- bane or boon for development?
By Dinithi Thanthiriwatte
Assistant Lecturer, Department of Commerce and Financial
Management University of Kelaniya
Multinational companies (MNCs) are believed to play a major role
in the economies of developing countries. Ideally MNCs have contributed
substantially towards the growth of developing countries.
is most simply defined as a corporation or enterprise that conducts
and controls productive activities in more than one country with
the head office being established in a developed country. Big companies
mostly from America, Europe and Japan but also increasingly from
newly industrializing countries like South Korea, Taiwan and Brazil,
create development opportunities. The issues created by these companies
are serious ones that must be considered.
is believed among many economists that MNCs fill various gaps within
a host country's economy. The first and most often cited one is
that, when domestic investment and savings doesn't meet the required
rate of growth in the economy, the gap in investment is filled by
the MNCs' investment.
when the targeted foreign exchange is not met by the net foreign
exchange derived from imports and exports together with net public
debt, the gap is constituted by MNCs' net exports and capital inflow.
These giant companies also fill the gap between targeted government
tax revenues and locally raised taxes. Lastly the gap of management
skills, entrepreneurship and technological skills are believed to
be filled by the MNCs.
what the majority believes, MNCs are not the panacea for development
for developing countries. This has been proved for many years. -
WHY? Even though it is said that MNCs provide capital and savings,
they charge a higher interest on capital borrowed by the government
in the host country. Apart from that, MNCs repatriate the profits
to their home country apparently hindering the re-investment possibility
of those profits in the host country. Further MNCs import the required
intermediate goods without purchasing from domestic producers, thereby
reducing the opportunity to grow for the domestic producers.
the long run the recipient country's current account balance may
worsen because of the substantial importation of intermediate goods.
Furthermore the capital account's balance may worsen because of
repatriation of the profits to overseas companies. The expected
contribution from the tax may be less than it should be as a result
of liberal tax policies vested upon MNCs. The salary structure of
MNCs increases the unequal income distribution in developing countries.
The cultural problems arise in the industrial zones where the MNCs
are being set up.
from that MNCs produce inappropriate products that are mostly targeted
towards a niche market - affluent class. At the same time the technology
that is being used to produce these products may not be compatible
with the developing countries' systems.
products are advertised in such a manner that the consumer is forced
to purchase the product no matter what economic conditions they
are facedwith. This will lead to an undesirable allocation of local
resources creating undesirable consumption patterns. MNCs use their
economic power over the host country's government when formulating
fiscal policies. MNCs demand tax holidays, investment allowances,
cheap provision of factory sites etc. As a result the MNCs private
profits may be higher than the social benefits.
"Transfer Pricing" phenomenon is used to avoid high rates
of taxes in some host countries by transferring the inter company
sales (inter company sales among subsidiaries) from high tax countries
to low tax countries at artificially high prices.
use their economic power, advertising effect, superior technological
knowledge, worldwide contacts and competition to wipe out the host
country's small-scale entrepreneurs from their business. During
elections in host countries, MNCs fund a particular political party
which is likely to come to power. After that party is elected, their
policies are influenced by the MNCs.
into account all these negative contributions, those who argue against
the activities of MNCs suggest that the governments of host countries
must have stringent regulations over the activities of MNCs. It
is also suggested that governments should bargain for better deals
and demand that MNCs adhere to certain criteria set by the government.