Multinational Investments: Reasons and Impacts
During the turn of the century, the world experiences more drastic changes than before, and these include changes happening in the environment, in the people, culture, religion, information, education, economy, and technology. In comparison to the events that happened in the past centuries, everything happens today in fast-pace. With what is happening to the world right now, it can be understood that these changes are being brought about by the continuous development of knowledge and technology, which leads to the process of globalization and internationalization. Both the process of globalization and internationalization hastens and emphasizes the interdependence of nations with one another, most especially in terms of economic aspects. One important aspect of economic interdependence among countries is given by the evidence of multinational investments, being endowed by international and multinational companies to smaller companies, which are usually located in Third World or poor countries. In this regard, this paper discusses the different reasons why multinational investments take place and its impacts or effects to its host countries.
Reasons for Multinational Investments
One would be able to determine that for multinational investments to take place, international business organizations must first be able to transact and negotiate with different businesses outside their domain. In this sense, it can be emphasized that for multinational investments to take place, the process of globalization and internationalization must also be recognized simultaneously. Globalization in its literal sense is a social change, an increase in connections among societies and their elements due to, among others, the explosive evolution of transport and communication technologies. The term is applied to many social, cultural, commercial and economic activities. Depending on the context, globalization can mean: (a)closer contact between different parts of the world, with increasing possibilities of personal exchange and mutual understanding between "world citizens"; (b) economic globalization or freer trade and increasing relations among members of an industry in different parts of the world; (c) or some negative exploitation aspects of economic globalization, such as evasion of legal and moral standards by moving manufacturing or mining and harvesting practices overseas (1998). The concept of globalization is a powerful real aspect of the new world system, and it represents one of the most influential forces in determining the future course of the planet. It has many dimensions, namely, economic, political, social, cultural, environmental, security, and others ( 2004). In popular discourse, globalization often functions as little more than a synonym for one or more of the following phenomena: the pursuit of classical liberal (or “free market”) policies in the world economy (“economic liberalization”), the growing dominance of Western (or even American) forms of political, economic, and cultural life, the proliferation of new information technologies, as well as the notion that humanity stands at the threshold of realizing one single unified community in which major sources of social conflict have vanished ( 2002). On the other hand and equally interrelated is the concept of internationalization, which is a process of increasing involvement in international operations that requires adapting the company’s strategy, resources, structure, and organization to international environments, thus, involving goods, services, and expertise transactions across national borders ( 2000). In this sense, it can be perceived that in relation to the process of globalization and internationalization, the primary reason for multinational firms and corporations to invest is for the expansion of their business. A lot of international business organizations and companies engage in and focus on international marketing, with the desire for more profits, sales, and recognition from consumers. International marketing also allows business organizations opportunities for further development and improvement, in terms of their products, services, strategies, systems, and operations. This is because international markets offer vast business opportunities for firms with a product or service in high demand, in line with newness, cultural adaptation, attractiveness, and appropriate marketing strategies that can assist them particularly ( 2007). This can be achieved through their ventures and investments in countries and markets, where their products, services, or technologies are not yet present. On the contrary, multinational corporations can also invest in other countries to increase competition. Nevertheless, in this sense, the primary reason for multinational companies to invest in other countries is driven by their personal gains and recognition from the market. This is because when such companies are given the chance to invest in other countries, they are provided with the opportunity to gain more knowledge and information in their industry, thus, having the opportunity to provide more innovative services and products to their consumers.
Another identified reason for multinational investments to take place was already mentioned earlier, which involves increasing competition among multinational corporations and companies. Increase in competition among international firms in relation to multinational investments would enable increase and improvement in the variety of products, services and technologies. At present, the distribution of market, resource and efficiency-seeking investment is uneven across transforming or developing countries. The distribution of GDP shares across industries in transforming countries was determined by external forces, rather than endogenous development. There is reason to believe that this trend will continue. Following accession, external forces are bound to reinforce the past distribution pattern of industries with market seeking and resource seeking FDI. At the same time, they will transform the original market or resource-seeking patterns into efficiency-seeking ones (2002). Another important reason for multinational investments to take place is related to the concept and importance to Foreign Direct Investment to both the parent and host countries, where the investment would be provided for. The issue of foreign direct investment becomes an essential basis for the development of a country. It is defined as a long-term investment by a foreign direct investor in an enterprise resident in an economy other than that in which the foreign direct investor is based, and creates a relationship consisting of a parent enterprise and a foreign affiliate forming a Transnational Corporation. In addition, in order to qualify as a foreign direct investor the investment must afford the parent enterprise control over its foreign affiliate (2007), and becomes important to attract other foreign investors to a particular nation. In this regard, it can be assumed that investors are powerful and rich countries, while its host countries are the poor countries that belong to continents, such as Asia, Africa, and South America. In this sense, the third reason that can be identified is the desire of the strong and powerful countries to help poorer ones, which can be concealed, to reveal their true motives, and that is to obtain power over poorer countries, being at their mercy.
From this, it can be emphasized that a number of reasons can be determined for multinational investments to take place. Such reasons include expanding their business enterprise to new environments, dominating or competing in new markets, increasing competition among firms in their respective industries, increasing the profits, sales, and market advantage of firms, attract foreign investments, assisting another country and its citizens to achieve success and development, and even controlling poorer economies or countries in order to get one’s advantage. From such reasons stem the different strategies and actions in relation to multinational investments. In this regard, the different impacts of multinational investments taking place would be discussed.
Impacts of Multinational Investments
Determining the impacts of multinational investments leads one to determine some of the impacts of the process of globalization and internationalization of many different businesses. Similar to the impacts of globalization, the impacts of multinational investments create both positive and negative reactions. In terms of economics, multinational investments increase the international flow on capital, including foreign investments. This would lead to the economic stability of the nation and means providing more development such as infrastructures and establishments. Furthermore, it could create international agreements among different nations, and may lead to more job opportunities in the nation. This also affects the political aspect, as more projects will be produced, nationally and locally, and will practically help the nation or country in their stability and leadership. More opportunities may also mean the boosting of confidence of each individual to become more productive and effective. Culturally, there will be an increase in the exchange of information, and multiculturalism will be achieved, having no inferior or superior races. This will lead to a boom in travel and tourism, which would totally help locals to promote their products and profit from their small businesses. In this regard, multinational investments, as being augmented by Foreign Direct Investments, along with all the aspects of globalization would mean the further development and improvement of host countries or Third World countries.
However, along with advantages of multinational investments are its different set backs, which present its negative aspects. It has been reported that there appears to be some conflict between the theory and the evidence regarding the changing nature of multinational investments. This is because some elements of corporate strategy appear to have changed many of the most notable investments in various regions of the world, which are far from the quality investments anticipated in literatures. Another setback is being emphasized by the relationship between overseas and domestic investment decisions by multinationals. Quite apart from any direct diversion of investment from domestic operations, FDI can result in subsequent changes in the level of output and exports of domestic operations, changes in the spatial allocation of product ranges and changes in input sources for company plants ( 1997). In this sense, it can be perceived that the different activities of multinationals, especially in terms in investments complicate and alter the economic condition of their host countries. In addition, it has been emphasized that one of the more significant complaints about multinational enterprises is that, when locating in developing countries, they look for countries with weak labor rights. Such conditions presumably permit firms to exploit local workers by paying them less than some notion of a fair wage. Given the breadth and complexity of the world economy, claims of this kind can be misleading and may support faulty policy prescriptions (2004). Thus, instead of assisting the poorer economies to success and development, multinational investments from multinational enterprises serve to push the economies of Third World countries farther down the drain.
Given such problems, most especially in relation to the exploitation of the economy, politics, technology, environment, and society of host countries, treaties and policies regarding the entry and operations of multinational enterprises have been set and provided for, in order to emphasize equality and justice in the process. Multinational investment policies have been implemented in the United States, in its aim to constrain FDI and multinationals. This is because many Europeans were expressing doubts, anger, and frustrations about the dominance of American multinationals in their home markets (Vaghefi 1991). In this regard, this is one way how host countries would be able to increase their bargaining power over multinationals. They can set treaties and policies regarding investments, thus, somehow limiting the power of multinationals over them. Another way on how to increase the bargaining power of host countries is by not only having a single multinational enterprise in an industry, which would dominate the host country. If only one multinational enterprise dominates a specific industry, then it can set high prices that the host country would not be able to do away with. However, if a host country decides to find another or more multinational enterprise in the same field or industry, then, the host country would be able to implement policies that would enable them to dictate regulations and provisions regarding the industry, thus, increasing their bargaining power. Another way to increase the bargaining power of the host country is to set taxes and limits on the entrance and exit of commodities from the host countries and to the country of the multinational enterprise. Setting taxes would not only limit the extent of the exploitation, but also serve as an income-generating strategy for the host country. This also serves to protect the damage of the host country in economic, political, environmental and societal terms.
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