THE EFFECTS OF MULTINATIONAL ENTERPRISES INVESTMENT IN THE NONTRADED SECTOR OF DEVELOPING ECONOMIES

This paper draws attention to the implications of multinational enterprises (MNEs) investment in the nontraded sector of a developing host country when their investment is characterized by the transmission of superior technology, but also draws on the local capital market to secure factors of production. In a simple general equilibrium model, we show that once the MNEs control the nontraded sector, their activities generate disturbing results for the host country¡¯s economy. In particular, the host country may experience reduced total employment and real national income as a result of their investment. The cause for such unsettling outcomes is directly related to the MNEs utilization of their sector-specific stock of knowledge-based assets in the production of nontraded goods.