Cambridge International as and a level Economics Ebook

Virtuous cycle: 
the links between, for example, an increase 
in investment, increase in productivity, increase in income 
and increase in saving.
KEY TERM
259
Chapter 9: The macroeconomy 

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new ideas, can add to GDP and exports and may generate 
employment. In the Caribbean area, for example, the 
impact of FDI from MNCs has been substantial. It has 
been particularly signifi cant in the bauxite, alumina, 
petroleum and natural gas industries. Th
ere has also been 
considerable FDI in sugar, tourism and utilities. US MNCs 
especially have been investors in these businesses.
Not all MNCs are well-liked in the countries where they 
invest, for a number of reasons. MNCs may not create higher 
employment and higher incomes if they replace domestic 
fi rms, they may deplete non-renewable resources and may 
create pollution. Th
ey may also send most of their profi ts 
back to their home countries and may employ foreign rather 
than home labour, especially in the top-paid jobs. Some 
of the products they sell may not improve people’s living 
standards. For instance, faced with declining sales in their 
home markets, a number of European and US tobacco fi rms 
are now putting considerable time and eff ort into marketing 
their cigarettes in Asian and African economies. In addition, 
MNCs put pressure on governments to pursue policies that 
are benefi cial to them but not the economies in which they 
are producing. Th
eir mobility and considerable economic 
powers mean that they oft en negotiate favourable tax breaks 
and exemption from some environmental laws.
Progress and development: 
In debating the eff ects of 
MNCs on developing economies, the concepts of progress 
and development are significant. The presence of an MNC 
in a developing economy may or may not increase its 
economic growth rate and its eff ects on living standards 
may or may not be beneficial.
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Remember that while an MNC may pay lower wages in a 
host country than it pays in its country of origin, it may 
still benefit workers in the host country if it pays more 
than paid by domestic employers to similar workers.