…Continued from FridayLast week, we discussed arguments in favour of foreign investments. Today, we will look at arguments against foreign investment.
Those who opposed to foreign private investment do so using both economic and philosophical reasons.
The economic reasons are in the form of rebutting the reasons given by those who advocate foreign private investment. They say:
Stifling local initiative: Though multinational corporations (MNCs) may bring in capital, their activities may inhibit local initiative to save money and invest. Quite often major corporations extract concessions from government privileges that are at the expense of local businesspeople. They may get concessions to import components for their factory from a branch situated in another country instead of encouraging local entrepreneurs to do that.
The MNC thinks in terms of boosting profits for the whole corporation and not just for a branch located in one country.
Drain on the nationÃ¢â‚¬â„¢s foreign reserves
To begin with, a foreign investor may indeed bring into the country the much-needed reserves. But later it orders components from abroad using the exchange that is available in the country from other sources such as export earnings.
The foreign reserves are further drained when the MNC repatriates (sends back) the capital by using the countryÃ¢â‚¬â„¢s foreign reserves; for this reason, the net reserves brought in by a foreign investor may not be as great as it seems at first.
Liberal tax concession and transfer pricing
Though MNCs when taxed contribute to government revenue, the contribution is weakened by the tax holidays they obtain from the government.
Before they launch their project, they usually demand from the government exemption from paying taxes on their earnings for the first years, for example, five years. In this way, the government is deprived of revenue from taxing the corporation.
Governments lose revenue on transfer pricing. This is the case when an MNC orders supplies from its own branch in another country. Usually, it inflates the cost of these supplies and then demands investment allowance on them. Some of the major firms persuade governments to put up tariffs to protect their products thereby raising prices to consumers.
Little impact. The management, entrepreneurial skills, ideas and technology and overseas contacts provided by an MNC may have little impact on the local people and may not be relevant to the needs of the country.
Some academics and philosophers have put forward more ideological reasons for casting doubts on the activities of the MNCs. These are some of the arguments:
Impact is uneven. It is noted that MNC reinforce dualistic economies. There is an active manufacturing sector with a poor agriculture sector. The MNCs encourage rural people to migrate to urban centres because the rural ones are neglected.
The manufacturers produce what meet the needs of a less sophisticated part of society while neglecting products needed by the majority of people.
Monopolistic of local resources. Through constant advertising, the MNC manages to create a dominant, monopolistic position in the market and prevents locally started small businesses from developing. The advertisements create consumption habits for luxuries instead of necessities.
Misallocation of local resources: Following the argument above, local resources are allocated to socially undesirable goods instead of the goods which enrich peopleÃ¢â‚¬â„¢s lives. This process aggravates the inequality between the rich.
Bad influence on governments: Because multinational corporations operate or can operate in a number of countries they often intimidate governments by threatening to close down and locate in another country if they are not given the privileges they demand such as tax holidays, excessive tariff protection, cheap provision of factory sites, tax rebates or drawbacks.
This phenomenon is known as Ã¢â‚¬Ëœrace to the bottomÃ¢â‚¬â„¢. Member countries of economic groupings like the Southern Africa Development Community (Sadc) should ensure MNCs do not try to force them into social harmful concessions using the Ã¢â‚¬Ëœrace to bottomÃ¢â‚¬â„¢ tactics.
Damaging host economies: Some of the MNCs adopt predatory tactics to drive out local entrepreneurs through excessive advertisements, preventing these budding entrepreneurs to have access to overseas suppliers. They do not want small businesses to grow and compete with them. They are like sharks that swallow the small fish.
Engaging in corruption: It is often said there is a lot of corruption in developing countries. They say ministers are corrupt, government officials are corrupt. Quite often the initiative is taken by the foreign investors who promises the public official Ã¢â‚¬Ëœa cutÃ¢â‚¬â„¢ if the government awards him the contract.
We will next time discuss how governments frame their policies to get the best out of complex situations like the ones described above.