What is a Multinational Corporation (MNC’s)?
Multinational companies are firms with their home base in one country and operations in many other nations. Most of these very immense firms establish in third word countries or developing countries where they could manufacture the same identical product for very low costs compared to establishing the same firm in the western countries producing that product.
Although transnational corporations (TNC’s) are commonly thought to be synonymous with MNC’s they are infact different in several regards. The primary defining factor is that they keep their financial headquarters offshore to protect them from taxes. Ideally MNC’s are one which are global operating across borders with no single national emphasis. The first multinational, appearing in 1602, was the Dutch East India Company.
A key concern with regards to MNC’s is their mobile nature. Logically they establish subsidiaries in countries where conditions are most favorable to their business operations.
Very large multinationals have budgets that exceed those of many countries. Countries often offer incentive to MNC, such as tax breaks or lax environmental standards, in order to attract MNC into their country. They can be seen as a power in global politics.
MNC’s are important vehicle for the movement of direct foreign investment. With Direct foreign investment, a firm in the country creates or expands a subsidiary in another through the use of international capital flows.
Companies such as Reebok, Nike, Mcdonalds, DeBeers, Enron, Coca-Cola, Pepsi, Toyota, Colgate, Cadbury are some of the multinational companies.
Positive Aspects of Multinational Corporation in an Economy
-Creating Competitive Environment – Competition is not destructive; it has compelled multinational corporations to provide the world with an immense diversity of high-quality and low-priced products. Competition, given free trade, delivers mutually beneficial gains from exchange and sparks the collaborative effort of all nations to produce commodities efficiently. As a consequence, competition improves world welfare while dampening the spirit of nationalism and, thus, promoting world peace.
-Boasting the Economy – There is evidence, which was supplied by World Bank and United Nations that multinational corporations are a key factor in the large improvement in welfare that has occurred in developing countries over the last forty years. These firms rent buildings and land, or sometimes buy them thus generating higher incomes for the owners. In 1998, 75% of foreign direct investment went to developed countries. Besides, labor costs alone do not determine where multinational corporations base their affiliates; other variables-such as political stability, infrastructure, education levels, future market potential, taxes, and governmental regulations-are more decisive and a boaster in the economy.
-Help to reduce poverty – They can bring money into a country through employment and investment. Three quarters of international investment in developing countries is from MNCs and private sources. They create jobs, raise labour standards as in their absence, the people would have had fewer or much lower paying jobs. For instance in Bangladesh, Mexico, Shanghai, Indonesia, Vietnam, and elsewhere figures show that multinationals actually pay what economists call a “wage premium,” that is, an average wage that exceeds the going rate in the area where they are located. Affiliates of some U.S. multinationals pay a premium over local wages that ranges from 40 to 100 percent.
-Welfare Activities Carried Out – MNC also organizes charitable funds for the welfare of the people of the countries where they are located. For example after the tsunami Schlumberger a well know MNC agreed to support four children’s activity centers that now are being administered by the two charitable trusts. Each will accommodate 50 to 100 children who will receive nutrition, counseling, and education.
-Spillover – This is a very good effect on developing economies; this refers to the fact that domestic firms learn productivity-enhancing techniques from foreign corporations with better technology and management practices. Production workers often learn better techniques while employed by foreign firms. Managers may learn about better practices by observing, or by having previously worked at multinationals themselves. And increased competition pushes all companies in an area where multinationals are operating to become more productive.
-Reliability & Awareness – When a product is associated with an MNC it is considered to be a good quality product and genuine as these firms follow the same standards and procedures to manufacture it wherever they are, which goes with their goodwill and reputation all over the world. For instance a burger at Mcdonalds will taste the same in Paris or India. This reliability helps the consumers to distinguish between the MNC product and local product thus creating awareness.
-No contribution to external Debts for Developing Countries – If the investment does not do well, the multinational corporations may lose their investment and the developing country does not receive the aforementioned benefits, but the developing country owes no restitution. As a result, multinational corporation investments do not contribute to the external debt problems of developing countries.
Negative Aspects of Multinational Corporation in an Economy.
Incidents such as the improper use in the Third World of baby milk formula manufactured by Nestle, the gas leak from a Union Carbide plant in Bhopal, India, and the alleged involvement of foreign firms in the overthrow of President Allende of Chile have been used to perpetuate the ugly image of MNCs. The fact that some MNCs command assets worth more than the national income of their host countries also reinforces their fearful image. And indeed, there is evidence that some MNCs have paid bribes to government officials in order to get around obstacles erected against profitable operations of their enterprises. Here are some negative impacts on the economy:
-Exploitation of Labor – This can be proved by examples like companies like Reebok, Nike have exploited the labor in Indonesia. Workers live in deteriorating, leaky, mosquito – infested apartments and only earn a mere 39$ a month for producing thousands of products worth well over 100$ each.
They encourage child labor as in poor countries where population is rising poverty is everywhere and children cannot afford to study are employed by these big firms thus jeopardizing their health and future. For instance in India one of the gem cutting industries DeBeers employed six-year-old children at work on dangerous polishing wheels, people living and sleeping at their workplaces, and trash, human feces and industry waste clogging the open sewers that run between the warren of gemstone workshops. In one factory almost half the workers were under-age. As diamonds are ground, fine dust enters and infects the lungs. Diamond cutting is among the top 10 hazardous and the employment of children under 15 is banned. However, the number of children employed in recent years has been rapidly expanding.
-Polluting the Environment – Some MNC’s are also responsible for polluting the environment like throwing industrial waste in rivers, polluting the air etc. We had a very serious case in India the Bhopal Gas Tragedy where in over 40 tons of deadly methyl isocyanate, hydrogen cyanide and other gases leaked from a hazardously designed pesticide factory in Bhopal owned by US based multinational Union Carbide Corporation. Over 500,000 men, women and children were exposed to the poison clouds and at least six thousand people died within the first week of the disaster. The current death toll is well over 16,000. Hundreds of thousands of survivors continue to suffer from multi-systemic injuries.
-Harming Domestic Investment – By pumping in foreign investments it discourages domestic investments it is like the big fish eats the small fish in the ocean. Local products suffers and this intern discourages domestic investments
-Monopolistic Power – Due to a large share in the economy they can exploit the countries on the basis of this like causing problems in aspects of human rights, economic fragility, corruption etc.
-Human Rights Violations – Due to having substantial amount of power it allows them to easily find cheap labor in large quantities as a result the workers are exposed to hazardous conditions, over exertion and overall are subject to abuse of capital -owners.
-Corruption – MNC can easily get their work done like acquiring a licence for manufacturing products which may cause damages to the environment or people by Bribing the officials and also exploit the government due to their stake in the economy thus encouraging corruption. Like the Enron project raised controversy for a number of reasons: there was no competitive bidding for the project. The project costs and power tariffs were higher than other power projects and the cost of electricity from Enron would be higher than before. The Maharashtra Electricity Board promised to buy all the high priced power produced by Enron even if cheaper power was available. No environmental impact assessment has been done. Natural gas is 90% methane, which is 20 times more damaging to the global climate than CO2. Each well produces thousands of tons of toxic drilling mud that contains arsenic, lead, and radium that severely affects the health of people.
Determining the positions (in favor or against) of nation-states towards MNCs is a bit complicated and not always logical. Generally developed countries usually favor MNCs as it allows firms to make more profit with cheaper labor.
With developing countries the stance is not very clear usually they will favor this in order to boost the economy and infrastructure. Thus delegates must consider many complex economic factors that would help explain whether it is in their favor to support or oppose multinational corporations based on whether that particular developing nation has comparative advantage or not.