The effect of large-scale foreign investments in developing countries remains an important open question. Despite their pervasiveness in the emerging world, the extent to which host economies benefit from these investment projects is widely debated. On the one hand, the extractive activities and exploitation of foreign companies may explain why some places remain persistently poorer than others. On the other hand, new technologies and capital injections associated with these firms can positively affect long-run growth. However, as it is challenging to estimate the effects of these firms on local development and follow their evolution over time, the empirical evidence remains scarce.
In a paper titled “Multinationals, Monopsony and Development: Evidence from the United Fruit Company”, Diana Van Patten (UCLA PhD student) and her co-author Esteban Méndez (Central Bank of Costa Rica) study the short- and long-run effects of large foreign investment projects on local economic development, using evidence from one of the largest multinationals of the 20th Century: The United Fruit Company (UFCo)—infamous American firm hosted by the so-called “Banana Republics”.
In Costa Rica, the firm was given a large land concession, where it was the only employer from 1899-1984. After collecting and digitizing over one hundred years of data, the authors document that the UFCo—which has been historically depicted as the poster child of an exploitative multinational—actually had a positive and persistent effect on local living standards in Costa Rica. For instance, households within former UFCo lands were 26% less likely to be poor than households in comparable locations while the company was still operating, and 43% of this income gap persisted 3 decades after the company’s exit.
Why were households within the former UFCo better-off? The authors find that a key driver of UFCo’s investment was that—although the firm was the only employer within the regions in which it operated—it had to compete to attract labor from other regions. Company reports explain the firm’s strategy to compete: To heavily invest in local amenities, like hospitals and schools, to attract workers and their families; a strategy that is then described as successful in later reports. This is consistent with spending per patient and per student in company hospitals and schools being significantly higher than spending in government-run institutions.
Finally, after estimating a theoretical model, the authors conclude that the sign and magnitude of the firm’s effect depends on the degree of labor mobility and on the outside options of local workers: If workers have low outside options, the firm does not have an incentive to invest to attract them, and actually decreases local welfare; while with high outside options, competition-induced investments can lead to long-run positive effects, like in the Costa Rican case.