This paper explores the paradoxical relationship between MNE current strategies and economic development. There is evidence that positive developmental impacts of FDI flows are conditional on high levels of human capital and thus on the existence of ‘good’ infrastructure in recipient countries. In this paper we suggest that current MNE strategies have a negative impact on the development of infrastructure in LDCs. The justification for this argument arises from the low developmental impact of current FDI patterns and from rising costs of attracting increasingly footloose investment. The overall effect is to aggravate government financial constraints on the development of basic infrastructure. We develop propositions for future empirical research. We also consider implications for MNE strategy and argue that current MNE strategies are not only ineffective for delivering poverty reduction but that current strategies in developing countries do not necessarily serve the interest of MNEs either.
In recent years, several international business (IB) scholars have explored the issues around impact of MNE activities on economic development and poverty reduction. This is a significant development in the IB literature, and constitutes an extension of the domain of international business as a field of study. In the past, international business scholarship was not particularly concerned with the development issue, probably reflecting the notion that inquiries beyond the firm as unit of analysis are not in the domain of international business (Nehrt, Truitt, & Wright, 1970; Ricks, 1985). The more engaged stance of international business scholarship with the development issue (see e.g. Meyer, 2004 and Ramamurti, 2004) is in part a refection of the fact that the earlier optimism regarding FDI as ‘an engine of development’ (UNCTAD, 1992) has virtually evaporated and replaced with an arguably more realistic assessment. There is now a general realization that positive developmental impacts from FDI are not automatic. The realization of potential benefits from FDI is a challenging process at which relatively few countries have been successful (Dunning & Narula, 2004; Lall & Narula, 2004; Nunnenkamp, 2004; Nunnenkamp & Spatz, 2004; UNCTAD, 1999). The recent interest in poverty issues by a number of scholars can be seen in a broader context which is witnessing a more nuanced and critical evaluation of the development impact of MNEs in LDCs (Ghauri and Buckley, 2002 and Ghauri and Buckley, 2006; Ghauri & Cao, 2006; Kolk & van Tulder, 2006; London & Hart, 2004; O’Brien & Beamish, 2006; Yamin & Ghauri, 2004). The present paper seeks to add to this literature by focusing on the impact of current MNE strategies on the development of basic infrastructure in LDCs. The focus on infrastructure is highly apposite from a poverty reduction perspective (Datt & Ravallion, 1998; Fay, Leipziger, Wodon, & Yepes, 2005) and yet is neglected in the discussion of the MNE impacts on poverty reduction.
Our arguments regarding the impact of MNE strategies on LDCs can be summarized in the following Fig. 1. As the figure shows, we consider that impacts on infrastructure development are generated from the interaction between MNE strategies and host-country characteristics in terms of existing infrastructure. However, both MNE strategies and LDCs are affected by fundamental environmental changes that can rather roughly be described as ‘globalization’ (Dunning & Narula, 2004).6 The key dynamics of globalization include liberalization relating to trade and investment regulation, and technological advance, particularly in information and communication (ICT) technologies enabling, inter alia, production modularization and geographical flexibility. In our paper these forces have not been in the forefront of the analysis; we have concentrated on the effects of MNE strategies on infrastructure (see also footnote 6). However, as indicated in Fig. 1, MNE-related effects constraining the development of infrastructure can be magnified, as LDCs also face pressures emanating from the globalization dynamics which effectively reduce the policy ‘space’ available to their governments (UNCTAD, 2004).
