Evaluate The View That Mncs Play A Positive Role In The Development Of Ledcs

Evaluate the view that MNCs play a positive role in the development of LEDCs

MNC stands for Multi-National-Company, a company such as Apple, Ford or Tesco which has operations in more than one country. LEDC stands for Less Economically Developed Country, one which has features such as lower per capita GDP in real terms than more economically developed countries. Development is a broader term than simply economic growth, although growth is an enabling condition for development.

On the one hand MNCs can play a positive role in the development of LEDCs. MNCs can provide foreign direct investment in the form of factories and even infrastructure. In turn these provide employment for local people. The net effect is an improvement in the supply side of the economy and an increase in aggregate demand as this diagram shows:

Diagram, AD shifts right, explain it in full, referring to the diagram.

The significance of this effect would be most profound for LEDCs with extremely low levels of per-capita investment and real disposable income. Economic growth in the short and long run should be improved but this effect is not guaranteed though& the extent of the effect depends on how labour or capital intensive the factories are and whether local or ex-pat workers are employed. Profits from MNC operations may also be re-patriated abroad, limiting the extent to which they foster further economic growth in the long run. It is also possible that MNC investments generate significant negative externalities as has been the case with oil extraction and distribution in Nigeria as this diagram shows:

Diagram, negative externalities in production, explain it, referring to the diagram.

In the case of Nigeria, above ground high-pressure oil distribution pipes have led to pollution which in turn harms the income and quality of life of workers involved in fishing and agriculture. We must also remember that generating economic growth and higher incomes does not guarantee development the latter depends on whether governments are able to gain increased tax receipts from MNC operations and spend them on, for example, transport, healthcare and education infrastructure.

On the other hand, it could be argued that MNC s are positively harmful to development in LEDCs, especially in the long run. An MNC entering an LEDC with the benefits of economies of scale might displace local firms which are operating at a much lower scale, as this diagram shows:

Diagram& Local firm unable to achieve similar costs to MNC with economies of scale explain it

We can see from the diagram that a MNC with economies of scale might be able to price far below the lowest LRATC achievable by a smaller-scale domestic firm in an LEDC. This would mean that the domestic firm may be displaced even if the displaced workers were re-employed by the MNC, there would be little or no benefit from a developmental point of view. Then again though, it could be that the MNC offered higher quality jobs, or greater opportunities for training, or even higher wages& all of these benefits might lead to improved development over the longer term, at least at a local level.

Another way in which MNCs might be harmful to development in LEDCs is that they might exploit domestic factors of production to the detriment of the domestic population. For example, a Coca-Cola bottling plant located in a country where water resources are relatively scarce might use up so much water as to reduce the quantity available to the domestic population, directly reducing the quality of life and potentially impinging on healthcare provision. The extent to which this is significant would depend on factors such as how well regulated the MNCs were& in less well-regulated LEDCs the issue could be very significant indeed.

It is important to note that not all MNCs are the same& some have the objective of profit maximising and might seek to minimise their costs by taking a very relaxed approach to health and safety and emissions control& this in turn might harm their workforce and the wider population, diminishing the level of development over the longer term. Other MNCs have well-developed policies on corporate social responsibility and may have objectives other than simply to profit maximise& these would be expected to have a greater positive impact on the level of development over time.

On balance, the evidence suggests that MNCs can have a positive impact on development in LEDCs over time but are not guaranteed to do so. The most directly positive impact they have is probably through inbound foreign direct investment and the provision of jobs although these factors promote growth rather than development we must remember that growth is an enabling condition for development and that many LEDCs suffer from very low levels of investment and growth. The most positive impacts of MNCs are probably reserved for LEDCs with an effective regulatory and taxation system, democratically elected government and a strong endowment of natural resources& for countries without these factors in place, the impact of MNCs on development is likely to be more marginally positive, or even negative.