Although industrialization has enough benefits that an MNC's decision to invest in a country may be welcome right from the start, often the MNC manager must assist government officials in their effort to prove that the benefits of the proposed plant location outweigh the costs. Thus it is imperative that the manager understand the way host governments evaluate MNC proposals.
The cost/benefit evaluation framework developed by Vernon and Wells will be briefly explained here. 1
As applied by governments, project evaluation is intended to help analysts determine whether the real value of a project's output is greater than the real value of its inputs. The key to this three-step process is to value the outputs and inputs at undistorted prices.
Step A: Estimate the value of the project's output to the economy. This value can be thought of as the cost of acquiring the output, usually from abroad, in the absence of the proposed facility.
Step B: Estimate the value of the project's inputs. This value is the total of the values of labor (L), capital (C), and material (M) that will be used by the plant.
Step C: Estimate the value of the project's externalities. This value reflects the costs and benefits of the project that are not captured in the economy's normal national statistical records.
Figure 13.7 presents Vernon and Wells's summary of the four basic methods used by governments in evaluating proposals. The World Bank and the United Nations have developed their own methods, which are too detailed to be treated here.
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