Passage 1
Force of the Multinationals
Direct investment by multinational companies is becoming hugely important force in the world economy. In essence, a combination of factors, such as the development of global communications and a change in the political climate towards multinationals, is bringing in an era of true global manufacturing. A company such as Siemens may now start making product in Germany then ship it to Malaysia for the labor-intensive final stages of manufacture. The strategy by Japanese companies of locating production in cheaper Far Eastern countries such as Thailand has done much to integrate the economies of the region. US companies were setting up production in Mexico, for similar reasons, before negotiations on the NAFTA had even started. There is an important distinction to be made between the kind of integration based on trade, which is relatively simple, and the far more complex links involved in global manufacturing The report says that"as integration moves from shallow trade-based linkages to deep international production-based linkage under the common governance, the traditional division between integration at the corporate and country levels begins to break down.”
Foreign direct investment tends to transfer assets from the developed world to the developing world. But the pattern is not entirely simple. Big shifts have occurred in the composition of foreign direct investment by sector. Increasing investment is going into services and high-tech manufacture, rather than basic manufacture and natural resources. As might be expected foreign direct investment in the developed world is mostly in the former category, whereas in the developing world the emphasis is on the latter. It seems countries have to reach a basic level of sophistication before they can get in the act. Simple cash incentives to set up production in a country have little effect, other than on margin. In addition, the increasing sophistication of global production means that cheap labor is often not a deciding factor either.

US companies set up production in Mexico for its cheaper labor and cost.