The Impact of Multinational Enterprise Strategy on Indigenous Enterprises: Horizontal Spillovers and Crowding Out in Developing Countries

September 1, 2006

Funding: National Science Foundation

Summary: This project seeks to understand how multinational enterprise (MNE) investment into a developing country affects indigenous firms operating in the same industry.  Critics of globalization have drawn attention to the potential negative impact of MNE investment, implying that countries' economic development policies should focus on indigenous entrepreneurship rather than foreign investment.  For instance, MNEs can pose strong competition, appropriate scarce resources, and offer employment alternatives to individuals who would otherwise found their own business.  However, in other cases, MNEs can benefit firms in the same industry, implying that countries' strategies to attract foreign investment can complement rather than run counter to policies to promote indigenous entrepreneurship.  For example, MNEs may strengthen the local supply infrastructure, expose local managers to new technologies and work practices, or train employees who eventually move to local companies.

This project begins from the premise that some MNE investment has a net negative impact, and other MNE investment a net positive impact, on indigenous firms in the same industry.  It then seeks to understand how the characteristics and strategies of MNEs influence the degree to which these positive and negative effects occur.  In order to gain insight into these issues, the project will include a large-scale survey of MNEs and indigenous firms operating in the country of Ghana.  Additionally, in-person interviews of MNE managers, owners and managers of indigenous firms, and policy makers in Ghana will be undertaken in order to both put statistical results into perspective and develop materials to be disseminated for educational purposes.  An understanding of the likely impact of an MNE’s investment, as well as the mechanisms by which positive and negative effects are most likely to occur, will assist developing countries’ policy makers in their efforts to lure foreign investment, give MNE managers greater insight into the impact of their activities on host countries, and help managers of indigenous firms better respond to MNE entry.



Jennifer Spencer