and preferential loans to MNCs, as well as measures like market preferences, infrastructure, and sometimes even monopoly rights. All these measures are taken as domestic firms also benefit from spillovers and externalities associated with FDI through exports and/or international integration.
MNCs have established global or regional production bases where domestic firms, particularly SMEs, can participate by serving as potential suppliers of outsourced parts or services. Participation in these networks can also provide domestic firms access to export markets. We are now increasingly experiencing productivity spillovers as the increase in productivity or efficiency of our country's local firms as the consequences of the entry or presence of Multinational Enterprise (MNE) affiliates.
In addition to this, multinationals may improve allocative efficiency by entering into industries with high entry barriers and reducing monopolistic distortions, and induce higher technical efficiency, if the increased competitive pressure or some demonstration effect spurs local firms to more efficient use of existing resources. Moreover, the presence may lead to increases in the rate of technology transfer and diffusion. Specifically, many instances showed that foreign MNCs may-
* Contribute to efficiency by breaking supply bottlenecks (but that the effect may become less important as the technology of the host country advances);
* Introduce new know-how by demonstrating new technologies and training workers who later take employment in local firms;
* Either break down monopolies and stimulate competition and efficiency or create a more monopolistic industry structure, depending on the strength and responses of the local firms;
* Transfer techniques for inventory and quality control and standardisation to their local suppliers and distribution channels; and,
* Force local firms to increase their managerial efforts, or to adopt some of the marketing techniques used by MNCs, either on the local market or internationally.
If we look into this matter of higher efficiency we can see two mechanisms by which FDI is creating positive spill-overs regarding higher productivity -- the labour mobility channel and the information and technology effect channel. In particular, firms that can hire managers and engineers from the foreign firms have higher productivity. This is supporting evidence that labour mobility provides a channel for FDI spillovers. Also, firms that hire younger and more skilled labour force tend to have higher productivity when there is more presence of FDI in their city and industry. This is consistent with the argument that learning and interaction among employees (especially skilled labour such as managers and engineers) is a mechanism for FDI spillovers. The fact that the MNC jobs are well-sought out in our job market is a clear indication to this. The experience accumulated in the MNC tenor serves as a vital base in the prospects and career of the professionals who are and were appointed in the MNCs of our country. So, positive spillover is taking place when well-trained employees of foreign firms establish their own firms or undertake jobs in domestically owned firms.
However, the most important reason for countries to seek investments by multinationals is to acquire modern technology and knowledge. It is also suggested that new technology and knowledge could spill over to local firms which will enhance their productivity. These spillovers and externalities are known to occur through different channels. Firstly, the presence of multinationals may lead to the spread of information on new technology and production processes which are also known as "the demonstration effect." Secondly, through linkage with local firms, foreign affiliates may enhance the production efficiency of the host country. Thirdly, the entrance of foreign firms may increase competition and thereby force local firms to be more productive and innovative.
If we look into the other side of the story, one may argue that foreign competition is driving small local suppliers out of the market as they face both fierce price and non-price competitions from their foreign counterparts. However, if we want to adopt the concept of living in a global village, there is no place for non-performers. Competition is turning into a war. Hence to sustain and flourish in the face of this incoming surge of antagonism, one must find, and capitalise on, its niche and survive. This is the façade on which our SMEs must base their sole criteria.
The writer is serving as an Associate Manager at a leading local bank in Bangladesh. [email protected]
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