‘The best hope for developing countries to attain economic growth is through integration into the world economy. And their tool, if only they are willing to use it is the multinational company’. Discuss.

International Political Economy

The best hope for developing countries to attain economic growth is through integration into the world economy. And their tool, if only they are willing to use it is…the multinational company’. Discuss

The presence and activities of multinationals (MNCs) in developing countries has been a subject of controversy in discussions on development, politics and economics. Renewed confidence in the positive benefits of MNCs has led many countries previously resisting MNCs in the 60s, 70s and 80s to be more open in the 90s . “Governments are liberalising MNCs regimes as they have come to associate MNCs with positive effects for economic development and poverty reduction in their countries.” Of course, in practice, objectives to attract MNCs differ by country and the impact of MNCs is not always desirable. However, economic growth and industrialisation combined with an increasingly globalized world enable MNCs to become a useful tool for economic growth.

This essay will assert that within a state planned strategy of growth, integration into the world economy through collaboration with MNCs can help developing countries grow economically. This essay will dispute the claims of dependency theorists who claim that integration into the world market must lead to underdevelopment and instead suggest a modern mercantilist perspective where development benefits from a mix of state and market is the best strategy for achieving economic growth. The question is not so much whether or not to use MNCs; the case for, is overwhelming. Rather, I suggest the more pertinent question is how to use MNCs as part of a focused strategy of growth.

A broad interpretation of multinationals (MNCs) will be used; a large company that operates in more than one country, usually entailing foreign direct investment (FDI) by a corporation. This is opposed to a purely domestic business which has no operations abroad. There are estimated to be 63,000 multinational corporations in the world. Nike, IBM, General Motors and McDonalds are typical examples. Between them, they are responsible for two thirds of global trade and 80% of investment. Economic growth will be understood to mean an increase in a country’s real GDP

After independence, many former colonies were faced with issues of economic underdevelopment. Although economic development was crucial to establishing a national identity and ensure internal political stability, “political leaders often viewed former colonial powers with some suspicion.” Many leaders of the new nation states believed Western led capitalism was partly responsible for the backwardness of their state, “in some parts of the developing world, these sentiments helped shape a cautious approach to adopting Western influence and methods of economic development.” Liberal free market economies were viewed with a certain degree of scepticism and many developing countries adopted closed, protectionist economies in an attempt to grow from within.

However, without a liberal free market economy, there is little entrepreneurship or incentive to industrialise as people do not directly profit from their work. The starting position for developing countries is a largely agrarian society; Rostow suggests this is the first of five stages of growth. This pre-capitalist society existed everywhere before the industrial revolution; there is limited output because of a lack of science and technology. Rostow suggests that development requires substantial investment in capital. For the economies of developing countries to grow, the right conditions for such investment have to be created. These conditions can range from transport and communication infrastructure to tax breaks and financial incentives for MNCs to invest. If aid is given or foreign direct investment through MNCs occurs at this stage, injections of investment can lead to rapid growth. MNCs can facilitate the industrialisation process and input science and technology needed for developing countries to industrialise.

Barriers to trade have also, from a liberal perspective, prevented the development of developing countries. Whilst in many cases they have goods to export, barriers imposed by developed countries prevent profitable trade. Rather than enlarging their market, they are constrained within their domestic market. Despite the fact that the developing world received $54 billion of aid in 1990, their unequal position in world trade cost them $500 billion. If trade took place in a liberalized and free market, where people, goods and money had access to every country, greater equality between countries would exist and developing countries would be able to integrate much more easily into the world economy. Without the opportunity to break into the world economy, many developing countries will not be able to develop substantial economic growth; the cycles of poverty cannot be broken from within the domestic economy. The level of investment needed to raise productivity and incomes is not possible. Thus foreign direct investment through MNCs is essential for industrialisation enabling integration into the world economy and economic growth.

Modernization theorists and economic liberals suggest “an open economy free from political interferences is needed to help generate the large amounts of investment needed to foster sustained economic growth and development.” From a modernization perspective, foreign trade is perceived as ‘the road’ to market expansion and economic growth. They understand the need for FDI to introduce modern technology and production skills. Without integration, liberals suggest developing countries will find economic growth slow as trading within a domestic market results in a poor balance of payments. Liberals would suggest that a free market economy promotes growth and can provide the solution for developing countries to integrate into the world economy. Liberal advocates of open, global markets suggest that the free market guarantees optimal economic growth and in the long term will bring about improved living standards for everyone. Ohmae suggests that “nation states have become nothing but a nuisance in a world economy dominated by MNCs and global markets for capital, commodities and labour.” He suggests that democratic contro...

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