Multinational Operations Create Poverty in Many Countries and Wealth in Only a Few
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. 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. 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. (). Indeed, multinational corporations that operate internationally offers wealth to some countries but no one can deny that it also offers poverty to some.
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 ( 2008).
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
Furthermore, it has also manufacturing, sales and service subsidiaries in one or more foreign countries. MNCs is also known as transnational or international corporation ( 2008). 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 (2008).
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
Methodology
According to (1983), the collection of information and the rules for confirmation is not only the part of research, it is more about the way of explanation and the resources by which explanations are produced. With this consideration, the research design for this paper 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 of the effects of multinational corporations to the host countries in accordance to poverty and wealth issues they provide.
Basically, qualitative method of research will be considered as the approach of this study. The qualitative method is chosen because there are only limited measurable data available on the subject of poverty and wealth per se. As every research project is built on a methodological approach, this study will deal on the philosophical position of interpretivist, 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 impact of multinational operations to different countries.
Analysis
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. ( 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 ( 1998).
c. Preventing competition
The most certain method of preventing actual or potential competition from foreign businesses is to acquire those businesses ( 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 (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.
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 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 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 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 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 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.
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 ( 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 ( 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 (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 (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 (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 ( 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 ( 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 (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 ( 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 ( 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 (1998).
c. Multinational companies and their subsidiaries frequently have very high profit margins, so they generate large amounts of tax revenue for host governments ( 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 (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 ( 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 (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 ( 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 ( 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. (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. (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 (1998).
0 comments:
Post a Comment