Multinational corporation and third world development

Research Paper (postgraduate), 2005

13 Pages, Grade: 2



Multinational Corporations (MNC) are important transitional agents in the contemporary global political economy. Although they can be viewed as economic actors following the logic of international market, their activities inevitably arouse questions of national power. Not surprisingly, such questions are most pronounced in the study of developing countries where weak government and societies potentially give the MNC strong bargaining position. Thus, the nature of their relationship between developing countries and the implication of this relationship for economic growth remains highly controversial. How ever, proponents of MNC posit in the past that MNC have made important contribution to developing countries. This interaction between MNCs and third world economy has led to a profound relationship whose impacts are enormous. Although many scholars have written more on the impact of MNC on host less developed countries, the most important question is, Do foreign firms behave differently from locally owned firms and if so what are their implication?

Multinational corporations are one of the main conduits through which investment is channelled and their evolution has reflected broader developments (OECD 2003).

This impact however will be examined from the negative and positive impact gearing towards the development of third world. However it is imperative to examine the characteristics of developing countries as well as some objectives of Multinational Corporations (MNC).


It is imperative to know the characteristics of the world economic system which is divided into two spheres: a relatively affluent and industrialized North and relatively poor and non industrialized South which encompasses the third world countries and their economies. Third worlds are the formal colonial countries of Africa, Asia, Central and South America. According to Krugman and Obsfeld (2003), poverty is the basic problem of these developing countries and escaping from poverty is their overriding economic and political challenge. Comparing them with the industrialized economies, most developing countries are poor in factors of production essential to modern industry. The scarcity to these factors of production contributes to low level of per capital income and often prevents developing countries from realizing economies of scale which many rich countries benefit. Politically, instability, insecure property right and non guided economic policies have discouraged investment in capital and skills thus reducing economic efficiency.

In the United Nations conference in Brussels (2001), these countries have limited human, institutional and productive capacity; acute susceptibility to external economic shocks, natural and man made disasters, limited access to education, health and other social services, poor infrastructure and lack of access to information and communication technologies


MNC are in business to make money. Their leading objective is obviously the maximization of profit. This requires them to produce goods and services at the lowest possible cost there by taking advantage of low fixed and variable production cost that exist in countries other their base country (Pool and Stamos 1990).

Closely allied with the economic power of “bigness”, MNC economically play an important role in world trade and investment (Krugman and Obstfeld 2003).

According to Grubel (1981) MNC provides opportunities for employment, growth, immediate foreign exchange income, tax, revenue and technological know- how.

Advocates further propound on the assertion that MNC do serve as principal means of satisfying the desire of most countries to attract foreign direct capital and technological know-how. The inflow of capital improves the balance of payment picture, brings advance technology, create jobs locally, effect savings on research and development, and enhance technical, productive and organizational managerial skills of indigenous personnel and manufacturing of domestic consumption. With this, through their own personnel policies, they introduce higher standard of wages, housing, and social welfare which affect other segment of the society. Despite all their influence, one can present a balance sheet of MNC.

An overwhelming proportion of direct foreign investment in the third world countries is activated by MNC.

In this view, FDI can alleviate poverty in host country by generating employment and create jobs (Asiedu 2004), and (Athreye 2003).

MNC employment boost domestic wages as they pay higher; offer training program for workers, foster the transfer of technology between foreign and domestic firms and enhance the productivity of the labor force. In another article by Asiedu (2004) the employments by MNC have both indirect and direct impact on the domestic employment. FDI generate new employment (direct employment) and create jobs (indirectly) through forward and backward linkage with domestic firms. Estimates show that FDI in developing countries has a multiplier effect on domestic employment as it creates about 26 million direct jobs with 41.6 million indirect jobs in 1997 in Namibia.

In a related example, 8 out of 12 industries, out put per worker was higher in foreign owned enterprise than in domestically owned firms with a difference in productivity ranging from 50% in electronics, to about 13% in non metallic minerals. This same applies in Ivory Coast where the productivity gap existed in fewer industries. This can be accounted partly by the difference in training opportunities for workers in foreign owned enterprises and domestically owned enterprises. In Kenya and Zimbabwe, the availability of training programs increases with foreign ownership as training is more prevalent in foreign owned firms that jointly owned firms. The diagram below shows foreign and domestic owned enterprises providing training to workers.

Percentage of Foreign Owned enterprises and Domestic Owned

Enterprises providing formal training to workers 1995

Abbildung in dieser Leseprobe nicht enthalten

Source: Asiedu E.

Development Policy Review 22: 2004

Table 1 Pages 7

Further more, employment fosters technological transfer in less developed countries. One of the ways by which foreign technology is been diffused in host countries is through labour turn over as domestic employees move from foreign firm to domestic firm. In this, foreign firms pay higher in order to retain their workers thereby preventing domestic firms from appropriating their superior technology.

More so, (Asiedu 2004) reiterates the fact that FDI is important source of capital and has become important to Sub-Saharan Africa in other to achieve its millennium development goals. In the same argument, during the United Nations Conference on Trade and Agreement (UNCTAD) (2005) , FDI into primary, mining and agricultural sectors in African countries have been a sole source of increased employment, government revenue and foreign exchange earnings, and a catalyst for a diversified industrialization path. A large scale of proportion of FDI has gone to the mining sector which has been a major drive of growth recovery. With reforms to liberalized and privatized the mining sector, Africa has become as attractive continent for mining. New investments have expanded the capacity of existing producers, including the development of new mines. Mali which did not have large scale mining sector has hosted large scale operations.


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Multinational corporation and third world development
University of Kassel
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Dingha Ngoh Fobete (Author), 2005, Multinational corporation and third world development, Munich, GRIN Verlag,


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