MNEs Developing Countries Essay

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3 February 2013

The Effect of Multi-National Enterprises on Developing Countries

It is important that developing countries are able to sustain a positive economic growth. Today’s modern society puts pressure on those countries making it very important for them keep up with the rest of the world in terms of globalization. Factors that contribute to globalization are increasingly advanced forms of communication and transportation technologies and services, the exponentially increasing movement of people and goods leading to a constantly increasing level of economic activity that some parts of the world just can’t keep up with. In order for the Capitalist system to work the world economy must move and grow at the same, if not similar, rates across all countries and economic systems. As the saying goes, ‘you can only move as fast as the slowest person’. This implies that the global economy can only grow as fast as the least developed economies do, and those economies are those in developing countries. To stay competitive, multi-national enterprises (MNEs) have to be constantly innovating and updating their processes, technology and communication methods, as well as investing in positive NPV projects. All of these things are supporters of positive economic growth which is crucial for globalization. So, would multi-national enterprises have a positive effect on developing countries? The answer to this question is yes. Multi-national enterprises have a positive effect on developing countries because they generate positive spillover on developing countries, benefit the host country with respect to corporate taxation, and have a positive effect in the form of social business. All three benefits stated prior will have a positive impact on the economic growth in the host countries with which MNEs chose to reside proving that they have positive economic effects. The first benefit to be analyzed is the positive spillover generated by multi-national enterprises in the host country. Multi-national enterprises have been and are being accused of reeking negative effects on the host country. One of these negative effects is crowding out country-local businesses. This would mean that the MNEs would take the local corporation’s market share and force them to downsize just to make ends meet. This is a speculative statement because despite the fact that the country’s own businesses may forfeit some market share, this is competition as usual; even if the MNE resides in a non-developing country. It is also arguable that there are many positive implications to this increased competition. This refers to the spillover effects that the multi-national enterprises have to developing countries. “Researchers advocating the benefits of MNE spillovers to developing host countries suggested that foreign firms would bring advanced technologies, knowledge, and skills that would spillover to local individuals, firms, and industries and be used by them to enhance their productivity and increase their knowledge and skills base” (Caves 1974, Lowe & Kenney 1999, Teece 1977). For example, a large multi-national company decides to reside in a developing South American country. They bring new technology used in their production process to this country in order to properly run their business. This technology has never been used in this country before. Researchers have observed positive impacts of large corporations on developing countries, “Technological catch-up has always fascinated economists. The spectacular performance of the Newly Industrializing Countries (NICs) animated debate and encouraged novel conceptualizations of economic growth and structural change” (Amighin, Rabellotti, Sanfilippo, 2010). The improved performance of the newly industrialized countries is proof that the technological spillover positively affects developing countries. Firms would pass on knowledge and expertise of the advanced equipment to the host country and it would be made better
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