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4) Examine the impact of Multinational Corporations (MNCs) on developing countries by

contrasting theoretical views on MNC investment with the structuralist perspective.

In the growing world today, we are seeing the vast investments of behemoth firms such as
Google, Apple, Facebook and Amazon into countries such as China, India, Brazil, and Argentina.
We see a vast array of investments through, providing better infrastructure, to providing labour
to the unemployed. It is important to note that the four countries given are examples of
developing countries and feel that a brief definition of the term will help make the argument
much clearer. It can be quite hard to nail this definition down to one detail, however
developing countries are categorised and seen as the countries that have lower gross domestic
product (GDP) than developed countries with a less mature socio-economic society.
Multinational corporations (MNCs) can affect these countries through both macroeconomic
policy as well as microeconomic indicators. The macroeconomic theories will explain things
from the international perspective and the microeconomic theories will focus on the individual
organisation, person, and firm. This will then be contrasted with the structuralist point of view
and go in depth with the use of dependency theory and world system theory to help
understand whether they are opposites or sit well together.

The first theory I am going to use to help make clear of the impact that MNCs are having on
developing countries is the use of a macroeconomic theory, foreign direct investment (FDI). Up
until the 1960s, FDI was known for its capital flows internationally. Capital flow theory suggests
that capital (and finances) moves between countries depending on the differing interest rates.
Which would suggest that those developing countries such as the BRIC countries, or a case
where it’s often seen a lot, Africa, that a lot of these big corporations will set up warehouses to
mass produce their products. Often more than just interest rates are looked at and there is
normally an eye for cutting cost of production, therefore wanting cheap labour. This is an
important point however it is also important to remember that with the investment of these
firms, they do to a certain degree help bring direct employment to the country and in the long
run help build indirect employment as some people within the firm may pick up the knowledge
acquired and create a small business for the locals creating more jobs. These firms also look to
find places with lower corporation tax meaning they are gaining the utter most profit possible.
In all this means that firms are looking to go to countries where there returns to investments
are higher (Parry, 1980). However, this can have positive impacts on the developing countries,
for example the trickle-down effect. Via their extensive investments, these enable linkages,
forward, backward, and horizontally. Not only is there the benefit of FDI, but it also benefits the
companies that they may be partnering with, such as companies that produce complementary
goods. Like I emphasised before, this will benefit the services industry, which in turn could help
build infrastructure. It will also help create demand for better infrastructure which in the long
run will be improved.

The second theory I am going to use is with the help of microeconomic theory, Hymer-
Kindleberger Theory. This theory is also regarded as the monopolistic and oligopolistic power
theory. To explain why MNCs were going multinational Hymer asked three key questions. (a)
Why do firms go abroad? (b) How are they able to survive in a market where they bear initial
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costs such as communication and misunderstanding? (c) Why do they want to retain control
and ownership? (Hymer, 1960) (Hymer, 1979). The basic founding’s where that the firm
enjoyed the monopolistic power/oligopolistic power within the host country. He noted that big
corporations do not tend to operate under perfect competition guidelines and therefore, seeing
the end to any type of competition within the host country. Now there is reason to suggest that
this is all bad however, those were not the only findings that were made, and I come back to
the impacts made previously within the macro section. On top of those there are even more
impacts that were seen because of the MNCs coming into these developing countries. Hymer
emphasised that one of the incentives was for firms getting better returns to scale, meaning
that that their production was much more efficient. This could only be done through the labour
and technology provided. Which brings me onto the next big positive of MNCs, being the
capital, and knowledge being transferred over. If, done correctly, this would save a lot of money
for the host nation as the cost of production for new technology these days are out of this
world, and therefore very beneficial for the host country if they can keep this equipment and
use it to help them build foundations for a more stable source of production.

Prebisch argued that structuralists such as himself partition the world into two types of countries. The
core consists of developed, industrialised, technologically proficient countries, with representative
democracies, while the periphery, to which most countries belong, is underdeveloped, mostly agrarian,
low tech, highly populated, disproportionately dependent upon natural resource commodity trade, with
social and political forms favouring elites over the masses. Structuralist argue that globalised
production fails to lift many workers out of poverty. Nicola Phillips and Fabiola Mieres make it
very clear that leading companies within the global value chains continuously force suppliers
and producers cut their costs. (Phillips & Mieres, 2015)

From what we have seen in these few theories, there is a large case of firms have pure
monopoly power over the host nation and its people, suggesting that there are a few critiques
of the MNCs and the economic theory behind it. The first theory I will be using is dependency
theory from the structuralist point of view. Dependency theory focuses on transnational classes
and class structure and asks questions between north and south and core and periphery. It also
asks questions about inequality and poverty, which also links to unequal trade relations.
Structuralist who uses dependency theory argue that there is no mutual benefit in terms of
equal sharing of profit between the host country and the multinational corporations. They do
this with sole purpose of ensuring that the host country remains forever dependent on the
multinational corporation and its home government. Nigeria is a good example of this.

The second theory which is very important as well is the world system theory. This theory, like
dependency theory, suggest that developed/core countries essentially exploit developing
countries or underdeveloped countries. However, unlike dependency theory, this breaks
countries into three categories instead of just the two that dependency theory does. They have
core, which is developed, semi-periphery, which is developing, and periphery which is
underdeveloped countries. This template also identifies the minimal benefits that are
possessed by underdeveloped countries in the world system unlike dependency theory. These
views stemmed from Immanuel Wallerstein as he further suggested that the way a country is
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integrated into the capitalist world system determines how economic development takes place
in that country.

Both these structuralist theories show massive impacts of an MNC on developing countries and
therefore we can see that there are two ways of seeing the involvement of MNCs on the
multinational level. We can see it from an economist’s point of view and an investors point of
view that overall, the financial benefit is larger for all parties involved. However, as discussed
from the structuralist side, it is clear to see that socio-economic foundations are being broken
and as well as this there could be other side effects which we have not discussed such as
environmental damage. Therefore, the impact truly depends on the company and the country
that is getting invested in. If the corporation wants to do create real change within the host
country, then not only will there be financial improvements but there will technological
advancements and socio-economic advancements. However, if the host country has no power
over the firm and the company is only using the host country as a profit-making investment,
then there might still be some financial aid, but there won’t be a significant amount of help in
any other departments.

Bibliography
Hymer, S., 1960. The international operations of national firms, a study of direct foreign
investment, Massachusetts: Massachusetts Institute of Technology .
Hymer, S., 1979. The Multinational Corporation: A Radical Approach. , Cambridge: Cambridge
University Press.
Parry, T. G., 1980. The Multinational Enterprise: International Investment and Host Country
Impacts.. Greenwhich: JAI press.
Phillips, N. & Mieres, F., 2015. The Governance of Forced Labour in the Global Economy.
Globalizations, 2(12), pp. 244-260.