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P O L I C Y R E S E A RC H W O R K I N G P A PE R

How Foreign Investment
Affects Host Countries

1745

Foreign direct investment may promote economic development by helping to improve productivity

Magnus Blomström
Ari Kokko

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.

The World Bank
International Economics Department
International Trade Division
March 1997

POLICY RESEARCH WORKING PAPER 1745
Summary findings
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
by

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