EXTERNAL INFLUENCES ON DEVELOPMENT
Multilateral Institutions
Multilateral Institutions
The road to development is complex, and it is difficult for the developing
countries to meet the challenges alone. The International Monetary Fund
(IMF) and World Bank are instrumental in the development process. The IMF
provides financial support for countries suffering severe balance-of-payments
problems, a group that includes most of the developing countries. As noted
earlier, this financial assistance, although multilateral, comes with strings at-
tached. Countries are often forced to make substantial and politically unpop-
ular concessions for IMF support. At times, countries have felt that IMF
financing entails too much loss of sovereignty.
The World Bank also provides financing to low-income developing
countries, especially in infrastructure development, such as transportation,
communications, and power. The World Bank tends to take a more active
role in helping countries modify their basic economic policies in return for
aid. Such changes would also bring the countries' policies more in line with the
one of the IMF
The Multinational Enterprise
In the 1970s numerous books and articles were published describing the im-
pact of the MNE on developing countries. MNEs were accused of causing a
variety of problems, including the destruction of the nation-state. This charge
seems unjustified for several reasons: (1) a shift in bargaining power toward
the nation-state; (2) a dispersion of multinationals to include home countries
other than the United States, thus eliminating the United States as the sole
source of economic influence; (3) the development of multinationals by de-
veloping countries themselves; (4) the emergence of more multinationals,
including a larger number of smaller, more flexible enterprises; and (5)
greater flexibility on the part of multinationals in adapting to local situa-
tions.30
One of these points deserves elaboration. The number of Third World
multinationals, usually based in the rapidly developing middle-income coun-
tries, has increased dramatically in recent years. These MNEs are located pri-
marily in three types of developing countries: resource-rich ones (such as
OPEC members); labor-rich and rapidly industrializing ones (such as Hong
Kong, Taiwan, and South Korea); and market-rich, rapidly industrializing
ones (such as Brazil, Mexico, and the Philippines).31 Hyundai Motor and
Goldstar are examples of two Korean MNEs. Governments in these countries
tend to be committed to international business activities. MNEs from the de-
veloping countries also tend to be more readily accepted in sister countries
since they are "part of the group" and are perceived to be less threatening
than MNEs from the industrialized countries.
A humorous description of the MNE appeared several years ago in the
Economist:
It fiddles its accounts. It avoids or evades its taxes. It rigs its intra-company
transfers prices. It is run by foreigners, from decision centers thousands of miles
away. It imports foreign labour practices. It doesn't import foreign labour prac-
tices. It underpays. It competes unfairly with local firms. It is in cahoots with
local firms. It exports jobs from rich countries. It is an instrument of rich coun-
tries' imperialism. The technologies it brings to the third world are too old fash-
ioned. No, they are too modern. It meddles. It bribes. Nobody can control it. It
wrecks balances of payments. It overturns economic policies. It plays off gov-
ernments against each other to get the biggest investment incentives. Won't it
please come and invest? Let it bloody well go home.32
Many developing countries are finding that they need to provide a better
climate for foreign investment in order to have access to the capital and tech-
nology of the industrial country MNEs as a key part of their industrial strat-
egy. For years, Mexico would not allow majority ownership for most new
investment, but the debt problems of the early 1980s caused them to pass
new legislation in order to attract more capital. They found that incurring
debt was not the best route, and as a result began, in 1984, to improve the
investment climate and restore the confidence of foreign investors in the
hopes of attracting more capital. In addition, in 1990, the Mexican govern-
ment entered into talks with the United States to establish a free-trade agree-
ment that would also include Canada and would become the largest trading
bloc in the world.
MNEs have a great deal to offer developing countries in terms of capital,
technology, managerial expertise, and access to world markets. As the oil
companies have learned, however, they need to be increasingly flexible about
the way profits are to be earned. As will be discussed in Chapter 15, licensing
agreements, production agreements, management contracts, and joint ven-
tures are sometimes taking the place of wholly owned direct investments. As
host countries improve their basic operating environments to attract invest-
ment and the MNEs adjust their operating strategies to these environments,
development will increase and profits will be earned.
Multilateral Institutions
The road to development is complex, and it is difficult for the developing
countries to meet the challenges alone. The International Monetary Fund
(IMF) and World Bank are instrumental in the development process. The IMF
provides financial support for countries suffering severe balance-of-payments
problems, a group that includes most of the developing countries. As noted
earlier, this financial assistance, although multilateral, comes with strings at-
tached. Countries are often forced to make substantial and politically unpop-
ular concessions for IMF support. At times, countries have felt that IMF
financing entails too much loss of sovereignty.
The World Bank also provides financing to low-income developing
countries, especially in infrastructure development, such as transportation,
communications, and power. The World Bank tends to take a more active
role in helping countries modify their basic economic policies in return for
aid. Such changes would also bring the countries' policies more in line with the
one of the IMF
The Multinational Enterprise
In the 1970s numerous books and articles were published describing the im-
pact of the MNE on developing countries. MNEs were accused of causing a
variety of problems, including the destruction of the nation-state. This charge
seems unjustified for several reasons: (1) a shift in bargaining power toward
the nation-state; (2) a dispersion of multinationals to include home countries
other than the United States, thus eliminating the United States as the sole
source of economic influence; (3) the development of multinationals by de-
veloping countries themselves; (4) the emergence of more multinationals,
including a larger number of smaller, more flexible enterprises; and (5)
greater flexibility on the part of multinationals in adapting to local situa-
tions.30
One of these points deserves elaboration. The number of Third World
multinationals, usually based in the rapidly developing middle-income coun-
tries, has increased dramatically in recent years. These MNEs are located pri-
marily in three types of developing countries: resource-rich ones (such as
OPEC members); labor-rich and rapidly industrializing ones (such as Hong
Kong, Taiwan, and South Korea); and market-rich, rapidly industrializing
ones (such as Brazil, Mexico, and the Philippines).31 Hyundai Motor and
Goldstar are examples of two Korean MNEs. Governments in these countries
tend to be committed to international business activities. MNEs from the de-
veloping countries also tend to be more readily accepted in sister countries
since they are "part of the group" and are perceived to be less threatening
than MNEs from the industrialized countries.
A humorous description of the MNE appeared several years ago in the
Economist:
It fiddles its accounts. It avoids or evades its taxes. It rigs its intra-company
transfers prices. It is run by foreigners, from decision centers thousands of miles
away. It imports foreign labour practices. It doesn't import foreign labour prac-
tices. It underpays. It competes unfairly with local firms. It is in cahoots with
local firms. It exports jobs from rich countries. It is an instrument of rich coun-
tries' imperialism. The technologies it brings to the third world are too old fash-
ioned. No, they are too modern. It meddles. It bribes. Nobody can control it. It
wrecks balances of payments. It overturns economic policies. It plays off gov-
ernments against each other to get the biggest investment incentives. Won't it
please come and invest? Let it bloody well go home.32
Many developing countries are finding that they need to provide a better
climate for foreign investment in order to have access to the capital and tech-
nology of the industrial country MNEs as a key part of their industrial strat-
egy. For years, Mexico would not allow majority ownership for most new
investment, but the debt problems of the early 1980s caused them to pass
new legislation in order to attract more capital. They found that incurring
debt was not the best route, and as a result began, in 1984, to improve the
investment climate and restore the confidence of foreign investors in the
hopes of attracting more capital. In addition, in 1990, the Mexican govern-
ment entered into talks with the United States to establish a free-trade agree-
ment that would also include Canada and would become the largest trading
bloc in the world.
MNEs have a great deal to offer developing countries in terms of capital,
technology, managerial expertise, and access to world markets. As the oil
companies have learned, however, they need to be increasingly flexible about
the way profits are to be earned. As will be discussed in Chapter 15, licensing
agreements, production agreements, management contracts, and joint ven-
tures are sometimes taking the place of wholly owned direct investments. As
host countries improve their basic operating environments to attract invest-
ment and the MNEs adjust their operating strategies to these environments,
development will increase and profits will be earned.
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