7 (a) ‘Developing countries have low levels of productivity and a high dependency ratio.

’
Explain the meaning of these two characteristics and consider whether they are linked. [12]

The dependency ratio is an age-population ratio of those typically not in the labour force

(the dependent part) and those typically in the labour force (the productive part). It is
used to measure the pressure on productive population. In developing countries birth
rates are high, firstly, they have lack of education about contraceptives, this is used to
prevent from having a baby, hence as they have lack of knowledge this will lead to a
higher birth rate as less people knows about the absence of contraceptives. Secondly,
some developing countries have their religion beliefs as certain religions encourage
large families or its harmful to use contraceptives. These beliefs will causes a high
birthrate as people in the country are encourage to have more child or it is illegal to
prevent a baby from coming out. Thirdly, developing countries means that less women
will work and therefore, the will be less busy unlike the women from developed
countries. As they are less busy they will have time for producing a baby. Lastly, some
developing countries parents are hopeless about themselves, so they think that the
more children they have the more chance that one of their child will be successful in the
future and bring a high income to their family.
Productivity is commonly defined as a ratio between the output volume and the volume
of inputs. In other words, it measures how efficiently production inputs, such as labour
and capital, are being used in an economy to produce a given level of output. There is
low productivity in developing countries as there is low literacy or education rate, this
means that people will leave school at an early age and governments doesn’t make it
compulsory to attend universities. Moreover, lots of kids in rural areas or farms they
may not have access to good schools and remote areas might not have school, these
factors will lead a developing country to have a low productivity as they will not be hired
by firms. Low literacy will lead to a low productivity as people are not efficient I their
working ways as they may not know how to use the latest technology and may not have
information in the best working practices. Secondly, healthcare, lack of education in
developing country will lead to lack of doctors, this means that poor health care means
workers are often on sick leaves and may spend a lot of their time and money searching
for the best healthcare. Which means high absenteeism rate and lower productivity.
In conclusion, they are linked as a high dependency ratio means higher number of
people in the population are not working, or are dependent on the working class. When
they are not working productivity and output is less. There will be less goods and
services produced in the country leading to a lower GDP. However, developed countries
often have a lot of pension people , which contributes to the dependency ratio. On the
other hand, it doesn’t mean that productivity is less as the working population is still
efficiently and effectively producing goods and services, contributing to GDP and output.
(b) Assess the view that foreign direct investment remains the key to economic growth in developing
countries. [13]

A foreign direct investment is an investment in the form of a controlling ownership in a business

in one country by an entity based in another country. One can define economic growth as the
increase in the inflation-adjusted market value of the goods and services produced by an
economy over time. Economic growth can happen if there are. Developing
countries are countries with economies that have a low gross domestic product (GDP) per
capita and rely heavily on agriculture as the primary industry. 
Most common type of FDI that comes into a developing country is through multinational
companies. A multinational corporation is a corporate organization that owns or controls
production of goods or services in at least one country other than its home country. Multinational
companies are encouraged to set up their company at developing country as, firstly, in
developing country labour or workers can be hired cheaply as there is a low minimum wage rate
there. Hence, they can benefit from the low wage rate as cost od production will be cheaper and
they will earn more revenue. Secondly, lower tax rates, this is the main factor that causes
multinational to operate in developing countries as the government of the country will charge a
low amount of tax rates and hence, they can earn more disposable income. Thirdly, there will be
less competitors in the markets compared to developed countries. As there will be low
competitor multinational can be a monopoly in the developing country and higher chances that
consumers will buy their product as there is little amount of competitor. Lastly, in developing
countries there will be less bureaucracy this will be easier for multinational to operate as the law
that is implemented by the government are not really complicated compared to developed
countries which will be harder for multinational to set up and earn more profits, hence they
would rather operate in developing countries which has less bureaucracy.
By multinational companies operating in a developing countries, this will also benefit the
economy of developing country. These benefits are, in order for the multinational company to
produce goods and services they would need to hire labour or employees that could work for
them. By hiring these employees this will then benefit the country as they will have an increase
in employment rate. Secondly, multinational companies will offer a wide variety of goods and
services as they will be producing them, this will then lead to an increase in consumer choice as
well as their standards of living. This happens as citizens in the developing country will get jobs
and consumers are able to have more choices on goods and services, therefore they will have
an increase in standards of living. Thirdly, as more output will be produced by the multinational
this will then increase the GDP of the country and this will then lead to a higher economic
growth for the country. Fourthly, as multinational operates in the developing country they would
need to pay taxes to the government as they earn income. Therefore, this will lead to a higher
tax revenue for the government which they could spend on infrastructure and provision of public
goods in the economy. Fifthly, it brings knowledge, technology and equipment to the country,
this can be used/learned by local businesses to improve their own production technique, leading
to efficiency. This will then allow them to compete with larger businesses or even multinational
companies. Lastly, if the multinational company exports their products to overseas markets or
sells it locally, developing countries will then have a BOP surplus as the exports will be higher
than their imports. In addition, FDI’s can also be in the form of share purchase, property
purchase or any investments made by a foreigner, FDI will improve our capital account which
will lead to BOP surplus.
However, here are also several drawbacks that multinational companies can cause by operating
their businesses in developing countries. Firstly, depletion of natural resources, pollution and
social cost. As multinational companies operate in a developing country they will cause all these
problems, because in order to build their company in the country they will need raw materials,
such as woods, metal and etc. Workers will also need to build the company by using
transportation or equipment that will cause social cost or pollution, in order to move the
materials from one place or another and also construct the building. Therefore, this will create
social cost to the country and it will also disturb the surrounding environment as there will be a
lot of sound and also air pollution. Secondly, multinational companies exploit local workers. This
is because multinational companies will need to pay higher wages to workers in developed
countries, but in developing countries they will then pay less wages as there will be less
minimum wage and the economy of the country is not developed yet, so the cost of labour in the
country will then be cheaper compared to developed countries. Lastly, multinational companies
will send money back to the original country, so they will not spend their money on the
developing country. This is a drawback for the developing country as they will not receive a
higher tax revenue if multinationals don’t spend it on locally produced goods. Therefore, this will
not be beneficial for the economy as consumers will be spending their disposable income on
their goods and services, but the money that the multinational company earns will be sent to the
home country. This will then allow a developed country to be more developed or richer, but it
doesn't help the developing country. 

In addition, there are other forms of investments or growth such as technology, export led
growth, improving labor productivity and allow more immigration. Firstly, technology allows
movement capital good, advanced machinery and technology from developed countries.
Secondly, export led growth is by exporting raw / agricultural materials which have a
comparative advantage. The demand for these products is usually irrational. It is not affected
by currency fluctuations. Another growth strategy through exports is to sell goods with abundant
natural resources in developing countries. For example: petroleum. Thirdly, Increase labor
productivity through education and training. This will improve the quality of goods produced
domestically, which will lead to efficiency in production. Hence, it will create a higher GDP for
the economy and more economic growth in the country.
In conclusion, multinational companies are good because they provide an inflow of capital which
helps to finance a current account deficit. Multinational corporations also provide employment.
Multinational firms may help improve infrastructure.Workers to work in developing countries,
new ideas and entrepreneurship may enter, leading to higher GDP and economic growth.
However, they may cause greater pollution in the country, exploiting natural resources and
giving low wages. It is crucial for multinational companies to set up in developing countries not
only in terms of economic growth, but also to allow a wider variety of goods and services,
technological advancements, better business practices, and to overall increase the SOL and
QOL of citizens in developing countries. Use an example (like Honda, Volkswagen) are foreign
multinational companies that produce cars and automobiles in Indonesia. Without these
multinational companies setting up here, Indonesians will only be reliant to Astra and have very
few selections of safe and good cars.