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Increased outward orientation: Foreign based affiliates tend to be more outward oriented. As multi-nationally based operations themselves, they are often more aware of the opportunities of foreign markets and therefore more likely to seek to export. This also helps improve a nation’s balance of payments. In the case of the United States, foreign investors account for roughly one-quarter of all U.S. exports (Schott, 179). In turn, this outward orientation often helps domestic firms become more aware of international opportunities.
Technology transfers: When companies build plants in foreign countries, they tend to bring the same production techniques and technologies with them that they use in domestic production. This helps raise the skill level of the workers employed in the new plants. The economist Raymond Vernon has observed that direct investment possesses a “life cycle,” starting with innovation in a firm’s home market, successful application of that new knowledge or technology, and ending with the replication of that innovation in foreign affiliates.
Productivity spillovers: Productivity spillovers can spur growth and raise productivity in industrialized countries as well as developing economies. For example ”just in time” manufacturing allows firms to minimize their needs for inventory by receiving necessary inputs immediately before they are needed. This reduces the need for warehousing and inventory costs. This innovation was brought to the United States from Japanese firms. It was adopted by many domestic firms and helped improve the productivity of many American businesses.
Improved production processes: Companies can enjoy significant improvements in productivity from economies of scale, which can be augmented by participating in global operations. Foreign investment need not mean duplicating production and distribution networks in new markets. Rather, foreign investment can make production more efficient by purchasing elements of a final product in the country with a comparative advantage in making that product. Globalization has produced an integration of production and marketing of goods across national borders.
Increased competitiveness in domestic industry: Competition from foreign corporations often encourages domestic companies to become more efficient and globally competitive. These improvements can result from the effect known as “backward linkages.” Backward linkages are the long-term relationships that develop between a foreign investor and other firms in the host country. For example, when a firm decides to build a plant that assembles electrical appliances in a foreign country, the firm not only provides a certain number of people with new jobs, but the location of the plant is also likely to encourage the development of new local industries that can supply it with electric motors, fans, and other parts for its production.