In developing countries, transnational corporations give more than take

Many TNCs are moving into the lucrative markets of the developing world – like this one in Africa

Recently, my Geography class discussed the topic of development. Undoubtedly, development (or for some nations, the lack of it) will be a hotly talked about issue on many levels of society. My Geography teacher thus posed this question to the class, “Are transnational corporations in developing countries ‘takers’ more than ‘givers'”? I am writing this essay to present my views.

The proliferation of transnational corporations is increasingly evident among developing countries. However, whether an organization is a “taker” or “giver” is highly subjective depending on the perspective from which you come from, and for the purpose of this essay we will analyze the question from the perspective of the developing countries rather than the transnational corporations. When we assert that TNCs are “takers”, it is understood that there is a negative impact on the developing country; and when we assert that TNCs are “givers”, it is implied that there is a positive impact on the developing country. We will analyze how TNCs in developing countries have “taken” and caused negative implications there and how TNCs have “given” and caused positive implications there, first from the economic viewpoint, subsequently from the social viewpoint.

From the economic perspective, in developing countries, transnational corporations are “givers” by injecting large amounts of inward foreign direct investment (FDI) into the country’s economy triggering a chain of positive effects. With TNCs investing in certain industries, demand for input to feed their systems of production increases, creating a multiplier effect in which local businesses are created to “feed” the overwhelming demand for supplies to fuel their production chains, creating employment opportunities at different levels of the value chain by giving birth to more job opportunities for the working population of the host country in these affiliated firms which supply raw inputs to the TNCs. While direct employment created by Minera Escondida in Chile was 2800 people in 2004, total employment, including contractors and other induced employment, amounted to as much as 15000 people.  (Dietsche et al, 2007). The Obuasi mine in Ghana created some 30000 indirect jobs (World Bank 2006). Thus, the greater number of people employed raises the local income levels and hence increases purchasing power of the local population, increasing demand for goods and services, and finally causing more private-sector investment, leading to further development of certain industries, and so on. As such, this positive feedback cycle of economic growth that is triggered by the FDI of TNCs move on to cause the developing country’s economy to grow.   Therefore, by “giving” FDI to the economy of the host country, in the bigger picture, TNCs are “givers” that contribute to the economic growth of the developing country.

Yet, even though the TNCs function for profit, a substantial portion of the profits are frequently repatriated to the home country of the TNC. In 2004, although gross FDI inflow to Bangladesh from foreign TNCs stood at $541 million, the net inflow of FDI excluding profit repatriation by the TNCs in Bangladesh was -180 million Statistics Department of Bangladesh Bank. For Russian TNCs, by the end of 2002, only a third of the money invested abroad remained abroad. Therefore, ironically, the developing countries are unable neither to reap the benefits of much of the profits that are repatriated overseas nor to use them to further develop their industries. This is so even though these profits are often made through exploiting resources of the host country on their own country’s soil. In so doing, by “taking” a substantial portion of the profit from the host country, TNCs are “takers” that bring back most of the revenues and dividends made in the foreign, developing countries to, for instance, fund their own research and development programs back home rather than in the host country.

However, while profit repatriation might seem as an obvious reason that TNCs are “takers”, the chain of positive economic impacts that TNCs induce are tremendously more beneficial to the local economy, if we consider with greater foresight the long-term consequences. TNCs provide the pre-conditions for a rapidly growing economy by creating greater demand for local services and suppliers, triggering the self-sustained economic growth cycle which continues in a positive feedback loop as explained above. This is crucial in the long-term sustainable development of the country’s economy. It provides the developing countries with a path to industrialization, which brings the country to the “pre-conditions for takeoff” stage as postulated in Rostow’s Model of Development, leading developing countries which currently stand as traditional economies to gradually industrialized economies. The profit repatriation by the TNCs may seem unfavorable for the developing countries during the infant years of TNC entrance, with the host countries hardly reaping tangible benefits as they see TNCs send money back home. However, this would be negligible in the long run, as the triggering of a self-sustained cycle of economic development caused by local businesses thriving by “feeding” the TNCs is the intangibly important benefit which will fuel the fundamental development process responsible for a mature future economy. On the other hand, the profit repatriation will be significant for a shorter period temporally speaking before the country reaps massive benefits from the multiplier effects caused by the TNCs. Therefore, TNCs will, in the bigger picture; be more of “givers” rather than “takers”, economically speaking, from the developing country’s perspective.

To achieve the necessary resources to feed their mass production or extraction plants, TNCs in developing countries “take” resources originally belonging to the locals, whether in the form of land, or natural resources which are needed to sustain their livelihoods. In constructing the Kelian mine in Indonesia, Rio Tinto expropriated the land of the local villagers. This is compounded by the developing countries’ governments’ willingness in giving grants for TNCs to take these resources for economic benefits, as seen in the case of government support of Coca Cola in India. This will threaten locals’ livelihoods, giving stress and can creating problems like crime and suicides as locals find alternative means to relieve stress. Research in India has attributed steady number of suicides of Indian farmers amounting to 22000 in the past decade to the stress exerted on these farmers by the proliferation of TNCs in India (Johnson, 2011). Hence, this implies that TNCs are “takers”.

TNCs in developing countries “give” to these countries in the form of infrastructure development, whether to aid their profit-making processes or as social responsibility. For example, the Sakhalin-2 project, a large foreign-invested oil and gas extraction venture by ExxonMobil in the Russian Federation, required the improvement of roads, bridges, airports, seaports, public medical facilities, waste management, telecommunications and other forms of infrastructure in Sakhalin Island where such infrastructure was lacking. The Sakhalin-2 project alone involves a $390 million social infrastructure upgrade program. In Tanzania, there have been steady infrastructural developments in the Mwana region due to development of the Lake Victoria Goldfields by TNCs. Example of companies doing so for social responsibility is Freeport-MacMoRAN CopperGold which donated $61 million from 1996 to fund village infrastructure developments in Indonesia. Such “givings” of social infrastructure are important to developing countries’ development process where their inability to provide proper infrastructure is a roadblock to social stability and development, resulting in the proliferation of social problems such as lack of medical facilities.

However, it must be noted that the “givings” of infrastructure developments are far more significant than the “takings” of local resources by the TNCs if we look at the bigger picture. While the taking away of resources mainly affect the local community where the production plants are located (as in cases of ExxonMobil and Coca-Cola), the infrastructure development given by the TNCs benefits not only the local community where the production plants are situated, but also on a larger scale, the regional community. Firstly, TNCs would need to upgrade the infrastructure of the entire region for their own interests and to speed up production to maximize profits. The Sakthika-2 project in the Russian Federation mentioned above saw facilities like airports substantially upgraded. Infrastructure built by TNCs will directly benefit a greater range of people over a region, while resources taken by the TNCs directly cost only the locals within the immediate vicinity of the production plants. Also, given that infrastructure like airports are crucial in encouraging interaction and flows to and from the local place, in this fashion, the local area becomes more accessible and relevant in the globalized context, making the local community more attractive to other investors and triggering many more social benefits such as increased employment. Finally, if we may consider infrastructure development as a “giving” of “resources” by the TNCs, then TNCs give more resources than they take by inducing a net benefit socially as they contribute positively on a greater scale than they contribute negatively.

I disagree to the statement. I postulate that TNCs are more of “givers” than “takers”, both economically and socially. While we concede that in developing countries TNCs are both “givers” and “takers” to certain extents, from both the economic and social perspectives, TNCs are more of “givers” than “takers” from the developing coutnry’s perspective. Yet, the debate on whether TNCs are “givers” or “takers” pivot on the notion of conflict of interests between the TNCs and the developing countries, given that TNCs aim to maximize profits and host countries aim to reap benefits from TNCs. In this light, the developing countries and the TNCs must cooperate and arrive at a consensus both economically and socially and also on the government level and on the local level. Economically, governments must contend with the TNCs’ interests and their own. Governments of developing nations are faced with many dilemmas including the regulation of profit repatriation – this is exceptionally tricky given that lax regulations of this would attract TNCs, but high regulations of this would allow profits to stay in the developing country and in local currency. To mediate the profit repatriation by TNCs, governments may impose regulatory taxes or restrictions on profit repatriation and more. Socially, even though it is argued that TNCs “give” more than they “take”, it is the TNC’s social responsibility to establish a “social agreement” with the local community, by supporting the livelihoods of the locals who had their resources taken by the TNCs such that both the TNCs and the local community may co-exist harmoniously.

Some websites read:

Role of TNCs in economic development in developing countries

Impact of TNCs and profit repatriation

Sakhalin-1 and Sakhalin-2 Project by Exxon-Neftgas, subsidiary of ExxonMobil

Resopnsibility of MNCs in developing nations

Coca-Cola in India

World Investment Report: Transnational Corporations and Extractive Industries

Profit repatriation in Bangladesh 


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: