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Development strategies
Multinational Enterprises (MNEs) and Foreign Direct Investment (FDI)
A MNE is a firm that owns production units in more than one country. They mainly
have their head offices in America, Europe or the Far-East and are responsible for much
of the investment flows into ELDCs. Furthermore many of them are enormous in size
and control more economic resources than the whole GDP of many countries. (For
example, Exxon Mobil’s revenue for 2010 was $383 billion– comparable to the GDP of
Thailand $369 billion or Hong Kong $243 billion.
The table below lists the number of companies (by home country) that are in Forbes’ list
of 2000 biggest companies in the world (as measured by revenue). Nearly all of these
will be MNEs (with a few exceptions- notably some of China’s biggest companies). Try
and guess which companies might be listed. If you click on each country it will reveal
the answers.
Number of Forbes Top 2000 companies per country 2015
Full list is here: http://www.forbes.com/global2000/list/
Foreign direct investment (FDI) is defined as a long term investment by a foreign direct
investor in an enterprise based in an economy other than that in which the foreign direct
investor is based. The FDI relationship, consists of a parent enterprise and a foreign
affiliate which together form a MNE.
Much of their investment is in middle income ELDCs such as China, Brazil, India,
Mexico and Indonesia. These companies bring not just finance, but technology,
managerial skills, market openings and new ideas.
The two central characteristics of MNEs, their large size and foreign ownership, have led
to substantial disagreements over the desirability of their role in developing countries.
The division of opinion can be classified as simply the ‘growth versus development’
argument.
MNEs and Economic Growth
The injection of FDI increases the national income of the receiving country. GDP,
investment and manufacturing all grow. There is also broad agreement that MNE
investment can break crucial supply side ‘shortages’ in ELDCs.
ELDCs
characteristically have supply ‘gaps’ in savings, foreign exchange, taxes, technology and
human skills. The activities of MNEs generate jobs, saving, tax revenue and exports.
However, MNEs are criticized as they often practice transfer pricing. This is the setting
of internal prices within branches of an MNE such than when components are shipped
between branches of an MNE the total tax bill is minimized. This is likely to work
against the ability of ELDC governments to collect taxes from MNEs and is compounded
by the fact that ELDC may offer concessionary benefits such as tax breaks, subsidies
and protection in an effort to attract further investment.
MNEs and Development
It can be argued that through their contributions to economic growth, investment by
MNEs will also lead to economic development in their host country. But as we already
know it is quite possible to have economic growth without development.
That MNEs are potentially anti-developmental is based on the following arguments.
MNEs:
 Widen the inequality between rich and poor by developing a modern high wage
sector
 Market inappropriate, sophisticated products for elite groups
 Widen the rural-urban divide by locating in the cities and as a consequence
encourage further rural-urban migration
 Use modern technology which, being capital intensive, is inappropriate for labour
abundant countries and does little for the jobs and incomes of the poor
 Can use their immense size and consequent power to influence governments into
anti-developmental activities
 May inhibit the development of local enterprise.
World Without Water
1. What are the positive effects of Coca- Cola’s investment and operations in India?
2. What are the negative effects of Coca- Cola’s investment and operations in India?
3. Is Coca Cola anti-developmental? Does it:

Widen the inequality between rich and poor by developing a modern high
wage sector?

Market inappropriate, sophisticated products for elite groups?

Widen the rural-urban divide by locating in the cities and as a consequence
encourage further rural-urban migration?

Use modern technology which, being capital intensive, is inappropriate for
labour abundant countries and does little for the jobs and incomes of the poor?

Can use their immense size and consequent power to influence governments
into anti-developmental activities?

May inhibit the development of local enterprise?