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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?