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The role of multinationalcorporations in developing countriesBy Hussain H. Zaidi

They came, they saw, they conquered. In the contemporary world if any institution deservesthis description, it is the multinational corporation (MNC), which is playing the leading role

in global economic integration.An embodiment of the concept of economies of scale, MNCs are based on the maxim: thebigger the better. Their huge size and immense resources confer them with the ability totake world markets by storm. Not only that, their tremendous economic power places themin a position of preeminence, whereby they can command political institutions and shapecultures.But as in case of any other conquest, the conquest by MNCs has evoked a great deal ofcontroversy. Opinions are divided on whether the conquest is beneficial for the vast majorityof the worlds population living in the less developed countries (LDCs). Whether it hasushered in an era of prosperity for the world at large, or whether it has simply marked the

opening of another era of colonialism for the Third World. We first consider the arguments insupport of MNCs.(1) Probably the strongest argument in favour of MNCs is that their presence is essential forLDCs to achieve the desired level of investment. Most of the LDCs, the argument goes, facea gap between national savings and the desired level of investment. In case of Pakistan, forexample, domestic savings account for less than 20 per cent of the GDP. The gap is to befilled by transfer of resources from abroad. FDI made by MNCs is one, and arguably, themost important, of these sources.(2) Technology is the mainspring of economic development. Technology requires a lot ofinvestment in research and development (R&D). LDCs, however, are deficient in both fundsand skills necessary for R&D. This explains why the level of R&D in developing economies isby and large small. MNCs, on the other hand, command resources for R&D, which canstimulate innovation in host or recipient countries.(3) MNCs also introduce the host country with superior management philosophies and skills.The higher the number of local people employed in managerial positions in MNCssubsidiaries, the more pronounced is the effect.(4) MNC investment also helps broaden the host countrys industrial base. FDI helps createbackward, forward and horizontal linkages. Foreign investment in an industry benefits thoseindustries that supply inputs to that industry, as well as industries producingcomplementary goods and services consumed by the factors of production employed in thefirst industry. In addition, FDI stimulates investment by creating additional demand,

controlling costs or improving infrastructure. The consequent increase in profits and outputhelps absorb idle production capacity.(5) By broadening the industrial base, FDI also broadens the export base of a developingeconomy. This may enable that economy to shed-off its over-reliance on export of primarygoods and to export value-added products.

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(6) The profits earned by MNCs are taxed by the host government and constitute afundamental part of public revenue, which can be used to finance efforts for economicdevelopment such as developing infrastructure etc.(7) LDCs have an extensive capital-labour gap, which accounts for much of unemploymentand underemployment. FDI helps fill this gap. By employing local people in their production

facilities set up in the recipient country, MNCs generate jobs. This is the direct effect. Theincome that local MNC employees receive creates additional demand in the economy leadingto increased output and employment. This is the indirect employment effect.(8) Another benefit of MNC investment to a LDCs economy is that it helps promote abusiness culture of competitiveness, quality and efficiency.(9) FDI helps improve BoP position of the host country. BoP may improve on both currentaccount and capital account. Current account position is improved when MNCs export goodsfrom the host country, or when they substitute local production for imports. As for capitalaccount balance, it is improved when MNCs inject capital into the host economy.Critics, however, point out that these so-called advantages of MNCs are merely the tip ofthe iceberg. In reality, they maintain, MNCs influence on developing countries has by andlarge been harmful. It is alleged that in MNCs, the West has created another instrument ofcolonialism albeit in a more subtle form-the bottles may be new but the wine is old. Thecriticism of MNCs rests in the main on the following arguments:(a) Far from improving, MNCs worsen the BoP position of the host country. This mayhappen on both capital and current accounts. The capital account position worsens whenagainst initial capital inflows into the host economy; MNCs repatriate their profits to themother country. The current account position worsens when MNCs prefer imports to locally-made goods. To offset this, the host country may require MNCs to buy a certain minimumpercentage of their inputs from the local market. Called the local content requirement, thiscondition is also on the wane with possibly more pronounced negative effects on LDCscurrent account position.(b) Since technology is a core competence of an MNC, these organisations are averse totransferring technology to the host country. Whatever technology MNCs introduce to LDCS,they get it patented. The result is that the LDCs remain deficient in indigenous technology.(c) MNCs demand fair competition and level-playing field from the recipient country, butthey themselves stifle competition by getting their costs subsidised through transfer ofresources from elsewhere. As it is difficult for domestic firms to match their costcompetitiveness, they are forced to quit the field. Once this is done, MNCs monopolise themarket and raise prices.(d) When local businesses lose market share to MNCs, FDI may result in loss of jobs. Hostcountries may require foreign investors to employ at least a particular number of localworkers. However, this requirement is declining chiefly because it is disapproved of by theWorld Trade Organisations agreement on Trade Related Investment Measures .(e) By virtue of their large investments, MNCs make host governments hostage to theirinterests and coerce them into pursuing policies suitable to their interests at the expense ofthose of the domestic industry or consumers.

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(f) MNCs immense resources give them control over mass media of the host country, whichthey use to propagate the superiority of their culture and values over those of the hostcountry. Adoption of the lifestyle espoused by MNCs causes a cultural lag in Third Worldsocieties.The debate on the role of the MNCs in LDCs is very strong. However, a few observations can

be made. One, owing to the dissolution of trade and investment barriers worldwide, MNCspenetration of developing world markets will further increase, which in turn will sharpentheir politico-cultural influence however it may be seen. Already MNCs are merging, whichindicates their desire to consolidate their position and expand even more.Two, FDI is a double-edged weapon, which cuts both ways. However, possible adverseeffects of FDI are no cause for denouncing or rejecting it altogether. Foreign capital, onemust not forget, played an important role in the uplift of todays developed nations.However, FDI should be looked upon as a supplement, rather than alternative, to domesticinvestment.Three, besides attracting FDI, developing countries should develop indigenous industries

capable of competing with foreign enterprises. Of vital importance, in this connection, is togradually remove the umbrella of protection from local industries.

Finally, power is matched by power. It is not by bewailing the influence of MNCs but byincreasing their own economic power that LDCs can counter the negative influence of thesemega organisations.