The Monopoly Power of Multinational Enterprises in the Service Sector of a Developing Country

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.