The dependency theory is a criticism of the classical theory. It does focus on an entirely different meaning of economic development. It redefines development as requiring not wealth transfer to the host state, but the development of the people of a state as a whole.

It is popular among Latin American economists. The proponents of the dependency theory analyze that multinational corporations have their headquarters in developed countries and the branches they establish in developing countries work in the interest of their parent companies and their shareholders. Hence, development becomes impossible in developing countries since their economy is subservient/dependent to the developed countries. Thus, they propose that indigenization measures and efforts be made to control foreign investment. because Attempts to permit foreign investments through joint ventures are seen as a failure and the foreign investor defeated it through his/her alliance with the elite in the host state. According to the dependency theory, foreign investment is a way for developed countries to gain power in developing countries. It influenced many nationalizations of foreign direct investment.

For example, nationalizations in Peru, Jamaica, and Chile were the results of such a theory. Further, it influences the restructuring of the economy by deriving out foreign investment and providing policy justifications for such restructuring. According to this view, there cannot be development until the people as a whole are free from poverty and exploitation. Development becomes a right of the people rather than that of the state.

For More please read Joho H. Barton and Bart S. Fisher, International Trade and Investment: Regulating International Business, Little, Brown and Company,1986, p. 28

QUESTIONS

1) Dependency theory is a criticism of classical theory on foreign investment. Discuss.

2) Cite examples where the dependency theory was applied.

3) Cite examples where the dependency theory is popular and explain its importance.