What’s in it for local firms with the arrival of the multinational companies?

By Adina Moloman

Transnational corporations from all over the world are taking important decisions of relocating their productions facilities in developing economies considering different strategic arguments (costs, labor, logistics, market, etc).

But the question is: what is the benefit for the local firms with the arrival of these multinational companies? Countries in development like Mexico are working on different strategies under Mexico Maquiladora Program to attract foreign direct investment. There are many arguments especially from economists that the only benefit for the local country is employment and raising in exports, which is not even significant, considering that the transactions are intrafirms (between multinational headquarters and their subsidiaries plants).

But there are another point of view where is considering that multinational corporations are introducing to the host country the latest technology necessary in their production process  and in a certain way these technology can be diffuse to local firms. The technology absorption from abroad can be possible by implementing specific local policies. By doing that properly, the foreign direct investment can have a positive impact on the productivity of local firms. How can we explain that?

Around this multinational firms are raising local firms, which are willing to provide them different kind of services. These firms have an incentive to improve the quality of products that they are delivering because of the high standards of norms and requests of the multinationals, so they are forced to acquire new technological equipment and invest in technological certifications to attend the standards required. Local suppliers can become indeed competitive.

The transfer of technology from multinational to local firms is occurring because they are the potential suppliers of intermediate goods. For example at the specific case of Mexico with the arrival of automotive companies there were established around these multinationals, local producers of parts and accessories. Those multinationals are transferring to local firms’ best practices, zero defect procedures and production audits to domestic suppliers, thereby improving their productivity and the quality of their products.

Another form to transfer technology to local firms in developing economies is happening when workers trained or previously employed by the multinational may transfer important information to local firms by switching employers. Another particular form which is also happening in Mexico is that ex transnational employers may contribute to technology diffusion by starting their own firms.