International Trade and Finance: A North American Perspective

By Khosrow Fatemi | Go to book overview

VII
MULTINATIONAL CORPORATIONS AND FOREIGN DIRECT INVESTMENT

Both multinational corporations (MNCs) and foreign direct investment (FDI) are part of the deep-rooted controversies of the international economic scene, particularly those pertaining to the developing countries. The MNCs and FDI have been simultaneously credited for the development of some LDCs and blamed for the poverty of others. The multinationals have been praised for helping host developing countries in their attempts to break the vicious cycle of underdevelopment, and overcome the problems of lack of capital, scarcity of technology, and even shortage of trained professionals. On the other hand, the MNCs have been accused of exploitation of host countries' natural resources, underpaying their workers, and selling them, at high cost, obsolete technology.

Traditionally, studies of MNCs, particularly those dealing with international political economy, have centered around investment or involvement by large (usually U.S.) MNCs in the developing countries. Both trends are changing. The growth of European, Japanese, and, in recent years, newly industrialized countries, has paved the way for an influx of a large number of MNCs from these countries. Furthermore, FDI, once an exclusive prerogative of large companies, has become an appealing option for medium-sized and even smaller firms. Two of the three chapters in Part Seven reflect this new trend. In Chapter 13, B. Nino Kumar discusses the findings of his survey of investment behavior of small and medium-sized German firms in the United States.

In Chapter 14, Zewdineh Assefa analyzes the findings of his preliminary study of the financial implications of local borrowing by foreign investors in host developing countries. The author uses regression analysis to study the data collected for selected countries categorized by income level. His conclusions suggest that even though foreign direct investors do borrow locally, there is no crowding out effect on local borrowers. Instead the supply of credit seems to expand to accommodate all borrowers. As a consequence, he concludes production in these countries is positively affected.

Finally, in Chapter 15, Theologos Homer Bonitsis discusses his findings of a study of the impact of foreign aid on economic development in selected South American countries. Methodologically, he uses a dynamic bivariate distributed lag test of causal ordering proposed by C. W. Granger to test the effect of economic aid flows on the recent economic development of ten Latin American countries for roughly the historical period 1952-80. His findings indicate that for many of the countries, aid flows had a noncontemporaneous and statistically significant effect on their development experience. He concludes, however, that the sign of causal ordering is not always the positive one predicted by the aid-cum-development hypothesis.

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