Question

Do Multinationals formed through Foreign Direct Investment use local suppliers or not? How would you define ‘local suppliers’ in this case? Are they just providers of raw materials or are they independent agents as in the case of outsourcing/licensing?

Answer 1

MNCs create wholly owned subsidiaries by making foreign direct investment (FDI) in that overseas market to perform the operations. Here, the wholly owned subsidiary can focus upon the core areas of work and take the support of local suppliers and service providers. So, it is always a possibility that an MNC using FDI mode, can use local supplier that can fulfil the need of procurement of different types of the factor of production. For example, a wholly owned subsidiary of the MNC, can use local manpower agency to provide labor force of the local areas to work on the floor, while the core employees are brought in by the parent MNC. So, it is the case of use of local suppliers.
The local supplier in defined as the domestic provider of supplies in that market, who has a good understanding of the local areas, market conditions and have control of resources at local level. So, in general the local suppliers refer to the native suppliers in that particular geographical area.
The local suppliers can be the independent agent when the requirements are in a limited capacity. But, the MNC using wholly owned subsidiary can outsource the function to the local suppliers for their regular requirements. For example, the requirement of local labor force, can be outsourced to the local supplier agencies.