The controversies over multinationals and FDI arise on two basic levels: the ideological split and functional

split: Ideological Split: Arises over the question of whether free market private enterprises are good or bad for development. Proponents of FDI and multinational companies are of the free trade/liberal school. Opponents view MNCs as a threat to the cultural/political/social/economic identity and strength of developing nations. They essentially believe that MNCs might adversely impact the power relationship between developing countries.

Functional Split: looks at the pro-developmental aspect of FDI and MNCs. Proponents argue that the transfer of capital would result in the highest rate of return as well as allocate resources more efficiently. Thus, they believe that the developing countries will benefit from the increased investment, jobs and output (Pro-developmental). Opponents argue that FDI in LEDCs only empowers the already powerful MNCs and the rich countries in which they are based. They believe that not only do MNCs widen the inequality gap, but they also exploit those labor-cost countries. The profits that they generate usually leave those LEDCs in the form of repatriated profits rather than being reinvested in the host country.

CRITICISMS: MNCs dont usually reinvest profits. So, the initial investment is countered in the long run. This, in turn, adversely affects the current account in balance of payments. Domestic firms in developing/less developed countries might not be able to compete with their larger rivals (MNCs). This could lead to lower total savings in the economy due to loss of jobs and income. MNCs usually tend to use heavy capital for their production, hence making it less labor intensive. This wont have a big impact on the unemployment levels in those LEDCs. MNCs have also been accused of employing monopoly power to create demand for inappropriate products which are primarily aimed at a relatively small clique of well-to-do people. The economic power of the MNCs allow them to have considerable leverage in getting good terms from developing countries that require capital inflows and employment opportunities. If tax concessions are granted, there would be no improvement in tax base and tax receipts of developing countries.