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Home Field Trips Copper Tour The Impact of Multinational Enterprises

Theories

The Impact of Multinational Enterprises

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A multinational enterprise is a firm that has productive capacity in a number of countries. The profit and income flows that they generate are part of the foreign capital flows moving between countries.

As countries adopt more open outward oriented approaches to economic growth and development the role of multinational enterprises (MNE) or transnational corporations become more important. As local markets throughout the world are being deregulated and liberalised foreign firms are looking to locate part of the production process in other countries where there are cost advantages. These might be cheaper sources of labour, raw materials and components or have preferential government regulation. Although LDCs may present high levels of risk they also present the potential for higher levels of profit. Many LDCs with growing economies and increasing incomes may provide future growth markets.

Many development economists are concerned with role of the MNEs in low income countries and identify a number of problems associated with foreign direct investment. Equally other economists and politicians argue that MNE activity can drive growth and development. The true answer is that probably the arguments put by both sides are applicable in certain countries with certain MNEs at certain times.

The Benefits of Multinational Corporations

Let us consider the arguments from both sides. Firstly, from those who maintain the importance of foreign direct investment as part of the engine necessary for growth.

• A MNE investing in an area may result in a significant injection into the local economy. This may provide jobs directly or through the growth of local ancillary businesses such as banks and insurance. It might initiate a multiplier process generating more income as newly employed workers spend their wages on consumption.
• MNEs may provide training and education for employees thus creating a higher skilled labour force. These skills may be transferred to other areas of the host country. Often management and entrepreneurial skills learned from MNEs are an important source of human capital.
• MNEs will contribute tax revenue to the government and other revenues if they purchase existing national assets as in the case in Zambia through the privatisation process.

In the light of these benefits what are the problems and concerns associated with MNEs?

The Problems of Multinational Enterprises

• The MNE may employ largely expatriate managers ensuring that incomes generated are maintained within a relatively small group of people. The attraction for the MNE may be the large supply of cheap manual labour who they can employ at low wages. This may contribute to a widening of the income distribution. It will also not lead to the transfer of management skills.
• MNE investment in LDCs often involves the use of capital intensive production methods. Given that many LDCs are often endowed with potentially large low wage labour forces and have high level of unemployment this might be considered inappropriate technology. More labour intensive production methods might be a more appropriate option for alleviating poverty and aiding development. Any resulting growth might be considered anti-developmental.
• MNEs engage in transfer pricing where they shift production between countries so as to benefit from lower tax arrangements in certain countries. By doing this they can minimise their tax burden and the tax revenue of national governments.
• As many MNEs are very large and have considerable power they can exert influence on governments to gain preferential tax concessions and subsidies and grants.

Outward oriented economists maintain that the cycles of poverty will not be broken from within the domestic economy. The level of investment needed to raise productivity and incomes is not possible. Thus foreign direct investment through the MNE activity is essential.

By investing in areas and utilising the factors of production where the LDCs have an absolute and comparative advantage MNEs will lead to a more efficient allocation of the worlds' resources. However if this leads to overspecialisation and overdependence in certain sectors of the economy then the host country will be vulnerable especially if the MNE decides for commercial reasons to leave the country in the future.

Next theory - The Theory of Externalities >>

Related Glossary Items:
Outward Oriented Development
Multiplier
Foreign Direct Investment
Comparative Advantage

Related Issues:
Industrialisation of Zambia
Privatisation of State Owned Enterprises
A Case Study of a Multinational Corporation

Related Theories:
The Principle of Absolute and Comparative Advantage
The Multiplier Principle