THE IMPACT OF MULTINATIONAL CORPORATIONS TO THE HOST GOVERNMENTS

PROPOSED TITLE

THE IMPACT OF MULTINATIONAL CORPORATIONS TO THE HOST GOVERNMENTS

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. 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. (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, and national and international labor organizations. As barriers to international trade continue to be removed; multinational corporations continue to expand its power and influence despite such concerns. (Eldrigde n.d.)

This study is focused on multinational corporations’ (MNCs) investment as an emerging economic role for the host state/government. On the side, it is also edged on finding how these multinationals affect the government capacity to pursue domestic policies.

ABSTRACT

This study is focused on the attraction of multinational corporations’ investment as a rising economic role for the state. It will also deal on finding how multinationals affect the capability of the government to pursue domestic policies. The rationale behind the study lies in the urgency to know the nature of multinational corporations and to identify and evaluate the domestic policies of the host government towards the investment of multinationals. The initial review of related literature will touch on such subjects as the background of MNC, a brief explanation of the nature of multinationals, the reasons of establishing MNC and its manner of entry to the new markets, the benefits derived by the host governments and individuals and the discussion of the policies of the host governments towards MNCs’ investments.

The research plan to adopt will be the qualitative method of research as the method can make significant results even with a small sample. The study proposes to adopt the interpretivism position and the abductive approach, mainly for purpose of more accurate and reliable arrival at conclusions based on the research’s findings. Primary data collection is intended to be in the form of electronic mail interview with three export processing zones authorities in three developing countries (e.g. Philippines, India and Cambodia) where multinational companies invested. The researcher may also interview one or two of the economic-political analysts from each country to further strengthen the data. Using a self-made open-ended questionnaire, the respondents, purposively selected by the researcher using a sampling criterion, will have to answer questions through email. Secondary data is planned to come from books, journals, the Internet and other resources relating to the multinational investments. The credibility of probable findings in terms of validity and reliability will be also briefly discussed in methodology. Proposed questions for the questionnaire will be found at the end of this research proposal.

RESEARCH OBJECTIVES

The proposed research will aim to identify and evaluate the role of multinational corporations as an emerging economic role for the host government. Secondary to that objective is the identification of the effects of multinational corporations’ investment to the capacity of the host governments to pursue preferred domestic policies and assist the future relationship of the host governments and multinationals.

INITIAL REVIEW OF RELATED LITERATURE

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)

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.)

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)

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.)

Merger or direct acquisition of existing companies 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.)

Sequential market entry, on the other hand, 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.)

In the procedure of creating joint ventures with firms already in the market, the venture partner to be entered retained considerable or even complete autonomy realizing the advantages of technology transfer and management as well as the production expertise from the parent concern. 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.)

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)

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)

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)

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)

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)

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.)

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)

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)

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)

As a summary, 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.

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'.

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.

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.

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.

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.

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.

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.

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.

RESEARCH METHODOLOGY

This chapter describes the procedure with which the author is planning to conduct his case study. It will begin with a description of the chosen research method followed by the selected research approach and strategy. And then it will proceed to present the research instrument which this study plans to use: the questionnaire. This section will also refer to the credibility of the dissertation’s probable findings in terms of validity and reliability. Ethical issues that may arise in the course of doing this study will also be pointed out by the research methodology. Throughout the chapter, the author will attempt to justify the reasons for using such method, approach, strategy and instrument.

RESEARCH DESIGN

According to Berry (1983), data collection and the rules for confirmation is not only the part of research methodology, it is more about the way of explanation and the resources by which explanations are produced. So knowledge of explanation is developed from research methodology. On the other hand, research design provides the plan and structure as how the explanation could be acquired. The research design was influenced by the following factors: (1) The need to meet the learning objectives of the multinational corporations; (2) The requirement for credibility of this research and; (3) The extent and limitation of the effects of multinational corporations to the host government’s domestic policies.

The researcher will use the QUALITATIVE METHOD of research in doing the study. A definition of this method states that, ‘any kind of research that produces findings not arrived at by means of statistical procedures or other means of quantification’ (Strauss & Corbin 1990). The qualitative method is chosen because there are no measurable data available on the subject of policies strategies per se. What are capable of measure are the actions translated from these strategies. As policies strategy is not measurable by itself, the method proves very adequate to serve its purpose since qualitative methods produce primary data much richer in meaning and – potentially – insight.

As every research project is built on a methodological approach, this study will deal on the philosophical position of interpretivism, which relies on the underlying assumption that the general condition needs to be taken into consideration in order to fully understand a phenomena, in this case, the phenomena is the attraction of MNCs investment as an emerging economic role for the state. From there, the researcher will attempt to identify and evaluate the procedures and policies made by the host governments to attract and restrict MNCs investment based from the survey questionnaires.

The study will use an abductive research strategy that is based on the interpretation and understanding of the subject. Abduction starts with the consideration of particular observations (in this case, the observation will come from the questionnaire results and related literature), then that consideration will give rise to a hypothesis, which relates them to some other fact, or rule that will account for them. This involves correlating and integrating the facts into a more general description and relating them to a wider context (Givón 1989). The use of abduction to generate a hypothesis will help the researcher subsequently formulate a conclusion based on the questionnaire’s findings through development of a theoretical pre-understanding, while still maintaining enough interest to develop a theory (Yin 1994). Using the abductive approach, the researcher will enable to gain insight and to develop a theory resulting data from the questionnaires are gathered.

This research will use a case study as a basis of generating a theory and making use of existing theories against which materials gathered can be compared. According to Abercrombie, Hill & Turner (1984), the detailed examination of a single example of a class of phenomena, a case study cannot provide reliable information about the broader class, but it may be useful in the preliminary stages of an investigation since it provides hypotheses, which may be tested systematically with a larger number of cases. (p. 34). A case study was chosen as a particular method of this qualitative research because it involves an in-depth, longitudinal examination of a single instance or event, rather than following a rigid protocol to examine a limited number of variables thus providing a systematic way of looking at events, collecting data, analyzing information and reporting the results (Wikipedia 2006). According to Bent Flyvbjerg (2006), case studies lend themselves to both generating and testing hypotheses (as cited in Wikipedia 2006).

RESEARCH INSTRUMENT

This will make use of a questionnaire to facilitate the study of the impact of multinational corporations to the host governments. This self-made questionnaire was chosen as a method for data collection for reason of its convenience to the researcher and the respondent considering the time constraints. The researcher could just send the questionnaire to the electronic mail of the respondents and do follow-ups thru instant messaging and emails at the same time. It was chosen like that way because of the geographical distance of researcher’s current location to the respondents’ location. While the questionnaire is in the respondents already, the researcher could attend to the other aspects of the research such as the application of the finishing touches to the review of related literature and preparation for how the data to be gathered will be treated. The questionnaire for this research has been designed in such a way that it would give an insight of the perception of the respondents on the impact of MNCs to the government policies.

DATA COLLECTION METHODS

To collect the primary data, electronic mail interviews with the three authorities (e.g. from the top management of the economic/export processing zones) from three developing countries (e.g. Philippines, India and Cambodia) will be facilitated in order to find out the judgment, evaluation and their understanding on the effects of multinational investment to their domestic policies as well as their future plan of actions regarding MNCs using an open-ended questionnaire. Time constraint and geographical distance are the reasons for choosing the particular method.

Secondary data will come from books, journals, Internet and other resources relating to the multinational corporations and the host country. Three developing countries will be the respondents because they are often the MNCs’ subject of investment. Data will be collected using either self-selection sampling or purposive sampling. The World Wide Web or the internet will be used in exploring the location of the economic zones of the developing countries, the contact persons and the contact details (e.g. email, yahoo messenger, office landline) of the respondents.

VALIDITY AND RELIABILITY OF PROBABLE FINDINGS

According to Trochim (1999), validity is the best available approximation to the truth of a given proposition, inference or conclusion (as cited in ‘Designs to rule out threats to internal validity’ n.d.). Research reliability refers to the repeatability of measurement, and how accurately a technique actually measures the phenomenon under investigation (as cited in Paul 2006). The researcher will relate the findings of the study to existing theories of multinational corporations’ investment and government’s domestic policies.

Through that way, the findings could contribute to the generalization of some aspects of the theory, while opening another avenue for potential future research. The credibility of the findings will depend mainly on the results of the questionnaire, and as the respondents will be asked to remain anonymous, the impartiality and objectivity of their answers will heighten. The author, however, does not guarantee one hundred percent validity and reliability, as subjective interpretations cannot be simply avoided. This is an ethical issue that may arise from the making of this research. Maintaining impartiality in the formulation of findings is not outright easy.

A research is ideally characterized by the maintenance of an attitude of impartiality and objectivity and by extreme care to convey information accurately. Thus, the researcher, in all aspects of the study, will attempt to maintain an impartial view about the subject and leave the readers to decide if the study has achieved such unbiased position. Another ethical issue that may arise is the respondents’ consent to participate in the study. The researcher will attempt to address this problem by giving the respondents a clear description of the nature, form and implications of the research as well as the role they should choose to participate.

POSSIBLE QUESTIONS FOR THE ELECTRONIC MAIL INTERVIEW

The following are open-ended questions, which will allow the researcher to come up with follow-up queries in the event that it is needed to further clarify an issue.

1. What are the multinational corporations (MNCs) in your country/region? What do you think the role of these multinationals in the economic development of your country?

2. What do you think the opportunities and threats of MNCs’ investment to your country?

3. What are the steps, processes, or measures your government did to attract MNCs’ investment?

4. What are the policies of your government regarding MNCs’ investment?

5. What do you think the strengths and weaknesses of such policies on MNCs’ investment?

6. How would you assess the implementation of the government’s policies towards MNC? Do the policies help to regulate the activities of multinationals?

7. In the scale of 1 to 10, 10 being the highest, gauge the power of your government to regulate MNC activities. Kindly justify your answer?

8. How would you describe the relations of multinationals with your government?

9. What strategic policies the government may adopt in the future to enhance its relationship with MNC with regards to the global market arena?

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