USING THE DEPENDENCY THEORY, EXPLAIN HOW FOREIGN DIRECT INVESTMENT BY MULTINATIONAL COOPERATIONS UDERMININE DEVELOPMENT IN DEVELOPING COUNTRIES

INTRODUCTION

Multinational corporations (MNCs) and foreign direct investment engage in very useful and morally defensible activities in Third World countries for which they frequently have received little credit. Significant among these activities is their extension of opportunities for earning higher incomes as well as the consumption of improved quality goods and services to people in poorer regions of the world. Instead, these firms have been misrepresented by ugly or fearful images by Marxists and “dependency theory” advocates. Because many of these firms originate in the industrialized countries, including the U.S., the U.K., Canada, Germany, France, and Italy, they have been viewed as instruments for the imposition of Western cultural values on Third World countries, rather than allies in their economic development. Thus, some proponents of these views urge the expulsion of these firms, while others less hostile have argued for their close supervision or regulation by Third World governments.

Incidents such as the improper use in the Third World of baby milk formula manufactured by Nestle, the gas leak from a Union Carbide plant in Bhopal, India, and the alleged involvement of foreign firms in the overthrow of President Allende of Chile have been used to perpetuate the ugly image of MNCs. The fact that some MNCs command assets worth more than the national income of their host countries also reinforces their fearful image. And indeed, there is evidence that some MNCs have paid bribes to government officials in order to get around obstacles erected against profitable operations of their enterprises.

Several governments, especially in Latin America and Africa, have been receptive to the negative images and have adopted hostile policies towards MNCs. However, a careful examination of the nature of MNCs and their operations in the Third World reveals a positive image of them, especially as the allies in the development process of these countries. For the greater well-being of the majority of the world’s poor who live in the Third World, it is important that the positive contributions of these firms to their economies become more widely known. Even as MNCs may be motivated primarily by profits to invest in the Third World, the morality of their activities in improving the material lives of many in these countries should not be obscured through misperceptions. This paper tries to use the dependency theory to explain how foreign direct investment undermine development in developing countries.

CONCEPTUAL CLARIFICATION

Dependency theory

Dependency theory has no universal accepted meaning. However, the study will limit itself to some definitions by some scholars. In the words of Osvaldo (1969), dependency theory can be defined as “economic development of a state in terms of the external influences-political, economic, and cultural on the national development policies. Dos Santos (1971) asserts that dependency is a historical condition which shapes a certain structure of the world economy such that it favours some countries to the detriment of others and limit the development possibilities of the subordinate economics. It can also be defined as a situation in which the economy of a certain group of countries is conditioned by the development and expansion of another country which their own is subjected.

Foreign Direct Investment (FDI)

Investopedia (2014) defined foreign direct investment as an investment by company or entity based in one country, into a company or entity based in another country. OECDi Library defined FDI as cross-border investment by a resident entity in one country with the objective of obtaining a lasting interest in an enterprise resident in another country. The lasting interest implies the existence of long-term relationship between the direct investor and the enterprise and a significant degree of influence by the direct investor on the management of the enterprise. Foreign direct investment is the acquisition of foreign assets by investment capital in affiliate or subsidiary firms.

Multinational Corporations (MNCs)

Multinational corporations are organizations that own and control production or services facilities in one or more countries other than their home country (Wikipedia 2014). Business dictionary defines Multinational corporations as an enterprise operating in several countries but managed from one (home) country. Generally, any company or group that derives its revenues from operations outside of its home country is considered a multinational corporation. Multinational Corporation has its headquarters in one country, and operates wholly or partially owned subsidiaries in other countries. Its subsidiaries report to the corporation’s central headquarters

Developing countries

Developing countries are also called less developed countries (LDCs), third world countries (TWCs). No single definition of developing countries has been recognized internationally. However they are general terms used to describe nations with low level of material well-being. It can be defined as a country that is considered lacking in terms of its economy, infrastructure and industrial base Investopedia (2014). Wikipedia defines developing countries as nations that have not achieved a significant degree of industrialization relative to their populations, and have in most cases, a medium to low standard of living with a low income and high population growth.

DEPENDENCY THEORY

       The dependency theory is rooted in the Marxist thought. It is a theory that addressed the real cause of underdevelopment in the third world. The theory is divided into two groups: the Activist and the Theorist group. The former comprises AmicalCarbal, Frantz Fanon, Fidel Castro etc. and the later comprises Walter Rodney, Claude Ake, Gunder Frank, Paul Barron etc. In this theory, they found it necessary to incorporate history in its analysis. The theory argued that the present cannot be explained adequately without the knowledge of the past. Thus, the present state of underdevelopment in the Third World cannot be adequately explained without knowledge of what transpired in the past. Akwen (2011)

        However, dependency theory is the notion that resources flow from a periphery of poor and underdeveloped state to a core of wealthy states, enriching the core states at the expense of the periphery. It is a central contention of dependency theory that the poor states are impoverished and the rich ones are enriched by the way poor states are integrated into the world system (Wikipedia). The theory arose as a reaction to modernization theory which held that all societies progress through similar stages of development, that today’s underdeveloped areas are thus in a similar situation to that of today’s developed areas sometime in the past, and that therefore, the task in helping the underdeveloped areas out of poverty is to accelerate them along this supposed common path of development, by various means such as investment, technology transfer, and closer integration into the world market. Dependency theory rejected this view, arguing that developed countries are not merely primitive versions of developed countries, but have unique features and structures of their own, and importantly, are in the situation of being the weaker members in the world market economy

         The basic assumptions of dependency theory include the following:

·         The theory posits that third world countries should embark on programs of import substitution so they don’t have to purchase the manufacture products from the advanced countries.( Ferraro 2008)

·         Dependency theorists consider international capitalism as the motive force behind dependency relationships. In other words, third world countries provide natural resources, cheap labour, destination for obsolete technology and markets for developed nations, without which the developed nations could not have the standard of living they enjoy. Akwen (2011)

·         Wealthy nations actively perpetuate a state of dependence by various means. This influence may be multifaceted, involving economics, media control, politics, banking and finance, education, culture and sport.

·         The theory argues that underdevelopment is not a stage but a process through which countries reach development goals and also, foreign assistance is never free, it has some conditionalities attached that helps deepen underdevelopment.

HOW FOREIGN DIRECT INVESTMENT BY MNCs AFFECT THE DEVELOPMENT OF DEVELOPING NATIONS

The dependency argument and its successors, modern adaptations of the Marxist exploitation claims, emphasize the mechanisms through which the international capitalist order distorts the economies of developing countries (Gilpin 1987, 273). This system allegedly allows advanced countries to transfer economic surplus away from less advanced countries through international trade and investment. Unequal exchange through trade, an expression coined by Emmanuel (1972), perpetuates underdevelopment in the periphery for it biases the terms of trade against the less developed countries. Empirical studies find that export dependence and a strong FDI presence contribute to lower economic growth and worse quality of life, including lower food supply, higher infant mortality, higher inequality, higher pollution, and reduced access to clean water, doctors, and education (Lee, Nielson and Alderson 2007). Furthermore, reliance on foreign capital from multinational corporations (MNCs) perpetuates the low status of developing countries in the world system hierarchy (Bornschier and Chase-Dunn 1985). As viewed by dependence theorists, FDI inflows to the periphery destruct local entrepreneurship, stifle technological innovation, crowd out domestic firms, increase unemployment, and strengthen the hosts‘ authoritarian regimes (Dixon and Boswell 1996;).

Wimberley and Bello (1992) claim that investment dependence has a very strong harmful effect on food consumption, even more detrimental than the impact of primary export dependence. MNC penetration reduces food security in the periphery host countries for several reasons (Wimberley and Bello 1992, 899). For one, FDI promotes luxury goods markets that decrease consumer demand. In addition, because of their use of capital-intensive production in labor-surplus environments, multinationals cause unemployment and underemployment. Finally, foreign investors cause immiseration by reproducing the core-periphery hierarchy, which is sustained through intra-firm transactions and the promotion of semi-proletarization.

UNCERTAINTY

There is much uncertainties associated with the operations of MNC. They are highly dynamic and therefore can simply close down their businesses in the foreign countries and move. This is especially likely with older plants which would need upgrading if the MNC were to remain or with plants that can be easily sold without much loss. If a country has a large foreign multinational sector within the economy, it will become very vulnerable and face great uncertainty in the long term. It may thus be force to offer the multinational perks in the form of grants, special tax relief and other concessions in order to persuade them to remain all of which are costly to the tax payers in the developing countries.

CONTROL
the fact that MNC can shift production locations not only gives them production advantages oreconomic flexibility, but it enables them to exert control over their host nations. This is particularly the case in many of the developing nations where MNCs are not only major employers but in many cases the principal wealth creators. Thus attempts by the host state, for example to improve workers safety and welfare or impose pollution controls may go against the interest of the MNCs. MNC might thus oppose such measures or even threaten to withdraw from the country if such measures are not modified or dropped, rendering those developing economies vulnerable to serious economic fluctuations and shocks.

             Also another form of control is interference in the politics of host contries were they invest capital. some of these multinational cooperation through direct foreign investment support military coup that will make policy that will favor their policy for example the alleged involvement of foreign firms in the overthrow of President Allende of Chile have been used to perpetuate the ugly image of MNCs.

Exploitation and profit making

According to the dependency theory MNCs are owned by shareholders who expect annual returns or dividends in compensation for funds they make available for the firm’s production and sales activities. It is to enable MNCs to pay such dividends that their managers seek out the most efficient workers for the wages they pay, buy materials at the cheapest costs possible, seek to produce in countries levying the lowest profit taxes, and sell in markets where they can earn the highest revenues after costs. (This is no different from anyone seeking employment at the highest wage for the least amount of tedium, the most congenial work environment and location, and the highest employment benefits states. Ahiakpor (1992)

But it is often argued that the wages in Third World countries are lower than those paid by MNCs in the more developed countries, and the working conditions are not of the same standard. However, the comparison misses several key points. For example, the skill or educational levels of workers in the Third World and those of the more developed countries are not the same. The amount of machinery and equipment handled by workers in the two locations are also different. In short, the amount of output generated by a worker in the Third World is typically smaller than that produced in the more developed world. Indeed, if MNCs could hire enough of higher skilled workers in the more developed countries at the wages workers are paid in the Third World, they would gladly do so. They would thus earn higher profits while selling their goods and services at lower prices. But the fact is that the voluntary exchange system in which MNCs operate would not permit them. Besides those working for charity, few others would for long accept wages they consider to be less than their contribution to an enterprise.Ahiakpor (1992)

The same explanation applies to wages paid by MNCs in the Third World. Unless workers find it most profitable to work for MNCs at the wages they offer, they would choose employment elsewhere. Similarly, unless MNCs can make as much profit as they can at home, as well as compensation for the additional risks taken to invest in the Third World, including the risk of asset confiscation by a hostile future government, they would not venture into those parts of the world. Thus, there have to be net benefits for both parties in a transaction (here workers and multinational corporations) for the transaction to take place, and on a continuous basis. The  MNCs are also  accuse for selling  inappropriate products to the third world countries and providing poor educational system

THEY CONIVE WITH COMPRADOR BOURGEOIS TO INVADE OR REDUCE TAX PAYMENT

Ahiakpor (1992)noted thatit may also be worthwhile to point out that research has not confirmed the frequent assertion that foreign firms, including MNCs, make excessive or higher profits per dollar invested than their local counterparts. On the contrary, private local firms on average earn higher rates of profits before taxes than foreign firms (as revealed by research in India, Brazil, Columbia, Guatemala, Ghana, and Kenya). And the simple explanation is that many Third World governments tax the profits of their local firms at a higher rate than they do those of foreign firms. Thus, the after-tax rates of profit are similar for foreign and private local firms in the Third World. Furthermore, new wealth created by any firm has to cover the wages, interest, equipment, and the rental costs of land and buildings incurred in production before profits are paid. And much of such payments stay within the host Third World economy.

ENVIRONMENT

Many MNCs are accused of simply investing in countries to gain access to natural resources, which are subsequently extracted in a way that is not sensitive to the environment. In the developing nations where there is the dire need for foreign direct investments, they are frequently prepared to allow MNCs to do this. We often put premium on the short run gains from the MNCs presence than on the long run depletion of precious natural resources or damage to the environment. Perhaps, we are a victim of this circumstance as a nation as far as the mining sector of the country is concerned. Governments in the developing world often have a very short run focus. They are concerned more with their political survival through the ballot box rather than the long term interest of their people.

Many of the benefits and costs of MNC investment that we have considered so far are most acutely felt in developing countries. The poorest countries in the world are most in need of investment and yet are most vulnerable to exploitation by multinationals and have the least power to resist it. There tend therefore to be a love-hate relationship between the peoples of the developing world and the giant corporations that are seen to be increasingly dominating their lives, from the spread of agro-business into the hinterlands through the ownership and control of plantations to international mining corporations, despoiling vast tracts of land from industrial giant manufacturing to international banks controlling the flow of finance, from international tour operators and hotels bringing the socially disruptive effects of affluent tourists from America, Europe etc, to the products of the rich industrialized countries fashioning consumer tastes and eroding traditional culture.

Although MNCs employ only a small proportion of the total labor force in the developing countries, they have a powerful effect on these countries’ economies. They also often exert considerable power and influence over political leaders and their policies and are frequently accused of meddling in politics in certain developing countries. It is easy to see the harmful social, environmental and economic effects of multinationals on developing countries and yet governments in these countries are so eager to attract overseas investment and to turn a blind eye on many of their excesses.

With particular reference to Ghana, our motherland, it is the sincere view of the writer that lessons from this will spur on the government to be on the guard to prevent cultural invasion and environmental abuse that are likely to surface in the course of producing Oil & Gas in the Western Region of the country. In negotiating and awarding oil and gas contracts, provision must be made to benefit more indigenous companies otherwise known as local content as this would be where most of our native workers will butter their bread either directly or indirectly. The government will be irresponsible to rush into concluding agreements with short term focus for the sake of political survival through the ballot box or certain individuals or group considerations rather than considering the long term interests of the nation.

POSITIVE IMPACT

Employment
Governments in the developing countries are always on the look-out to attract Foreign Direct Investment (FDI) and are prepared to put up considerable finance by making considerable concessions because of employment. MNCs investment constitutes a stimulus to economic activity and employment creation. The employment that MNCs create is both direct in the form of people employed in the new production facility and indirect through the impact that the MNC has on the local economy. The Ghanaian economy for example has benefited immensely with the influx of many mining, petroleum, banking and telecommunication companies like MTN, Vodafone, and Zain to mention but a few. This has accounted for an increase in the domestic incomes and expenditure and hence the stimulus in domestic business as lots of jobs had been created. The workers also gain

Taxation revenues

Taxation is also a plus in the operations of the MNCs for the domestic economy. MNCs and domestic producers are required to pay taxes and therefore contribute to the public finances. Giving the highly profitable nature of many MNCs, the level of tax revenue raised from this source is mostly significant. The host country’s balance of payment position is also likely to improve on a number of counts as a result of MNC investment. Firstly, the investment will represent a direct flow of capital into the country and secondly, in the long term, the MNC investment is likely to result in both import substitution and export promotion, for, goods previously purchased as imports could now be produced locally. Despite the gains, multinational investment may not always be beneficial either in the short or long term with particular reference to the developing world. It is possible that jobs created in one region of a host country by a new MNC with its superior technology and working practices may cause businesses to fold elsewhere and thus increase in the level of unemployment in those region. Profits repatriation which constitutes capital flight might effectively undermine many or all of the potential gains from multinational investment. In addition to these concerns, there are also the following problems;

CONCLUSION AND RECOMMENDATION

Accordingly, neo-Marxist theories (such as dependency) question such relationships and advocate for internal dependence or a regional dependency among countries. From historical accounts, lessons could be drawn from the new ways to confront cotemporary problems. Third world economies need of a progressive change and if such change could be achieved by economic relationships, she must not assume the dependent position if such relationships should exist. For example Nigeria, just like other Third world countries, is blessed with numerous natural resources which make her the envy of both Western countries and emerging nations. Besides, it was these natural resources which attracted colonial powers to her in the first place. Consequently, under international boundaries of bilateral and multi-lateral economic relationships, Nigeria could take the leading role and not revise the case; breaking away from neo-colonial controls which hold captive her economic development. Although some scholars advocate adoption of a socialist mode of production; where the Nigerian proletariat and peasantry would have the opportunity to control, exploit and utilize Nigeria’s domestic resources for genuine national development (Obasi, 2005) ,the answerwould be to perform whatever solution without Nigeria playing second fiddle.

The most fundamental element in the economic growth in a developing economy is trust in the existing political and economic system within the country, and the capacity for this system to provide an environment conducive for development. Building confident in the governing bodies, however, is a complex, deliberate and time consuming task, requiring the establishment of appropriate institutions and bodies to properly govern and provide order.The solution ought to be a loosening of restrictions on businesses so they may create more wealth and in the process facilitate the development of local enterprise and lessen the incidence of corruption in government.

REFERENCES

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