Introduction
In several developing countries, policymakers usually put up several efforts to attract foreign investment. These include providing regulatory exemptions, setting up infrastructure, and provision of tax holidays. The policies are implemented with the hope that when foreign investors come, they will bring along managerial expertise, capital, and advanced technology that would spill over and help in the development of domestic industries.
However, evidence from various studies shows that spillovers are likely to happen between industries that are linked vertically and rarely within the same industry. The assertion is founded on the fact that most multinational firms put efforts in place to protect against the leakage of knowledge to competitors or potential competitors. Some of the factors include the structure of ownership of the foreign companies, the geographical distances, and the capabilities of the firms (Liang 28). The paper analyzes whether the presence of foreign firms helps or hurts domestic competition. The paper offers an example to show whether the firms collaborate or compete for market share.
The main body firms and domestic competition
Foreign firms and domestic competition have been subjects for debate worldwide. Most studies report that foreign firms hurt domestic competition while others claim that the collaboration of domestic firms with foreign firms increases their market shares. The truth is that foreign firms tend to hurt infant industries, given their entrenched nature, financial abilities, and brand loyalties. However, various factors contribute to the dominance of a firm in a certain market. Some of these factors are the ones possessed by multinationals that make them be threats to domestic firms. One factor is the lower costs of production.
The factor is usually brought about by favorable statutory policies like subsidies, tax holidays, and other benefits from the government. Economies of scale and advanced levels of technology and management are also contributors to the cutting down of costs. With low costs of productions, a firm can sell its products at lower prices than that of its competitors but still attain a higher profit margin. The provision of a product superior to all the others in the existing market is also a factor that can lead to dominance. Market dominance may be contributed by a firm’s technical superiority or reputation that it has built during the provision of quality products (Peng 33).
It is usually believed that multinational industries usually have a competitive advantage against domestic firms. The assertion is founded on the foreign-based firms advanced reputations, management skills, and advanced technologies. These advantages, commonly referred to as intangible productive assets, are gained through relevant tactic knowledge or experience in the industry, meaning that it may not be easy for the domestic industries to replicate them. However, they can be transferred, leading to the productivity of the local investors through various channels.
The first channel that can be used is the acquisition of knowledge directly transferred by foreign customers to the local suppliers. Foreign customers may be having demands for better qualities and higher management skills for supply chains pushing the local industries to advance their skills in management and technology. The observation of the management skills and technology of foreign investors by the domestic firms may also help them to come up with similar methods. Interactions with the personnel from foreign companies and the employment of those trained by multinationals would also help the domestic firms to acquire the skills from foreign corporations (Konings 36).
However, there are cases where the multinationals try to put in place measures, which ensure that there are no leakages of information or technology to the local firms. One of the measures that they might take is paying high wages to their staff so that they can ensure that they retain them and do not lose any staff to the domestic firms. Local firms may also not have sufficient capacity for the recognition and absorption of the technologies and management skills from foreign firms. These factors make it hard for the domestic industries to reap from technology spillovers that may result from imitation and personnel turnover (Galina and Long 61).
Cases also exist where foreign and local firms supply products and services to different markets. There are cases where multinationals supply the foreign market where there are high demands for quality, while local firms supply the domestic market with relatively lower demands for quality. In such a case, the competition among the foreign and local firms will be almost non-existent due to the diverse markets that they operate.
On the positive side, while foreign investors are usually very cautious of sharing their knowledge with local competitors, they normally provide incentives to their suppliers in the form of management and technology training to ensure they maintain high-quality supplies at a reduced cost. Foreign investors may also encourage the sharing of knowledge in the supply sector so that they do not over-rely on a single supplier. These suppliers will, therefore, advance in their products that may provide better inputs even to the local industries. In the process, the strategy boosts their productivity and competitive advantage (Liang 25).
The local industries may also gain from foreign suppliers. Foreign-owned suppliers in the domestic market may provide the local industries with high-quality equipment and components. Domestic customers may also be provided with technical support when they purchase the equipment from foreign firms. This will ensure that there is an increase in the productivity of domestic firms hence a rise in the competitive advantage.
The advantages also arise from the recruitment of local experts by foreign firms. The higher the number of people employed by foreign companies, the higher the chances of communication on the operations and organizations of the multinationals. In the end, this helps in the leakages of technology. This will help in raising the absorptive capacity of the local firms, eventually raising their competitive advantage (Kosova 39).
Case Illustration
McDonald’s has been an excellent example of a firm internalizing its business. The company has managed to successfully franchise in more than 120 countries with more than 34,000 outlets. The nature of McDonald’s business requires the company to enter the international market in one phase as opposed to manufacturing companies that can enter the international market by first exporting the products. The company has to open foreign subsidiaries to amplify the number of customers. The actuality opens the avenue for examining the strategies used by the company to enter into the international market.
The company may set up a master franchising dealer where the main franchisee owns and manages all other outlets in the region. Alternatively, the company may pursue the acquisition of similar companies in the target markets. The company, in the past, attempted all these entry modes, with each different presenting results. However, all the ventures have been successful. When operating in the domestic markets where there are entrenched local corporations, the company hardly competes with a franchisee for the market share. In fact, the company may also sign a partnership deal with local partners.
Conclusion
As shown in the paper, the infiltration by multinationals into the domestic markets of developing countries has a little impact on overshadowing the local firms in the short run. In the long run, however, it has been demonstrated that it can help in uplifting the domestic firms, thereby ensuring their competitive advantage.
Works Cited
Galina, Hale and Long, Cheryl. What Determines Technological Spillovers of Foreign Direct Investment: Evidence from China. New Haven, CT: Yale University, 2006. Print.
Konings, Jozef. The Effects of Direct Investment on Domestic Firms: Evidence from Firm Level Panel Data in Emerging Economies. London, UK: William Davidson Institute, 2000. Print.
Kosova, Renata. Do Foreign Firms Crowd out Domestic Firms? The Evidence from the Czech Republic. Michigan, USA: University of Michigan Business School, 2003. Print.
Liang, Helen. Does Foreign Direct Investment Improve the Productivity of Domestic Firms? Berkeley, CA: Haas School of Business, 2008. Print.
Peng, Mike. Global Strategy. New York, NY: South-Western Publishing Co., 2013. Print.