Economic Development

Start Free Trial

Imagine you are in charge of development for a developing country and were approached by a multinational corporation interested in locating in your country. Identify some of the benefits and some of the costs to the host country from allowing a multinational corporation to locate in a country with a developing economy.

Expert Answers

An illustration of the letter 'A' in a speech bubbles

Having a multinational company locate in a developing country can be a mixed blessing. Whether it is something positive or not depends on the nature of the company. Therefore it would be important to look at multiple issues before granting or withholding permission.

  • Environmental Impact: Especially if the company is one involved in an extractive industry (logging or mining, for example), it would be important to assess the company's effect on the local environment and the mitigation efforts it would put in place. The benefit of foreign investment can be wiped out if the company pollutes water or destroys fisheries or agricultural land.
  • Jobs: One major benefit such a company can bring is jobs. It is important to ask, though, whether the company will employ local labor, what sort of wages it will pay, and what sort of working conditions will be provided. Although job growth is beneficial, sweat shops, child labor, and unsafe working conditions are detrimental.
  • Competition with Local Firms: While foreign investment is usually beneficial to a country's economy in the short term, one must also consider whether the presence of a multinational might stifle growth in local industries. For example, if a multinational beer company such as AB InBev, SAB Miller or Diageo (DEO) built a plant in a developing country, that might put local breweries out of business causing long term harm to the economy.
Approved by eNotes Editorial Team
An illustration of the letter 'A' in a speech bubbles

The presence of a multinational company in a developing economy can certainly be a two-edged sword.  Such companies can bring short-term development, but they do not necessarily help in the long term.

In the short term, the presence of such a company is typically a good thing.  The company hires a relatively large number of local workers at relatively good wages.  It will (unless your government has made a deal where it does not have to) pay taxes, thus helping your government.  If your country has few jobs and a small tax base, this can be very beneficial.

In the long run, however, it may not be so great.  The firm might know that it has leverage over your government and use it to pay less in taxes or to evade things like environmental or safety protections.  The firm might only use your country as a source of cheap (relative to the rich world) labor rather than using locals as suppliers or giving them the ability to move up in the company. 

Multinational corporations do bring jobs to your country, but they are only using your country for as long as it is beneficial to them and they might not be helpful overall in the long term.

Approved by eNotes Editorial Team