THE MONOPOLY POWER OF MULTINATIONAL ENTERPRISES IN THE SERVICE SECTOR OF A DEVELOPING COUNTRY

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THE MONOPOLY POWER OF MULTINATIONAL ENTERPRISES IN THE SERVICE SECTOR OF A DEVELOPING COUNTRY Powered By Docstoc
					          THE MONOPOLY POWER OF
      MULTINATIONAL ENTERPRISES IN THE
       SERVICE SECTOR OF A DEVELOPING
                  COUNTRY
                                        Abera Gelan*
                          University of Wisconsin-Milwaukee, USA


ABSTRACT

This paper draws attention to the implications of the foreign direct investment (FDI) in the presence
of monopoly power of multinational enterprises (MNEs) in the industries that are natural
monopolies of a developing host country. We also take into account the MNEs’ behavior that relies
on the local capital market in order to finance their FDI. In a simple general model, we show that
these firms use their advanced technology to lure local resources to the industries under their
control away from the industries under the control of indigenous firms. As a result, the MNEs are
likely to prosper from their activities at the expense of indigenous firms. This reduces employment
and leads to a fall in real national income of the host country. It is further shown that a long-run
expansion of the indigenous firms may be stalled by the monopoly power of MNEs which impedes
the allocative efficiency of relative price and hinders local resources from adjusting to factor
rewards.

JEL Classification: F10; F23; 010; 019
Keywords: Foreign Direct Investment, Knowledge-Based Assets, Monopoly Power, Multinational
Enterprises, Natural Monopolies, Nontraded Good
Corresponding Author’s Email Address: agelan@uwm.edu


INTRODUCTION

 In the last two decades, developing countries have taken unprecedented steps to privatize
and allow the foreign ownership of their normally public owned service sectors. As a
result, they have created unique opportunities for overseas investments and successfully
influenced the location decision of multinational enterprises (MNEs), which are the
architects of foreign direct investment (FDI). According to UNCTAD (2003) the flow of
FDI in the service sectors of less developed countries (LDCs) has surpassed all other FDI
flows in these countries.1
             One of the key objectives behind the liberalization of policies towards inward
MNEs investment by these countries is aimed at attracting foreign private capital
investment to their economies. The idea is rooted in the assumption that the growth in
FDI augments Economic growth by bringing in additional capital stock to the developing
countries. Many of these countries have taken uncritical faith in the virtue of this
assumption to attract the much needed capital investment and so embarked on a fresh
                                                                                          2


restructuring of their economies in order to create a hospitable environment for the
MNEs’ investments.
             By the same token, MNEs have their own interest in the newly privatized
service sectors as they hunt for overseas investments. First of all, developing countries
have served as lucrative markets for multinational service providers (UNCTAD 1996).
Second, the resolve of national governments to sustain market-facilitating policies,
particularly by implementing steadfast procedures, has not only reduced the uncertainty
of investing in LDCs, but has also helped to increase their active participation. Third,
many services are difficult to trade. Hence, it is desirable for foreign firms to be based
inside LDCs to serve the local markets. Fourth, the opening up of local-public-owned
service sectors for non-reside
				
DOCUMENT INFO
Description: This paper draws attention to the implications of the foreign direct investment (FDI) in the presence of monopoly power of multinational enterprises (MNEs) in the industries that are natural monopolies of a developing host country. We also take into account the MNEs' behavior that relies on the local capital market in order to finance their FDI. In a simple general model, we show that these firms use their advanced technology to lure local resources to the industries under their control away from the industries under the control of indigenous firms. As a result, the MNEs are likely to prosper from their activities at the expense of indigenous firms. This reduces employment and leads to a fall in real national income of the host country. It is further shown that a long-run expansion of the indigenous firms may be stalled by the monopoly power of MNEs which impedes the allocative efficiency of relative price and hinders local resources from adjusting to factor rewards. [PUBLICATION ABSTRACT]
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