This paper will begin by presenting concrete glimpse in the history of multinational corporations and explaining its definition and nature. It will then explore the motives for establishing multinational corporations (MNCs) in other countries as well as its manner of entry into the new markets. Concerns about MNCs, the benefits derived by the host governments and individuals from it, the criticisms on such benefits and the negative effects brought about by MNC to the host government will then be briefly discussed. It will be also argued whether MNCs are beneficial or not. Finally, this paper will look at the policies of the host governments towards MNCs and the issues concerning the two parties.
Introduction
Multinational corporations have existed since the beginning of overseas trade; thus it remained a part of the business scene throughout history. During the 17th and 18th centuries with the creation of large, monopolistic concerns, multinationals were viewed as agent of civilization and played a vital role in the commercial and industrial development of Asia, South America and Africa. (Eldrigde n.d.)
It retained its favorable image as agents of improved global relations through commercial ties by the end of the 19th century since advances in communications closely linked the world markets. However, the existence of close international trading relations did not prevent the occurrence of two world wars in the first half of twentieth century. But, after the period of conflict, an even more closely bound world economy emerged. (Eldrigde n.d.)
Multinational corporations have grown in power and visibility in recent years. Both governments and the consumers worldwide have come to viewed it more ambivalently. Indeed, multinationals today are viewed with more suspicion given its perceived lack of concern for the economic well-being of particular geographic regions and the public impression that multinationals are gaining power in relation to international trade federations and organizations, national government agencies and local, national and international labor organizations. However, as barriers to international trade continue to be removed; multinational corporations continue to expand its power and influence despite such concerns. (Eldrigde n.d.)
What is a Multinational Corporation?
Multinational corporations originated early in 20th century and proliferated after World War II. Typically, a multinational corporation develops new products in its native country and manufactures them abroad, often in Third World nations, thus gaining trade advantages and economies of labor and materials. Many smaller corporations became multinational, some of them in developing nations, during the last two decades of the 20th century. (The Columbia Electronic Encyclopedia 2003)
It is a business concern with operations in more than one country. The operations outside the company’s home country may be linked to the parent by merger, operated as subsidiaries or have considerable autonomy. (Eldrigde n.d.)
Furthermore, it has also manufacturing, sales and service subsidiaries in one or more foreign countries. MNCs is also known as transnational or international corporation. (The Columbia Electronic Encyclopedia 2003) All major multinational firms are either American or Japanese or Western European. Nike, Coca-Cola, Wal-Mart, AOL, Toshiba, Honda and BMW are examples of these multinational corporations. (Investopedia 2000)
MNCs had worldwide influence over other business entities and even over governments. In addition to approximately 250,000 overseas affiliates running cross-continental businesses, over 40,000 multinational corporations are currently operating in the global economy. The top 200 multinational corporations had combined sales of $7.1 trillion, which is equivalent to 28.3 percent of the world's gross domestic product in 1995. These MNCs having the capacity to shape global trade, production, and financial transactions are headquartered in the United States, Western Europe and Japan. (Eldrigde n.d.)
Motives for Establishing Multinational Corporations
There are motives why multinational corporations bring businesses and invest in other countries particularly in the Third World.
a. Desire for growth
A corporation may have reached a level of meeting domestic demands and anticipate little additional growth; thus, a new foreign market might provide opportunities for new growth. (West Encyclopedia of American Law 1998)
b. To escape the protectionist policies of an importing country
Through direct foreign investment, a corporation can bypass high tariffs that prevent its goods from being competitively priced. For example, when the European Common Market (the predecessor of the European Union) placed tariffs on goods produced by outsiders, U.S. corporations responded by setting up European subsidiaries. (West Encyclopedia of American Law 1998)
c. Preventing competition
The most certain method of preventing actual or potential competition from foreign businesses is to acquire those businesses. (West Encyclopedia of American Law 1998)
d. To reduce cost
Another motive for establishing subsidiaries in other nations is to reduce costs, mainly through the use of cheap foreign labor in developing countries. A multinational corporation can hold down costs by shifting some or all of its production facilities abroad. (West Encyclopedia of American Law 1998)
MNC holds that they create employment, create wealth, and improve technology in countries that are in dire need of such development. Critics, however, point to their inordinate political influence, their exploitation of developing nations, and the loss of jobs that result in the corporations' home countries.
Entry of Multinational Corporations into New Markets
Multinational corporations are able to penetrate new markets in a variety of ways, which allow existing concerns in the market to be accessed a varying degree of autonomy and control over operations. There are three general procedures such as merger with or direct acquisition of existing concerns, sequential market entry and joint ventures that are followed by MNCs in seeking access to new markets. (Eldrigde n.d.)
a. Merger or direct acquisition of existing companies
This is the most straightforward method of new market penetration employed by multinational corporations because it allows MNCs, especially the large one to take full advantage of the size and the economies of scale that it provides. This entry is also known as foreign direct investment. (Eldrigde n.d.)
b. Sequential market entry
It involves the establishment or acquisition of concerns operating in niche markets related to the parent company’s product lines in the new country of operation. Also, it includes foreign direct investment. (Eldrigde n.d.)
c. Creating joint ventures with firms already operating in the market
In this procedure, the venture partner in the market to be entered retained considerable or even complete autonomy while realizing the advantages of technology transfer and management as well as the production expertise from the parent concern. (Eldrigde n.d.)
However, the establishment of joint ventures proved to be awkward in the long run for MNC since its venture partner become formidable competitors especially when more direct penetration of the new market is attempted. (Eldrigde n.d.)
Concerns about Multinational Corporations
There is no doubt that MNC can bring economic success to the host country. However, labor organizations and government agencies worldwide as well as social welfare and environmental protection groups questions its motives and actions of establishing businesses to other nations. (Eldrigde n.d.)
National and international labor unions have expressed concern that multinational corporations in economically developed countries can avoid labor negotiations by simply moving their jobs to developing countries where labor costs are markedly less. (Eldrigde n.d.)
The labor organizations in developing countries also face the converse of the same problem since they are usually obliged to negotiate with the national subsidiary of the multinational corporation in their country, which is usually willing to negotiate contract terms only on the basis of domestic wage standards, which may be well below those in the parent company's country. (Eldrigde n.d.)
Social welfare organizations are similarly concerned about the actions of multinationals, which are presumably less interested in social matters in countries in which they maintain subsidiary operations. Environmental protection agencies on the other hand are concerns on the hazardous operations of MNC in countries with minimal environmental protection statutes. (Eldrigde n.d.)
Finally, government agencies fear the growing power of multinationals, which once again can use the threat of removing their operations from a country to secure favorable regulation and legislation. (Eldrigde n.d.)
All of these concerns are valid, and abuses have undoubtedly occurred, but many forces are also at work to keep multinational corporations from wielding unlimited power over even their own operations. (Eldrigde n.d.)
Benefits of Multinational Investment
A. To Host Nations and Governments
Access to Foreign Capital
Development of Resources
Technology and Productivity Improvement
Management and Marketing Skills
Revenue and Taxation
Diplomatic and Economic Alliances
Even if MNCs use financial power to impose unfavorable conditions or unfair terms on host nations particularly in the Third World, is not surprising that nations still compete to attract MNC investment because of such benefits. Governments offer MNCs attractive terms including tax holidays, low cost land for factories, concessions, advantageous depreciation and other incentives just for its investments. (Sherman 2001)
Acceleration in national development is the prize won by governments in granting these short-term advantages. Such multinational investment will not only provide benefits to the economy of the host nation but also to its political leadership. (Sherman 2001)
Access to capital, both equity and debt which not available to the host nation is bring by these multinational corporations. Multinational investment in natural resources permits the realization of income and value from hidden national assets such as oil, hydroelectric potential and other minerals. Technologies which are not normally available to the host nation are often utilized by these investments; thus national productivity is improved by access to the specialized machinery, modern tools and laborsaving equipment that MNCs use in its operations. (Sherman 2001)
The techniques of modern management to supervise and safeguard the investment such as planning and management system, personnel policies, safety training and other proven techniques to enhance efficiency and train local staff are also brought by these multinational investors. The investment of intellectual capital becomes part of the host nation’s business culture as employees move into and through the MNC organization. (Sherman 2001)
Finally, attracting MNC investment increases concrete benefits of political value to the nation’s leadership. The increased revenue and tax income in the long term even if deferred by tax holidays and temporary abatements are the most obvious in these benefits. Furthermore, MNC investments increase the host country’s diplomatic and economic stature since it provide the project materials, markets and capital to them. (Sherman 2001)
B. To Individuals
Employment and Jobs
Skills and Education
Entrepreneurial Opportunities
Consumer Products and Services
Modern Commercial Institutions
The benefits that MNC brings to the individual citizens of the host nation are visible. It creates work that did not previously exist. Workers are technically trained freely provided by MNCs. There are also supervisory and leadership content and potential for other positions; thus permitting local employees to achieve increased responsibility and compensation at rates more attractive than the local market provided previously. (Sherman 2001)
A new job created in local companies which provide goods and services to the MNC investor brings a very significant employment effect. Support enterprises develop around the new investment which provides construction, local transportation, food service, supplies, and other necessities create an important employment and income multiplier in the local economy. (Sherman 2001)
Inevitably, since the national and individual wealth increase, sellers of products seeking new markets are attracted. Demands for basic products that improve individual nutrition, health, communication and mobility are also created. Moreover, multinational investors bring new or improve products into the local markets, either directly through new factory investments or indirectly by import. (Sherman 2001)
Finally, since multinational investors required sophisticated banking, transportation and commercial services to support its operations, local firms are organized to provide these services. Sometimes other MNC also invest to support this valuable existing relationship. All other local companies and individuals also had the access to these improved useful services since it is offered at lower cost. (Sherman 2001)
Other Benefits
a. Multinational investment supplements domestic investment and leads to increased economic activity.
The past investment strongly influenced a country’s economic growth rate. Therefore, future output will be higher if the level of investment in a country is increased. (Roberts 1998)
b. Multinational investment provides host countries with much-needed foreign currency.
The initial flow of capital into the host country and the (presumed) increase in exports caused by the presence of multinationals have beneficial effects on the host country's balance of payments. The inflow of foreign exchange also helps to reduce balance of payments deficits and allows host countries to import more goods and services from abroad. (Roberts 1998)
c. Multinational companies and their subsidiaries frequently have very high profit margins, so they generate large amounts of tax revenue for host governments. (Roberts 1998)
d. Multinational companies bring with them a host of managerial skills, business knowledge and (most importantly) technological information which are of immense benefit to host countries. (Roberts 1998)
Criticisms on the these Benefits
a. Multinational investments may not raise the aggregate level of output in the host country since its main aim is to maximize its profit. Considering predatory pricing, combined with large grants and subsidies from the host governments, MNCs also often displace existing companies or prevent the emergence of new competitors because they can offer lower prices and higher wages than the indigenous competitors. MNC may also prevent the natural emergence or expansion of indigenous suppliers by buying intermediate products from overseas affiliates; thus profits that would otherwise have accrued to local entrepreneurs, and probably been reinvested locally, are instead repatriated abroad. Moreover, the host country becomes more dependent on multinational companies for employment and output. (Roberts 1998)
b. Because MNC desire to buy inputs from affiliates in other countries, it imports both inputs and capital equipment. Furthermore, it also sends back to its home countries the profit and royalties as well as the management fees and interest payments. Thus, it suggests a negative net effect on the host country’s balance of payment. (Roberts 1998)
c. Transfer pricing can be used by MNCs to switch their profits to countries with very low rates of corporation tax. Also, the corporation tax it paid is actually outweighed by the subsidies and grants it receives from the host governments aside from the generous tax succession and allowances. MNCs further reduce the host government’s revenues by displacing indigenous competitors. (Roberts 1998)
d. It is cheaper and easier to allow MNCs to "transfer" its technology by establishing subsidiaries, employing and training local people and forming linkages with the domestic economy. On the other hand, technological advancement would require vast amounts of research and development expenditure on the part of indigenous companies. (Roberts 1998)
Moreover, the multinational company's technical knowledge is often of little (external) benefit to the host economy. When technology is transferred to the host country, it is often inappropriate and incompatible to the needs of the host economy. The introduction of the labor-shedding technology to developing economies, also, can lead to increases in unemployment and deprivation. (Roberts 1998)
Negative Effects of MNCs’ Investments
a. Multinational companies change local consumption patterns.
Luxury goods that are produce in developing countries are sold locally. MNCs advertise its products in order to create demands. However, it is argued that these changes in demand patterns of host countries are the result of economic development and increased prosperity not of MNC activity, since multinational companies merely respond to changing demand patterns. (Roberts 1998)
b. Multinational companies lead to increased inequality and contribute to the development of urban slums in developing countries.
MNCs pay high wages relative to the host country average. Consequently, only small proportion of the population is on high income, while the rest struggle to earn a subsistence income. There is also an unbalanced compensation offering since the workers in the city are earning high wages compare to those in provinces and rural areas. Furthermore, since, multinational companies require host countries to finance part of its investments, it draw resources away from other areas, including agriculture, which can lead to increased unemployment. (Roberts 1998)
c. Multinational companies reduce the host country's sovereignty and economic independence.
Multinational often make decisions which affect the long term welfare of citizens in host countries, particularly about environmental matters. It often has no incentive to consult host governments about the use of non-renewable resources. Furthermore, multinationals often influence the political processes of host countries by using economic and fiscal aspects. (Roberts 1998)
Are MNCs Beneficial?
Multinational corporations’ investments have the potential to benefit the host countries since investments can lead to increased economic output and increased prosperity. Foreign investment, also, creates multipliers that will lead to the growth of domestic investment. However, since MNCs often prevent or displace indigenous enterprise, distort consumption patterns, and intensify inequality and other social problems in the host country, it is unclear in practice whether multinational corporations benefit the host economy. (Roberts 1998)
MNC’s Internationalization
The global expansion of multinational corporations has generated more controversy in the international political economy. Some consider these powerful corporations help to mankind, dominating the nation-state, diffusing technology and economic growth to developing countries and interlocking national economies into an expanding and beneficial interdependence. Others view MNCs as imperialistic predators, exploiting all for the sake of the corporate few while creating a web of political dependence and economic underdevelopments. (Kimep n.d)
The international operation of these corporations is consistent with liberalism. However, it is directly counter to the doctrine of economic nationalism and to the views of countries committed to socialism and state intervention in the economy. (Kimep n.d)
Both hopes and fears about MNCs are well founded since many multinational are extremely powerful institutions and possess resources far in excess of most of the member-states of the United Nations. These corporations have continued to grow in importance. (Kimep n.d)
The scope of operations and extent of the territory over which some multinational corporations range are more expansive geographically than any empire that has ever created. They have integrated the world economy more extensively than ever in the past, and they have taken global economic interdependence beyond the realms of trade and money into the area of industrial production. This internationalization of production impinges significantly on national economies. (Kimep n.d)
Host Government Policies Towards MNCs
Host governments adopt policies to encourage or discourage inward MNCs investments. Incentives such as financial and tax incentives as well as market preferences are offered. Restrictions on MNC activity are also regulated. These policies can severely distort economic activity and reduce the efficiency of international investment. Furthermore, gains arising from them tend to be at the expense of other countries. (Roberts 1998)
a. Incentives
There are number of incentives that a government can offer to multinational investors such as fiscal incentives, financial incentives and market preferences. (Roberts 1998)
Fiscal incentives include accelerated depreciation, investment and reinvestment allowances, tax reductions, and exemptions from import and export duties. Financial incentives, on the other hand, include grants, subsidies and loan guarantees; while market preferences include protection from import competition, preferential government contracts and monopoly rights. Governments also offer low-cost infrastructure. (Roberts 1998)
b. Restrictions
Host countries restrict multinational companies' activities in a number of ways. For cultural and national security reasons, governments often restrict the entry of MNC to certain sectors or they seek certain requirements to the firms operating in those sectors. Moreover, national governments also impose performance requirements on foreign firms operating in their territory. (Roberts 1998)
Traditionally, the most widespread performance requirements were trade related wherein governments can insist that MNCs must exported a minimum proportion of their output or sourced a minimum proportion of their inputs locally. They can also require that MNCs employ a minimum number of local workers, not to repatriate the profits excessively and to agree that MNC license its technology to indigenous firms. (Roberts 1998)
These requirements enable the host country to maximize the benefits of multinational investments since it reduces the efficiency of international investments. There is no reason for multilateral policy co-ordination in this area since one country's restrictions does not adversely affect any other country's welfare. (Roberts 1998)
Issues on MNCs and the Host Government
The relations of multinational corporations with the host government is the most controversial issue which undergone in the era of continuous debate. History is already filled with nationalization and expropriation. Many were associated with violent revolutionary changes in the government. Many, also, resulted in confiscations of assets without compensation. (Sherman 2001)
The quality and success of MNCs’ relationship with its host government is determined by the relative balance of power between these two parties. The balance is heavily weighted in favor of governments since it possesses sovereign power. The exercise of this power in generating and maintaining a favorable economic climate attracts foreign investment. However, adverse government action or regulation may repel it. As circumstances change, government uses its power to manage its relationship with multinational investor and often change the terms which have been agreed between the parties. (Sherman 2001)
When one party is perceived to enjoy greater or lesser financial success than anticipated, difficulties arises. Significant changes in international market prices may occur. Change in government leadership may also happen in other instances. The foreign investor or its operations become identified with a specific political faction or philosophy attracting criticism from the opposition and its allies. In the worst case, both government and the opposition view an international investor as a non-voting source of cash to repair budget deficits or fund unrelated projects, often social in nature. (Sherman 2001)
The option of MNCs regarding the sovereign power is limited to legal and constitutional arguments. But it is ineffective in areas of the world where the executive branch exercises strong political control over the legislative and judicial branches. Thus, the positive outcome depends on negotiation where MNC possesses considerable economic power. (Sherman 2001)
Marketing systems based upon well-known brands that enjoy worldwide trademark protection are usually controlled by MNCs. It maintain logistical or distribution systems that are difficult for governments to access and duplicate at reasonable cost. MNC also utilize proprietary technology essential to the operation of the product which the government and alternative local investor might not have. A multinational investor can also withhold capital and move its operations elsewhere at some considerable cost. (Sherman 2001)
The disagreement between governments and multinational investors has a negative impact on the quality of the host nations’ investments climate. Also, loss of international reputation can have serious financial and political consequences for either party. However this dispute is often resolved to emphasize the positive, mutual agreement to invest capital in order to enhance operations. Likewise, the relationship between them is rebalanced. (Sherman 2001)
Today, there is an increasingly pressure from external sources on both governments and MNCs. This pressure occurs on governments from other nations seeking foreign investment and on companies from their multinational competitors. In democratic societies, influence of business and employer associations, labor unions and special interest groups is exerted on both the government and multinational investor. Finally, international non-governmental organizations and the media also scrutinize the actions of the governments and MNCs in the trade arena. (Sherman 2001)
Generalization
Multinational corporations are powerful entities. These companies are not directly subject to the rule of any individual nation. Most of MNCs are larger than most nations in strictly monetary terms of economics and finance. Only international treaties offer binding resolutions with these giants of industry. . (Karliner 1997)
National governments often offer incentives to these MNCs to invest in them. These incentives may be dams to provide cheap power, tax free areas for manufacturing or direct capital investment from the government. National governments also provide direct subsidies to MNCs in the form of military aide and population control since few corporations will invest in a country if the political situation is 'unstable'. (Broadhead 1981)
When a multinational giant invests in a new foreign land, especially in a developing nation, its powerful sphere of influence affects the entire process, the social policies, political policies, environmental issues, taxes, labor rules, accounting, campaign contributions, and many other related issues that collectively have a huge impact on the host environment. (Gnazzo 1996)
MNCs exert significant influence over the domestic and foreign policies of the governments that host them. Indeed, the interests of the most powerful governments in the world are often intimately intertwined with the expanding pursuits of the multinational that they charter. At the same time, multinational corporations are moving to circumvent national governments (Karliner 1997)
MNCs control national governments because the national government needs what the multinational have - technological expertise, equipment, goods, shipping lines, and investment capital - although most corporations are not above a few bribes or kickbacks to government officials. (Broadhead 1981)
Generally, countries today are no longer effectively ruled by nation states or by the democratically elected governments. Instead, there has been a massive shift in power - out of the hands of nation states and democratic governments and into the hands of multinational corporations and companies. (Clark n.d.)
It is the MNCs that effectively govern the lives of people and rule the earth itself. At the same time, extensive changes are taking place in the role and mandate of democratically elected governments. (Clark n.d.)
Now we are living in a new age of globalization which is characterized by forms of corporate tyranny. The laws have been designed to protect the rights and freedoms of multinational capital, not the basic human and democratic rights of people. It is no longer a prime role and responsibility of governments to defend or protect the economic, social, and environmental rights of its citizens but of the MNCs. (Clark n.d.)
The real power of governance is wielded behind the scenes by an elaborate system of multinational corporations. The operations of governments and their agencies largely serve to cover up these new forms of corporate rule. (Clark n.d.)
References
Broadhead, T. 1981, ‘Indigenous Homelands and Transnational Corporations’, Center for World Indigenous Studies, 18 April
Dismantling Corporate Rule, Clark T., 1997, Converge, viewed 15 September, 2006, <>
Eldrigde, G, Reference for Business, viewed 20 September, 2006, < www.referenceforbusiness.com>
Gnazzo, D. 2006, ‘Global Reach: The Power of the Multinational Corporations’, New World Order, 17 February.
Karliner, J. 1997,’The Corporate Planet: Ecology and Politics in the Age of Globalization’, Sierra Club Book.
Kimep, Kazakhstan, viewed 21 September, 2006,
1998 ‘multinational corporation’, West Encyclopedia of American Law: Legal Encyclopedia, The Gale Group, Inc.
2000 ‘multinational corporation’, Investopedia Inc: Investment, Investopedia.com.
‘multinational corporation’, The Columbia Electronic Encyclopedia: Encyclopedia, 6th edn, Columbia University Press.
Robert, S 1998, ‘Foreign direct Investment and the Multi-lateral Agreement on Investment-The Hidden Agenda.
Sherman, G 2001, ‘In Defense of Multinational Corporations’, Bastiat’s Odyssey, 1-5 July.
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