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Can Multinationals Have a Positive Local Impact?

In this article published on the Yale Insights website, the author investigates whether multinationals have a positive local impact if they face enough labor competition. This is supported by research co-authored by Yale SOM’s Diana Van Patten on the United Fruit Company, which existed in the twentieth century. The study looked at the company’s presence in Costa Rica and discovered that in some places, competition for workers prompted it to invest in local infrastructure, which had a long-term positive impact.

According to the article, the United Fruit Business’s political techniques were infamous in the twentieth century, which is why the company became most strongly identified with the term (and political arrangement) “banana republic.” According to the story, the corporation had a poor image across Latin America, but it was a more beneficial force in Costa Rica, where it invested heavily in local amenities. Van Patten argues in a recent article co-authored with Esteban Méndez-Chacón of the Central Bank of Costa Rica that neighboring labor competition and employees’ flexibility to migrate between occupations play a critical role in determining how favorable a corporation like the United Fruit Company’s development impact will be. According to the article, the UFCo grew swiftly in Costa Rica, employing around seven percent of the working force by 1950. As the company’s plantations expanded, it established campgrounds on its land for farmers and their families. UFCo ultimately managed commissaries, schools, power plants, sewage systems, hospitals, and recreational amenities within these camps. As a consequence, the research found that residents in the former UFCo region had superior living conditions to those in neighboring regions in terms of housing quality, cleanliness, education, and consumption capacity. The researchers reviewed UFCo shareholder papers to better understand the reasons for the disparities in living standards. The researchers found that its management made obvious references to the necessity to spend on facilities to attract workers in the reports. These investments were more likely to be undertaken in areas where UFCo employees had alternative job opportunities nearby. Hence, the researchers concluded that multinationals have a positive local impact while adhering to the condition that they face enough competition for labor.

The study’s result implies that with labor market competition, the multinationals have a positive local impact and a fair economic impact; however, in another context with limited labor mobility, bringing the company in may not be a no-brainer, since it may reduce local welfare.

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