How do multi-nationals affect international development?

to what extent do the multinationals participate in the conversion of developing countries to capitalism?

Question answered by JesseGordon in Capitalism

A viewer asked this question on 8/14/2000:

Hi Jesse,
I'm writing my final thesis on the theme you've seen in subject. Actually I would be glad if you could help me to find some authors or theory which have developed around this.
The problem is quite basic: economic advantages in most cases, political stability in most cases as well but nothing is free, all this has a cost! I would like to make a sharp analysis of the progressive changes, drawbacks and advantages but the academic point of view is very important, that's why I'm in search for theories and their authors.

Thanks a lot for your help

JesseGordon gave this response on 8/15/2000:

Multi-nationals will likely be more important in the future than small countries, so your thesis topic is relevant. And the backlash against globalization (for example, in Seattle a few months ago) makes it timely as well.

The importance of multinationals is simply because they're huge -- look at the largest ones' annual gross revenue, and it will exceed the GDP of many small countries. So, yes, of course they have a major effect on development.

Here are some issues you might address. I focus on negative aspects because the positive ones (development and stability) are obvious. Write a follow-up to narrow down what your topic is, and I'll help you find some theoretical sources:

1) United Fruit, a multinational in Central America, created a political situation closer to feudalism than capitalism throughout most of the 20th century. A one-industry economy, especially in a monopsony (a single buyer, like monopoly is a single supplier), does not necessarily foster a healthy economy.

2) There's a risk even in strong capitalist economies when the economy focuses too heavily on one industry. Economists call this "Dutch Disease." For example, when there's an oil boom in an oil-rich country, all the economic resources move to the oil sector, and all other sectors go up in price as a result of less labor supply and less capital availability, making them less competitive on the world market. That happened in Nigeria and Holland in the late 20th century.

3) The concentration of power in large multinationals tends to mean that power in the host country is also centralized. It makes sense to deal with one regime, or one person, and the US government has an economic stake in preserving that regime (because a US company often has millions at stake). In harsher terms, multinationals favor strong-man dictators. Yes, that's "stability," but it's not good for the people of the host country. I feel this is a major shortcoming of US foreign policy -- we tend to support bad leaders just because they're the leaders we know and have dealt with in the past. A prime example is the Shah of Iran, who worked very well with multinational oil companies.

4) Multinationals follow economic rules, but have no interest in protecting the environment of the host country. It might make economic sense over a period of decades, for example, to sustainably cut forests, but to a multinational which has no assurance of getting permission to cut any time but in the present, the only economically sensible action is clear-cutting as much as possible. That has happened in Malaysia and Indonesia, and to some extent in Brazil. The gist of this point is that deals between multinationals and host countries rarely look at the long term.

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