Financial Times

MNCs - bane or boon for development?
By Dinithi Thanthiriwatte
Assistant Lecturer, Department of Commerce and Financial Management University of Kelaniya
Multinational companies (MNCs) are believed to play a major role in the economies of developing countries. Ideally MNCs have contributed substantially towards the growth of developing countries.

MNC is most simply defined as a corporation or enterprise that conducts and controls productive activities in more than one country with the head office being established in a developed country. Big companies mostly from America, Europe and Japan but also increasingly from newly industrializing countries like South Korea, Taiwan and Brazil, create development opportunities. The issues created by these companies are serious ones that must be considered.

It is believed among many economists that MNCs fill various gaps within a host country's economy. The first and most often cited one is that, when domestic investment and savings doesn't meet the required rate of growth in the economy, the gap in investment is filled by the MNCs' investment.

Secondly when the targeted foreign exchange is not met by the net foreign exchange derived from imports and exports together with net public debt, the gap is constituted by MNCs' net exports and capital inflow. These giant companies also fill the gap between targeted government tax revenues and locally raised taxes. Lastly the gap of management skills, entrepreneurship and technological skills are believed to be filled by the MNCs.

Despite what the majority believes, MNCs are not the panacea for development for developing countries. This has been proved for many years. - WHY? Even though it is said that MNCs provide capital and savings, they charge a higher interest on capital borrowed by the government in the host country. Apart from that, MNCs repatriate the profits to their home country apparently hindering the re-investment possibility of those profits in the host country. Further MNCs import the required intermediate goods without purchasing from domestic producers, thereby reducing the opportunity to grow for the domestic producers.

In the long run the recipient country's current account balance may worsen because of the substantial importation of intermediate goods. Furthermore the capital account's balance may worsen because of repatriation of the profits to overseas companies. The expected contribution from the tax may be less than it should be as a result of liberal tax policies vested upon MNCs. The salary structure of MNCs increases the unequal income distribution in developing countries. The cultural problems arise in the industrial zones where the MNCs are being set up.

Apart from that MNCs produce inappropriate products that are mostly targeted towards a niche market - affluent class. At the same time the technology that is being used to produce these products may not be compatible with the developing countries' systems.

Those products are advertised in such a manner that the consumer is forced to purchase the product no matter what economic conditions they are facedwith. This will lead to an undesirable allocation of local resources creating undesirable consumption patterns. MNCs use their economic power over the host country's government when formulating fiscal policies. MNCs demand tax holidays, investment allowances, cheap provision of factory sites etc. As a result the MNCs private profits may be higher than the social benefits.

The "Transfer Pricing" phenomenon is used to avoid high rates of taxes in some host countries by transferring the inter company sales (inter company sales among subsidiaries) from high tax countries to low tax countries at artificially high prices.

MNCs use their economic power, advertising effect, superior technological knowledge, worldwide contacts and competition to wipe out the host country's small-scale entrepreneurs from their business. During elections in host countries, MNCs fund a particular political party which is likely to come to power. After that party is elected, their policies are influenced by the MNCs.

Taking into account all these negative contributions, those who argue against the activities of MNCs suggest that the governments of host countries must have stringent regulations over the activities of MNCs. It is also suggested that governments should bargain for better deals and demand that MNCs adhere to certain criteria set by the government.

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