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What Costs Do MNCs Accrue to Developing Countries?

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One of the costs of MNCs is that they may employ largely expatriate managers. This will ensure that the incomes generated are maintained within a relatively small group of people. This is because the attraction for the MNCs may be the large supply of cheap manual labour whom they can employ at low wages. This may contribute to a widening of the income distribution. It will also not lead to the transfer of management skills due to the relatively limited adaptive and skill absorptive of the manual unskilled workers.

It is also noted that investment by MNCs in developing countries often involves the use of capital intensive production methods. Given that many developing countries are often endowed with potentially large low wage labour forces and have high levels of unemployment, the capital intensive investments by the MNCs therefore presents inappropriate technology. Most growth and development policies and developing countries agitate for the use of labour intensive production methods as an instrument of creating employment and income generating opportunities. This is critical even for poverty reduction, which is consistently reflected by the developing countries as their growth and development priorities. Thus if an MNC is capital intensive as is always the case, then any resulting growth might be considered anti developmental.

Another cost of MNCs is that they often engage in transfer pricing. This is situation whereby the MNCs shift production between countries so as to benefit from lower tax arrangements in certain countries. By doing this they can minimize their tax burden and the tax revenue of national governments. This means
that they will deny the host countries the most needed revenue for the growth and development of the countries in question

One of the traits of the MNCs is that they have a size or scale requirements that exceed the size of a single national market, and they often treat the world as though it were a single market. This means that the MNCs can use their considerable power to exert influence on governments to gain preferential tax concessions and subsidies and grants. Depending on how such concessions are designed and administered, they can bring distortions within the economy, including elements of discriminatory tendencies by the government.

It is granted by investing in areas and utilizing the factors of production where the developing countries have an absolute and comparative advantage, MNCs will lead to a more efficient allocation of the worlds’ resources. However, if such activities by the MNCs lead to overspecialization and overdependence in certain sectors of the economy then the host country will be vulnerable especially if the MNC decides for whatever reasons, to leave the country in the future

Kavungya answered the question on May 2, 2019 at 12:45

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What Costs Do MNCs Accrue to Developing Countries?

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