However, investments in infrastructure made solely by the State or SOEs are excluded. Competitive or ownership advantages of infrastructure TNCs are primarily related to specialist expertise or capabilities, such as network design and operation, engineering skills, environmental know-how, project management capabilities and tacit, hands-on skills.
Specialized business models and financial prowess are important in some industries and segments, such as telecommunications. The majority of infrastructure TNCs invest abroad in order to access the markets of host economies. They aim at benefiting from market opportunities arising from a number of measures, including liberalization and deregulation in host economies, invitations to tender for infrastructure projects, and the opening up of host countries to foreign acquisition of local firms including privatization and acquisition of private firms.
Additional motivations for investment can include following clients in the infrastructure business, searching for economies of scale and taking advantage of regional growth opportunities. The primacy of the host country market as a motive for infrastructure TNC involvement in developing economies places LDCs at a disadvantage in attracting their investment, as they have small markets in general and in infrastructure industries more specifically.
Financial constraints faced by governments were a major reason for an increasing number of developing countries to open up to FDI and TNC participation in infrastructure industries in the s. Indeed, TNC participation in infrastructure in developing countries has resulted in the inflow of substantial financial resources.
As mentioned earlier, the stock of infrastructure FDI in developing countries, an indicator of the extent to which TNC participation mobilizes financial resources, surged after Despite significant levels of TNC investment in developing-country infrastructure, more of it is required to bridge the vast financing gap: there is need for substantial amounts of additional investment, irrespective of source.
Across much of Latin America, in a similar vein, investment in infrastructure by foreign companies in the s was connected with a decline in public investment in the sector. In expectation of a large-scale increase in private sector investment, many governments in the region cut back on public expenditure in infrastructure, but the increase in investment by TNCs and the domestic private sector did not fully compensate for this decline. TNCs in infrastructure bring both hard technology e.
As regards hard technology, in telecommunications for instance, market entry by international operators from both developing and developed countries has contributed to lowering the threshold of access to and use of information and communication technologies in developing countries. TNCs also transfer soft technology to host country operations, for example by re-engineering operational processes, improving procurement and subcontracting practices, and enhancing client records and collection methods.
Overall, studies show that in a number of cases the introduction of hard and soft technology by foreign affiliates has helped enhance productivity in services provision, as well as its reliability and quality. However context matters, and performance gains as a consequence of TNC and more generally private involvement depend very much on a well-defined regulatory environment. The industry-wide impact of technology transfer by TNCs also depends on the diffusion of technology to other firms in the industry through a number of routes of transmission, including joint ventures, mobility of personnel and demonstration effects.
This has enabled the latter to enhance their expertise and efficiency. For the effective diffusion of technology from infrastructure TNCs, the existence of capable domestic enterprises is essential. The higher the contestability of an infrastructure industry, the more likely it is that TNC participation will contribute to enhanced efficiency through increased competition.
For example, in many countries, a competitive market structure has been established in telecommunications as a consequence of technological change and industry reforms. In Uganda, for instance, competition between the national provider and TNCs led to price reductions and a rapid increase in penetration of mobile telephony.
Cross-country studies have shown the complementarities between privatization and competition: competition increases the gains from privatization, and vice versa. On the other hand, in water supply, which is an example of an industry that is still essentially a natural monopoly, the entry of TNCs can result in State monopolies being turned into private, foreign-owned monopolies. This limits competition and thus the scope for efficiency enhancement. In other services, while the entry of TNCs can increase competition and thus efficiency, it may also pre-empt the entry of domestic players or crowd out existing ones.
In electricity and telecommunications — both relatively contestable industries — the experience of a number of developing countries indicates that infrastructure TNCs in some cases can be associated with anticompetitive behaviour. In some developing countries where domestic capabilities exist, local private participants can enhance their competitiveness and efficiency by collaborating with TNCs in a variety of ways. For example, partial privatization with minority ownership by TNCs has been implemented by developing countries such as Morocco in telecommunications, with favourable results for competition.
As an alternative to TNC involvement, some developing countries have also been able to improve the performance of public utilities through corporatization reforms, without direct TNC participation. However, successful cases are mainly in relatively high-income or large developing economies. The participation of TNCs has generally increased the supply and improved the quality of infrastructure services in host countries, but their impact on prices has varied.
In some instances this has caused concern over services being priced beyond the reach of the poor. In particular, the affordability of services is jointly determined by the price of services and the disposable income of consumers in an economy. The impact of TNC participation on access to services can thus differ among segments of a society: improvements in industry performance do not necessarily translate into increased availability and affordability of services for all members of a society, especially the poor and people living in rural, remote and economically deprived areas.
Improvements in supply, coverage of services, price and access as a result of TNC participation in developing countries are more pronounced in telecommunications than in any other infrastructure industry, especially in mobile telephony. TNC entry into the transport industry of developing countries is far more varied than in other areas. International terminal operators, for instance, have considerably improved the quality of services in major ports, and thereby increased developing-country connectivity to the global economy.
In contrast to telecommunications, and to a lesser extent transport, the impact in electricity and water has been mixed. The impact of TNC participation on prices, and thus access to electricity and water, depends on political, social and contractual issues, as well as productivity and efficiency gains. In the absence of government subsidies to users, additions to supply capacity, productivity and efficiency improvements may be insufficient to maintain low prices while covering costs.
Prices can continue to be subsidized after entry by the private sector, although countries sometimes raise tariffs both to attract companies and to reduce subsidies. Evidence from a number of developing countries suggests that greater private sector investment — often with TNC involvement — has in many cases led to increased supply capacity and network connections in electricity, and thereby to steady improvements in the reliability and quality of service in the industry.
Given the many factors involved, electricity prices have sometimes fallen after TNC entry, but overall there has been no definite trend in prices, up or down. Partly because TNC participation has sometimes not met expectations of improved access, there have been cancellations of water concessions in countries such as Argentina, Bolivia and the Philippines. In summary, in the telecommunications and transport industries, the TNCs have contributed substantially to making services more affordable and accessible.
For those services that are considered essential, such as drinking water, if the efficiency improvements achieved by TNCs cannot allow them to maintain prices at low levels while covering costs, and the government does not provide subsidies to users, access for the poor is affected.
Government policies are critical for all infrastructure industries, but, from a social perspective, more so in the case of electricity and water. Host countries need to consider when it is appropriate to draw TNCs into the development and management of infrastructure. They also need to find ways of ensuring that projects with TNC involvement lead to the expected development effects. This is a complex policy challenge.
As policy priorities and options vary between countries, so too does the optimal mix of public and private including TNC investment. Designing and implementing appropriate policies to harness the potential role of TNCs in infrastructure require adequate skills and capabilities. Governments need to prioritize among competing demands for different projects, establish clear and realistic objectives for the projects chosen, and integrate them into broader development strategies. This means that government agencies have to possess the necessary institutional capacity and skills to guide, negotiate, regulate and monitor the projects.
This applies not only at the central level, but also at the provincial and municipal levels. While many developing countries seek foreign investment to develop their physical infrastructure, convincing foreign companies to invest has become even more challenging. Growing demand in the developed world and in large emerging economies is leading potential investors to expect higher returns for a given level of risk.
This poses a particular problem where large-scale capital investments are needed up-front, where cost-recovery is difficult to achieve and where social concerns are considerable. Furthermore, project failures and multiple investment disputes have contributed to a more cautious attitude towards infrastructure projects among overseas investors. The trend towards opening up has been more widespread among developed countries and the relatively advanced developing and transition economies.
While the nature of liberalization has varied, all groups of countries are now more welcoming to TNC activities in infrastructure than they were two decades ago. However, there are significant variations by industry. Openness is the highest in mobile telecommunications, and the lowest in water.
Countries are generally more open to TNC involvement in industry segments that are relatively easy to unbundle and expose to competition. Openness also appears to be greater in countries with more developed institutional and regulatory capabilities. At the same time, some governments are becoming more careful about allowing foreign companies to take control of certain infrastructure, including power generation and distribution, port operations and telecommunications.
New restrictions have been proposed based on national security or public interest concerns. These concerns notwithstanding, many countries have moved beyond the removal of barriers to TNC involvement, and are actively promoting it in some areas of infrastructure. Many investment promotion agencies IPAs are targeting infrastructure industries. Almost three quarters of the IPAs stated that infrastructure is a more important priority than it was five years ago.
Confirming the broad patterns of openness to TNC involvement, the infrastructure industries most often targeted by IPAs are electricity generation, Internet services and airports. By contrast, the lowest number of IPAs targeted electricity distribution and transmission table 7.
Judging from the patterns of investment in LDCs, there may be a case for low-income countries to target TNCs from other developing countries, especially in transport infrastructure. Without an adequate institutional and regulatory framework, the risk increases that countries will lose out by opening up to TNC participation.
Moreover, once a country liberalizes, it is often hard to reverse the process. This is why the sequencing of reforms is important. Ideally, competitive restructuring, the introduction of regulations and the establishment of an independent regulatory agency should precede steps towards opening up. Such a sequence helps clarify the rules of the game for potential investors and makes governments better prepared for engaging in a specific project.
However, in reality, opening up to foreign investment has often preceded comprehensive reform, with less positive outcomes as a result. Until credible regulatory bodies can be established, developing countries are likely to be better off keeping their utilities in the public sector. Inviting TNCs to deliver infrastructure services tends to place more, rather than less, responsibility on public officials.
Infrastructure investments typically require the negotiation of contracts between the host country and the foreign investor s. Contracts provide for a tailor-made agreement that responds to the particular requirements of each project and to the intentions of the contracting parties. It is therefore important for countries to develop the expertise to determine the desirable level and forms of TNC involvement, to negotiate and monitor the implementation of projects.
Due to asymmetries of information and experience between a TNC and a host country government, it is generally difficult for public sector staff to match the resources of the private sector when engaging in contract negotiations. Transnational corporations TNCs or multinational corporations MNCs are companies that operate in more than one country. TNCs tend to have offices and headquarters located in the developed world.
They often have factories in countries that are not as economically developed to take advantage of cheaper labour. When a TNC locates within a country, there are advantages and disadvantages. Advantages of TNCs locating in a country include:. Disadvantages of TNCs locating in a country include:. Transnational corporations are among the world's biggest economic institutions. Some experts suggest that the largest TNCs own or control at least one-quarter of the entire world's productive assets.
This demonstrates the sheer scale and influence of TNCs in world trade. Some TNCs are able to exert influence over developing countries directly:. Some TNCs enlist the help of developed governments to further or protect their interests in developing countries.
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