Multinationals and Development

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Some technical focus areas include transfer pricing, asset valuations and risk assessment. As a trusted development partner in this joint initiative, UNDP brings local knowledge, reach and scale to the table. It leverages field support, builds demand and political support for tax reform, ensures the initiative is embedded in national development strategies and informs national and international policy dialogues on broader international tax reform.

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What are the challenges for TIWB and the way forward? Two major themes emerged, managing potential conflicts of interest between stakeholders and looking beyond just the easily quantifiable tax revenue numbers. It is thus important for TIWB to strengthen its checks and balances and expand its impact measurement by veering its key indicators of success towards sustainable skills transfer, institution building and long-term change in tax compliance culture of the developing countries.

MNE tax avoidance remains a major concern for development. For more information, visit the Tax Inspectors Without Borders website.

The Rise of the New Multinationals

Home Blog Taxing multinationals is pivotal to finance development. Posted on December 13, Taxing multinationals is pivotal to finance development. Radha Kulkarni. Tax Inspectors Without Borders sends experienced auditors to Liberia and other developing countries to work side-by-side with local officials on complex audits. Filed under: Radha Kulkarni Effective development cooperation partnerships Development Effectiveness Blog post resource mobilisation Development Finance.

In the context of MNCs we often find the application of the efficiency wage theory.

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MNCs often pay higher than the market clearing wage even during recessions so that their efficient workers do not quit and join domestic firms. Most developing countries are labour surplus countries, due to population explosion. Some export-oriented units, set up with foreign capital, enables the home countries to earn foreign exchange which is a scarce resource in such countries. The profits and other increased incomes originating from the foreign direct investment projects are a source of new tax revenue for the host country.

Such revenues can be used for developmental projects.

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However, this is likely to happen when the tax measures are effectively implemented i. Furthermore, the host country has to spend the tax revenue wisely and should not impose too high a rate of tax on the foreign firm as this might cause the firm to leave the country by creating an incentive problem.

Multinational Corporations in Developing Countries | Economics Help

The foreign firm might enter an industry in which there is scope for more production and thus realisation of both economies of scale and economies of scope or returns within scale for at least two reasons:. Domestic firms might not be able to raise necessary capital to achieve the cost reductions associated with mass production.

Since the skills are among the scarcest resources in developing countries, a crucial bottleneck is broken when foreign capital brings in the much needed human capital in the form of skilled managers and technicians. With the arrival of a foreign firm, a domestic monopolist faces new competition. This forces the domestic firm to increase its output and to reduce its price in order to survive or remain competitive. Thus, international capital movement in the form of inflow of DFI through a foreign firm can act as an antitrust policy.

This implies that the commodity terms of trade i. Many FDI projects have a negative impact on the economic welfare of the host country. The main reason for this is the lack of competition in input and output markets in which the foreign firm operates. The foregone tax revenues are likely to be used for consumption rather than for saving.

Looked at from a different side, supplies of funds in the developing country may supply the much-needed financial capital to the foreign firm than to local enterprise because of perceived lower risk. This diversion of funds will make it difficult for the host country to use its limited capital in those areas which could be more valuable to its economy.

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With the inflow of FDI, a developing country receives foreign exchange. This improves the balance of payments. As a result, the currency of the host country appreciates in the foreign exchange market. However, when the foreign firm imports inputs or when it sends a major portion of its income to its home country, there is a pressure on the balance of payments of the host country.

As a result, the currency of the home country depreciates in value. Thus, the operation of a foreign firm introduces a certain degree of instability in the host country and makes it difficult for it to engage in long-term economic planning. Large foreign firms can exert enough economic-cum-political power in more ways than one.

It is under pressure from a foreign firm as far as formulations of economic policies are concerned. In this context, a quote from E. The operation of foreign firms in developing countries explains this very clearly. The foreign firm usually brings its own capital-intensive techniques into the host country.

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However, such techniques are not appropriate for a labour-abundant country. So, the foreign firm hires very few workers and displaces many others by forcing many domestic firms to close down their business. Thus, the presence of MNCs is a double blow to developing countries. The MNCs lead to deindustrialization and labour redundancy at the same time. They do not normally absorb the displaced local workers. Then the firm will exist as a monopolist, with all the abuses of monopoly.

Most MNCs reserve the jobs that require expertise and entrepreneurial skills for the head office in the home country. Jobs requiring low level of skills and ability are offered to workers of host country who are engaged in branch offices or subsidiary operations. Since the local workers and managers remain engaged in routine management operations, rather than creative decision making, they do not get an opportunity to acquire new skills and management techniques.

Ill-advised on the policies in both developed and developing countries are often the principal source of the disadvantages created by MNCs for both the governments of host countries and the MNCs themselves. It is not possible to make an overall assessment of the MNCs in the context of developing countries in terms of benefits and costs because these cannot always be quantified.