Immiserisation and the Emergence of Multinational Firms in a Less Developed Country: A General Equilibrium Analysis

This paper investigates the resource allocational implications of the expansion of the multinational firm sector within a less developed country. Because many of the questions raised with respect to this type of investment can only be dealt with in a general equilibrium framework, i.e. by considering the effect on aggregate employment and national income, a general equilibrium model is developed that captures the unique features of that type of investment within a less developed economy. In particular, an X-efficiency factor enters the multinational firm production function to capture managerial, technological, or other advantages possessed by the multinationals. Our principal results are that the expansion of the multinational firm sector can lead to immiserisation and that a non-wage income tax can be used both to mitigate the effects of the multinationals and to compensate for existing factor market distortions present within a less developed country.