However, in regards to development economics it was suggested that for development to take shape some conditions must be met. In Kingsbury (2008) the driving force of growth in the developing countries requires these conditions in order to stimulate growth; they are human capital, it is said that there should be adequate amounts of human capital and they should be skilled. Also proper governance must be put in place to control the conduct of individuals and companies, and to avoid corruption and exploitation. The Political systems must be strong enough to avoid conflicts over resources and various issues that could hinder development. However, it was suggested that removing some of the limitations on development, growth will transpire in a spontaneous manner without requiring any further inputs, but other theorist challenged that in reality growth is complicated and only achievable at a great price. All the necessary conditions and inputs must be accessible at the right time and place; growth to some theorist is a conditional and contextual process that should progress in the right set of order. (Kingsbury, 2008, p.104-105)
On the other hand, Borentztein et al. (1998) proposed that technology flow acts as a vital role in the process of economic development; the recent economic growth report has highlighted the dependence of growth rates on the statement of domestic technology relative to that of the rest of the world. The developing countries growth rates is dependent on technology diffusion “...the extent of adoption and implementation of new technologies that are already in use in leading countries” (Borenztein et al., 1998, p.116). Technology diffusion involves the adoption of foreign technology and acquisition of human capital; these are key factors for international diffusion of technology. In Borenztein et al., (1998) the paper investigated the effect of FDI on economic growth in section 2, making use of various sources of collated data on FDI; the distribution of financial flow to developing countries, growth rate income and human capital data on the average level of secondary education was used in the course of this investigation. However, the result of the research indicated that countries with human capital higher in secondary school attainment above 0.52 according to the research will benefit positively from FDI. In return this translates to a rise by 0.3 percent in the host economy; ‘FDI and human capital yield a coefficient that is positive and highly statistically significant’ (Borenztein et al., 1998, p.123).
Although Borenztein et al., research indicated economic growth but other theorist had different views of FDI, an explanation on the extensive research of the dependency theory is that the existence of Foreign Direct Investment (FDI) in the global south suggests that dependency slows down economic growth over an extensive period of time. Firebaugh, (2003) argued that although “...domestic investment is better for growth than foreign investment, both spur growth in the short and long terms, undermining the dependency perspective” (Glenn Firebaugh,1992, p.327). Although, FDI could contribute to economic growth simply by supplementing capital accrual in host country, but this action could create a crowd out effect on domestic investments creating a competitive market. Usually in competition on product and financial markets according to Blomstrom and Sjohom, (1999) these alteration are most likely to cause a variety of externalities or ‘spillover effect’ which causes increase in production within local firms (Blomstrom and Sjohom, 1999, p.916). Borenztein et al., (1998) suggest that MNCs may dislocate local firms; on the other hand, suggests that FDI “...may support the expansion of domestic firms by complementing production or by increasing production or by increasing productivity through the spillover of advanced technology” (Borenztein et al., 1998, p.114). Although, spillover effect may not become visible if there is a wide gap in the technology between local and foreign firms, another factor is ownership sharing of foreign affiliates. Many restrictions by the government of host countries are imposed on foreign ownership and are forced into joint venture agreements. (Blomstrom and Sjohom, 1999, p.916)
The spillover effects as a result of over production could have negative impact on local firms, however, FDI in the role of growth was recently looked at from the view of neo liberal theories and the dependency theories; neo liberal focus on the importance of direct foreign Investment as a key means of advancing development. Neo liberals argued that FDI is good for growth because it leads to a boost in income and employment; also allow the developing countries to import advanced technologies. Also Neo liberals argued that the levelling up causes reduction in poverty reduction through trade liberation and FDI. In contrary to the neoliberal’s theory, the dependency theorist argues that MNCs are driving force of exploitation as a result of low labour cost. They also argued that capital shifts to location of low costs by this means encouraging race to anywhere capital locates the most attractive investment, this; the dependency theorist says is the levelling down process. The dependency theorists have also argued that FDI is not only exploitative, but also produces greater level of income inequality. (Kiely, 2007, p.146-147).
The developing countries according to Firebaugh (1992) benefits less from FDI, in comparison with local firms FDI enjoy incentives that their local counterparts do not benefits from. FDI according to Firebaugh is less likely to contribute to public revenues “as multinational corporations are often able to avoid taxes through mechanisms such as transfer pricing, less likely to encourage the development of indigenous entrepreneurship... less likely to re invest profits in the host country” (Firebaugh, 1992, p.328). FDI may be outward looking, both the profit and the products flows outwardly; in this context output can slip out of the host country not leaving much trace in the rest of the economy. In contrast, the local industries are more likely to form links with other industries in the domestic economy, such linkages promotes economic development. “A linkage exists whenever an ongoing activity gives rise to economic or other pressures to lead to the taking up of a new activity” this new activity is an essential record towards development. It is concluded that an outward looking economy is probably going to experience shortfalls, however, the growth effects of foreign direct investment fall well short of those domestic investment. (Firebaugh, 1992, p.328-329)
Investment by FDI in the developing countries accounted for a comparatively small amount of domestic capital formation and it complimented national capital and was subject to state control. Moreover, at the same time TNCs exported capital in form of repatriated profits, it was said that some investment went to the host countries and this could act as a stimulant to further economic activity. The argument applied equally to financial dependence, Warren (1973) proposed that it was ridiculous to claim that this drained of surplus from the developing countries. The TNCs repatriation of profits was said to have created balance of payments problems, but warren claimed that this argument ignored the initial inflow of foreign investment which could be used for further capital accumulation. Finally, warren (1973) argued that the original source of technology was not important, and that the developing countries could benefit from importing technology. (Warren, 1973, p.29-32)
The development impact of TNCs in the developing countries was argued in two parts, the apologist and the critics. Some writers argues that FDI by MNCs comprises net gain for receiving countries saying that, FDI increases the capital stock in a country, and consequently raising the income of that particular country, including foreign currency earnings. Also claims that FDI provides employment, increasing incomes, the population increase in consumption; and in promoting economic growth, TNCs may also promote long term political stability. On the other hand, in the view of the critics of MNCs, disregard the fact that FDI increases income, it argued that FDI does not robotically lead to an increase in income for particular countries, as capital outflow may exceed inflow. Linkages with local firms are rear; FDI imports to required inputs, rather than obtain from local suppliers, also creates few jobs and in an exploitative means. (Kiely, 1998, p.68)
In conclusion of this essay, the effect of MNCs on the developing countries was examined and the report of UNCTAD (2009) revealed a rise in the inflow of FDI in the developing countries but economic growth rate is in a regression mode. In the area of human capital in countries where MNCs have investments, a report suggest that countries that has higher rates of literacy adults benefits extensively in economic growth, however in the area of promoting domestic investment a very little progress was seen. Technology diffusion is fundamental in the process of economic development; FDI is a considerable way for the transfer of technology, increasing growth reasonably in the developing countries. Nevertheless, the relationship between FDI and growth stimulation towards economic growth in the global south is probably far more complex than has been assumed. The process involves the balance of inflow and outflow, and FDI from UNCTAD in World investment report indicated a rise in developing countries accepting FDI as a means to advance economic growth. In recent time, development researcher and theorist appeared to be attempting to find a long lasting solution to advance growth and promote sustainability in a more natural form.
REFERENCES
Blomstrom, M. and Sjohom, F. (1999) Technology transfer and spillover: Does local participation with transnationals matter? European Economic Review 43: 915-923
Borensztein E., Gregrorio, J. and Lee, W. (1998) How does foreign direct investment affect economic growth? Journal of International Economics 45 (1): 115-135
Kiely, R. (1998) Industrialisation and Development UCL, London
Kiely, R. (2007) The New Political Economy of Development: Globalisation, Imperialism, Hegemony, Palgrave Macmillan, Great Britain
Kingsbury, D., McKay, J., Hunt, J. Et al. (2008) International development: Issues and Challenges, Palgrave Macmillan, Great Britain
Glenn Firebaugh (1992) Growth Effects of Foreign and Domestic Investment Chapter 23: p.327-344 in Seligson, M. and Passe-Smith, J. (eds)(2003) Development and Underdevelopment: The Political Economy of Global Inequality, Lynne Rienner, USA
United Nations Conference on Trade and Development UNCTAD (2002) World Investment Report: Division on Investment and Enterprise, URL: : [09 May, 2010]
Warren, A. (1973) Imperialism and Capitalist Industrialization, New left Review 81. P9-44
