ChainWhat it assumes · how to break it
Start
A multinational opens a garment or electronics factory in a low-income economy that relies mainly on agriculture.
1
As a result, the multinational hires local workers directly to build and staff the plant, since labour is a derived demand.
derived demand
derived demand
Assumes: The multinational recruits locally rather than bringing in its own staff.
But: Managerial and technical posts are often filled by expatriates, and a highly automated plant may employ few workers.
2
This means workers move from low-productivity farming into manufacturing, where output per worker and wages are higher.
structural change · Lewis model
structural change · Lewis model
Best link to attack
Assumes: There is surplus labour in agriculture that can move without farm output falling.
Assumes: There is surplus labour in agriculture that can move without farm output falling.
But: If farming still needs the labour, or workers lack the skills and cannot move to where the factories are, the shift is slow.
3
As a result, the share of manufacturing in GDP and employment rises and the share of agriculture falls.
primary · secondary sector
primary · secondary sector
Assumes: The new plants are large relative to the economy.
But: In a large economy a few plants make little difference to the overall structure.
4
Therefore, the economy becomes less dependent on a narrow range of primary exports, so it is less exposed to swings in commodity prices.
diversification · primary product dependency
diversification · primary product dependency
Assumes: The manufactured goods are exported or replace imports.
But: If the country specialises in one type of assembly for one multinational, it has swapped one form of dependency for another.
End
The structure of the economy shifts from agriculture towards manufacturing, and the export base becomes more diversified.
Evaluation chain
- E1However, the shift out of agriculture depends on there being surplus labour that can move into factory jobs.
- E2If workers lack basic education, or the factories are far from rural areas, few farm workers can take the new jobs.
- E3As a result, the plant draws its workers from the towns and the agricultural workforce changes little.
- E4So FDI changes the structure of the economy slowly unless it is backed by investment in education and transport that lets labour move between sectors.
Another way to attack it: The multinational may stay an enclave with few links to the rest of the economy, so structural change is confined to export zones while most people stay in farming.
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Questions this answers
- Assess the impact of FDI on the structure of a developing economy.
- Discuss whether attracting multinationals is the best way for a country to reduce its reliance on primary products.
- Explain how inward investment could lead to structural change in an economy.
Diagram
The Lewis two-sector model, or a PPF showing more manufactured goods and fewer agricultural goods. Data on sector shares of GDP and employment make good evidence.
Reverse and related
Multinational withdraws → manufacturing jobs lost and workers drift back to agriculture or the informal sector.