MMU research and expertise is informing UN work on how to make the most of multinationals.
By Heinz Tüselmann
The secret to making the most of foreign investment is more important than ever for Britain’s highly internationalised and open economy. Brexit amplifies the need to embed commitment among multinational companies (MNCs) to stay, expand and broaden into higher value activities.
At MMU – in the heart of Britain’s “Northern Powerhouse” – we’ve discovered some answers for business and policymakers. We also appreciate the urgency of sharing this knowledge. We have vital insights for Britain but also for poorer nations where footloose international firms often up sticks, sending economies into a spin.
But what’s the best way to stop multinationals adopting a ‘here today, gone tomorrow’ approach? How can we make foreign investment work harder for economic development, growth and industrial upgrading? How should governments avoid this year’s exciting industrial development becoming the next decade’s derelict landscape?
United Nations draws on our research and expertise
That’s why I’ve spent my Chancellor’s Fellowship at the UN in Geneva as Senior Advisor to UNCTAD, which is the responsible for trade, investment and development. I’ve been supporting UN advice to countries on how to become the “must-stay”, development locations for multinationals. The UN has been very open to our research. First, drawing on our findings, I have advised on, and contributed to, the UN’s flagship “World Investment Report”. It’s widely consulted by Heads of State, government ministries and the international investment community.
Second, I’ve been asked to turn the UN’s journal on multinationals, investment and development into a bridge between academic research and policy. That’s great news for MMU’s impact on policy thinking. So we’re now at the heart of a global conversation on these issues.
Why is our research of such interest for the UN and the wider investment community? Our work goes beyond exploring the characteristics that typically attract inward investment – cheap labour, tax breaks and less regulation. These can easily be replicated elsewhere. Also, if investment is rooted solely in these advantages, a country may become victim of its own success as prosperity and wages creep up. Suddenly, manufacturing cars in Silesia can look more attractive than Sunderland, unless the country ratchets up its skills, technology and knowledge base to be attractive for higher value production.
Anchoring and upgrading foreign investment occurs at different levels. It might be a simple task, such as foreign investors in a developing country shifting from simply growing pineapples to canning and processing them as well. At the higher end of activities, we’ve seen, for example, Sysmex, a Japanese multinational, upgrading its US subsidiary to include advanced customer-facing data centres. Meanwhile, China’s Times Electrics is developing its UK subsidiary from a small semiconductor components firm into a major R&D and design hub for the multinational’s worldwide business operations.
In our research, we were surprised to find that such upgraded investment in multinational subsidiaries – including in highly developed economies – was quite rare, even though many of these multinationals had been operating in the countries for years. Many had had plenty of time, but failed, to anchor themselves more firmly in the society and move to higher value activities with higher productivity and use of more skilled labour.
This unexpected finding came from large-scale representative surveys of well over a thousand foreign-owned subsidiaries in major foreign investment host countries, such as the UK, Germany and Scandinavia.
How to anchor and upgrade foreign investment
However, we believe that we have found the trick to properly anchoring multinational companies and upgrading their investments against the alluring siren calls of other nations. It lies in persuading global HQ that the local subsidiary is special.
To do this, the subsidiaries must make a case for expanding their role from simple production into higher value corporate functions such as R&D, product or service development, and marketing. These are highly prized activities within a multinational. They establish local subsidiaries as centres of excellence with worldwide or regional mandates. Such status removes them from the list of footloose subsidiaries that can be flat-packed and moved elsewhere.
These activities also transform simple foreign investment into an engine to upgrade economic development within a country. They increase productivity, creating demand for higher-skilled, better paid workforces. If countries can help subsidiary managers in this way to convince global HQ, then they can achieve a win-win for the country, workers, the subsidiary and the multinational company itself.
Locally networked companies gain power with global HQ
But how do local subsidiaries persuade headquarters along these lines, so that they gain strategic autonomy to perform certain activities beyond their particular region? Our research finds that subsidiaries which have been successfully proactive in this way are typically deeply embedded in their host economies. They have close links with local networks such as trade bodies, chambers of commerce, universities, research parks, marketing associations, investment agencies and other local agencies as well as other firms in the same industry. They were often part of a quality circle within their region for sourcing and supply. All these activities seem to play a big part in strengthening the hand of the local subsidiary for expanding its activities, supporting an anchoring and upgrading foreign investment by headquarters.
Our work with the UN is vital for disseminating this essential message and for building the dialogue between research and policy-thinking. Meanwhile, at MMU, we are researching the missing bits of the puzzle. We’re trying to understand what countries need to do at national, regional and local levels to link multinationals better into these crucial local networks that can help to anchor and direct their investment into higher value activities.
We aim to highlight for national, regional and local policymakers the ways in which they can partner better with central and local multinational managements. This can create “win-win” situations for all parties. It could help Britain’s “Northern Powerhouse” initiative, given the region’s productivity and skills gap. Foreign investors could play an important role in upgrading their investment to close these gaps.
Crucially, as researchers, we’re not whistling in the wind. We have the ear of the UN. The world is listening.
Heinz Tüselmann is Professor of International Business at the Management Department, Centre for International Business and Innovation, Manchester Metropolitan University. He is currently on secondment as a Senior Advisor to the United Nations Conference on Trade and Development (UNCTAD).