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Role of multinational corporations (MNCs) in fostering economic growth in low-income countries

Question

The presence of multinational corporations (MNCs) in a low-income country always promotes economic growth in that country. Evaluate this statement. (20 marks)

Category:

Economic Growth and Development

CIE A Level October/November 2023

Preview Answer

• Transference of skills and knowledge: managerial and workshop.
Increased tax base giving opportunities to government to invest in the economy.
• Definitions of MNC and short term (actual) and long-term (potential) economic growth.
• Impact of foreign direct investment (FDI) on a country’s aggregate supply/PPF. Analysis may be in terms of the multiplier, the circular flow of income or AD/AS.
• The improvement of education and health and the promotion of long term growth AO3 Evaluation
• Evasion of enhanced legal limits in home country: environmental impact - FDI can be used to export ‘dirty’ industry and transfer negative externalities to another country. Evasion of home employment/health and safety laws which increase costs.
• Destruction of host country’s indigenous industry by large scale MNC production. Negative impact on employment exceeds benefit of MNC employment.
• The MNC may establish a local monopoly that exploits the consumers with higher prices and lower output.
• MNC may practice transfer pricing to remove profits from developing country to tax haven.
• The impact on macroeconomic aims of the government is analysed.
• The jobs created in the local environment may be low-skilled, with the multinational employing expatriate workers for the more senior and skilled roles

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