Strategic Trade Policy and the Multinational Enterprise in Developing Countries

Abstract

A recent paper by Wells and Encarnation (1986) examines a number of investments by multinational firms in one developing country from a social cost/benefit point of view, and concludes that a sizeable percentage of these impart net negative benefits to the local economy. The sectors in which these investment undertakings were made generally benefited from high levels of protection from imports of substitutes for the final output of the undertakings. The authors conclude that the major reason for the outcome is that the scale of the undertakings is sub-optimal, resulting in average costs of production of output substantially above the landed price of imported substitutes.