When transnational corporations introduce into a host developing country a package of resources and capabilities which they own or control, the impact may be such as to retard the development process. Foreign capital may divert profits into unjustifiably large outflows of dividends and service payments to the corporate headquarters. New technology and machine-intensive processes may not always be appropriate for local needs such as employment creation. Managerial and marketing decisions may divert resources from where they are most needed to where they are most profitably sold. Transnational corporations may serve as carriers of modernization, or they may place the host countries in a situation of even greater dependency. At the same time, increased competition among a few giant global firms, especially if they are free to use whatever unfair practices and restrictive business practices they wish on international markets, will inevitably eliminate new entrants, in particular smaller emerging firms from developing countries.
The extraction of natural resources may generate few processing industries or do little to raise the level of local skills. Branch plants which operate purely as off-shoots of their parent companies, such as component manufacturers, are unlikely to integrate fully into the local economy. The attempts of host countries to raise taxes or to place limitations on foreign exchange remittances can be negated by vertically or horizontally integrated multinational corporations through transfer pricing and the use of tax havens. The negative non-economic impact may also be important. The very cultural identity and the entire social fabric may be at stake, especially if transnational corporations attempt to transplant their own models of social development to the host country.
Foreign capital augments the resources of the host country and relieves bottle-necks in foreign exchange. New technology improves the utilization of resources. Managerial and marketing skills enhance productivity and the availability of goods. Access is provided to the capital, technology, skills and markets of the global network of the corporation and employment is created.