The Role of Multinational Corporations (MNCs) in Developing Countries and Economies

Categories: Corporation

Controversial debates have stirred for many years now on exactly MNCs (Multinational Corporations) and its role in developing countries and economies, and with time it has gained countless of supporters as well as oppositions. The term MNC is effective when used “to identify firms that have extensive involvement in international business and engage in foreign direct investment (FDI). MNCs own and control value-adding activities in more than one country that are usually coordinated from central headquarters” (Griffin and Pustay, 2005). FDI refers to the flow of investments from the home to the host country.

(Kindleberger 1969) identified a multitude of factors that contributed to the fact that a business could become a foreign direct investor and this is inclusive of having owned a brand name, equipped with unique marketing strategies, accessibility to preferred sources of finance, economies of scale in manufacturing and economies of vertical integration. (1969:14) Countless of MNCs have surfaced rapidly in developing countries ever since the mid 80s, this is contributed by globalisation.

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Because of that, new resources and bigger markets were the priorities of firms of that era. (Greer and Singh, 2000) Today we have MNC giants like Mcdonalds, Samsung, Toyota and the list goes on. These firms share a common factor of their existences, that is they are highly efficient. This is due to the fact that instead of contracting out production, these firms opt to perform some activities on their own. (Supriya Guru, foreign investments). MNCs are then of course selective on their foreign investments, and this can be backed up with the fact that nations with the greatest potential in growth such as China , Malaysia, Thailand, Argentina and Brazil all comprises of the highest numbers in Multinational Investments.

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The estimated value of MNCs across the globe exceeds a massive $1.5 trillion, over 33% of which lies in developing countries. (GhanaWeb, 2012).

Developing countries stand to have some characteristics that is quite the opposite of that of developed countries and this arguably forms reasons for MNCs to heavily invest in them. The definition of developed countries is broken into several different factors that would then make up for the fact that it is a developed country. Few of the factors include inequality in income distribution, lack of access to technology, high rates of unemployment and a high dependency of the primary sector. In contrary to African nations, these developing countries that are located mainly in Asia actually possess high growth potentials aforementioned. Thus, this could be the cause of MNCs investing in them.

Technological advancement is undeniably a correlation to globalisation. The rate in which globalisation is moving has surged exponentially since the dawn of the information age. Today human divisions are simply not based off ideologies like it used to anymore. Today, the only thing that separates mankind from one another is if one country is technologically disconnected (Sachs 2000). In accordance to the new growth theory 1990, the paramount drive of technological advancement is no other than innovation itself, and this results in stimulating economic growth. The main reason a country welcomes Foreign Direct investments(FDI) is to soak up the spillover of technology from MNCs. Both hard and soft technologies are agreeably the prime factor of growth and development in an economy. When vertical integration occurs between an MNC and a developing country’s business, the host firms are bound by strict guidelines set by the MNC in order to safeguard their good quality of goods and services. Foreign firms would provide managerial and technical guidance and as a result of that, improving the quantity and quality of service by domestic firms. An increase in a country’s productivity is a spinoff of rival local businesses stepping up in terms of what they can bring to the table to prevent going out of business. For instance, Walmart, US top one retailer’s entry and expansion has led to the increase in productivity of the logistics industry in China (Zhu 2016). It is crucial for countries to become technologically advanced if they intent to carve a spot for themselves in the world economy. Sure enough countries may start importing foreign technology but then again these procedures can incur an exceptionally high cost. On top of that, developing countries may grow even further from the advancement of technology if there is a failure to create a market to export (Sachs 2008). However, the ‘trickle down’ effect of MNCs might just be the saviour to that. The “trickle down” effect is the transfer from developed countries to developing countries in terms of technological skills, and the occurrence of this lies simply through FDI. A real life example would be the transfer of Panasonic microwaves’ factories from the U.S to China has resulted in two thousand and eight hundred local Chinese firms involved in supplying parts for it. Not only this led to the the birth of new technologies, but also advanced managerial techniques in terms of operations to the Chinese Market (Sinani and Meyer 2004).

MNCs throughout the world are constantly on the lookout for any potential competitive advantage that may pop up. As domestic markets throughout the globe undergo deregulation and liberalization, MNCs look upon this as a chance to re locate a portion if not all of their manufacturing processes to these developing countries where advantages might be present. Some of these developing countries as mentioned before in this paper possess high growth potentials, which inevitably leads to increases in income and market growth. It is claimed that MNCs are responsible for the hiring of up to 65% of private job positions in any host country(Reid ,2011). MNCs affects both directly and indirectly a country when it creates employment in a host country. Direct in the sense that people of that country are being employed in a production plant and indirect in the form of impacts of MNC on their domestic economy. In accordance to a list of developing economies on Wikipedia, Ghana is indeed a still developing economy. Examples of how MNCs has affected the state of the Ghanian economy is the entries of countless petroleum, banking and telecommunication firms such as Vodafone and MTN. This inevitably led to a rise in local expenditure and incomes and thus is stimulating growth in local businesses due to the jobs MNCs had created. With another example comes Malaysia in its 70’s. MNCs have created labour intensive industries for Malaysians, thus significantly bringing down the rate of unemployment. Although there are many impassioned arguments that MNCs are paying low wages and not offering any better working conditions than the local employers, governments around the world are in tough competition in attracting Foreign Direct Investments. This is due to the fact that in 2006 Foreign Direct Investments are a great measure of a country internalizing their manufacturing processes. As MNCs account for over one third of the global exports, it speaks for how MNCs are impacting developing countries as well. According to the OECD report, MNCs in fact offer higher wages than domestic firms. In a general sense, MNCs offer wages of 40% more compared to domestic firms and the difference becomes even more significant in developing countries in Asia and Latin America (OECD,2006). The reason for MNCs’ willingness to offer higher wages is backed with intentions of reducing labour turnover. Additionally, MNCs are often publicly criticized for having terrible working conditions for their employees. It is not justifiable to say that this is entirely the MNCs fault as governments and global organisations are in huge responsibility in ensuring MNCs abide to the regulations and acceptable labour standards of having proper working conditions. Much like a 7 year-old who swears, if anything is wrong it has 90% to do with the parenting of that child. Furthermore, Nike was once criticised by the anti-globalisation movement for labour exploitation and “sweat shops”. Nike responded with the hiring of a thousand production managers to work in close proximity with local suppliers around the world , however had still faced a failure rate of as high as 80% in terms of improvement. The notion that MNCs are responsible for labour exploitations remains in question whether or not it truly is their fault. Nonetheless, MNCs as of this specific standpoint plays the role of an employment creator, stimulus in a developing economy’s growth and higher wage offerors compared to domestic employers (Alexander Hijzen and Paul Swaim).

While at times MNC proved to act as a stimulus of growth to developing countries, their ulterior motives are often questioned by the rest of world, so are their true roles in developing countries. The shaping of monopolies by MNCs in developing economies must not be overlooked in this matter as well as the exploitation of their resources. Certain MNCs are also being criticized for holding on to the neo-colonialism policy. They are a potential threat to the sovereignty in developing countries, with the intention of acquiring absolute power resulting in a monopoly over their natural resources and implement agreements that would be deemed unfair to the host country. At this standpoint, these MNCs are playing the role of a corporation that forces these countries to run against the current of their own economic lives and a negative effect on their political independence. Not only that, they utilize the cheap natural resources that is found in the specific developing country, produce it and charge it at relatively high prices. Exploitation kicks in as MNCs abuse the reason to establish different manufacturing facilities for the developing country, but their own assets are a rapid growth. Taking example of an occurrence in India , assets of subsidiaries underwent a twofold increased from Rs8967mil in 1967 to 12267mil in 1976. In addition to that, a research gathered that MNCs in India used up to nearly Rs 2200mil of their foreign reserves each year( Public Admin of the Indian Institute). This goes into further of a negative effect to India’s economy as major portions of profit generated by the MNCs are being injected back into their respective home economy. Moreover, incidences of MNCs having their main HQ in countries where tax laws do not exist, hence avoiding taxes. There are several cases in India where MNCs appoint Directors of their own with extremely high pay regardless of the fact that India owns 60% of shares. On an external point of view, MNCs served as a hinderence to the state of independence of developing country’s economies. MNCs that are involved in the food industry have also reportedly convince developing countries to sway away from grain production with the intentions that they themselves could profit from exporting grain to them. Sometimes monopolies can be a good thing for a developing country when that certain monopoly is simply a firm far more superior in terms of production efficiency. However in this case MNCs uses coercive force to attempt to monopolise a market so to speak, charging high prices with low qualities just because they can (PRACHI).

It is not only economic exploitation that some MNCs are practicing. Certain activities carried out by MNCs in industries such as petroleum, chemicals and mass engineering can have detrimental effects on the environment and society of these developed countries where most of their facilities are located. MNCs find no trouble in setting up operations in these developing countries due to lack of regulations in pollution controls. Like all profit maximising firms, this is an opportunity for MNCs of these hazardous industries to set up their operations because it means they would have competitive advantage. The roles they play in developing countries by doing this would then make them the harbingers to the environments of these nations. In accordance to the World Health Organisations(WHO), more than five people suffer pesticide poisoning each year in places like Sri Lanka , India and Indonesia. Back in 1984, an underground pipe line caused the death of over a hundred people by fire. The same year had also taken the lives of more than two thousand people in the Bhopal poison gas incident. In this case, the Union Carbide had a team of Americans intentionally distracting the management based in India of the faulty operating lines in the plant back in 1982. This clearly showed that the MNC had no concerns for the safety or environment of India as making profits is only the motive for them. This speaks miles about what threat an MNC could potentially bring to these developing nations (PRACHI).

Ultimately, it is undeniable that MNCs do offer growth in these developing economies and some good transfer of technology along the way which may help these developing countries gain a position in the global economy. However, one must not overlook the fact that these MNCs are fully profit driven and at times their intentions are not what meets the eye. MNCs may attempt to exploit a developing countries economy or threaten the safety and environment of one country’s homeland. It is up to the government of these developing countries to critically analyse the benefits and the drawbacks of MNCs operating in their countries. Are they willing to risk having fierce competition brought by the MNCs to the local firms just to get FDI on the increase? Or are they willing to risk their environment being polluted for advancement in technology and infrastructure? It is hereby up to the hands of governments of developing countries like India to ensure their regulations and safety hazards are of strict standards to prevent chances of their economy being exploited and pollution kept at a minimal level. Doing all of this while still retaining MNCs in bringing in benefits to them. There is always a good and a bad in everything, but it is always up to the man in charge of what comes and what does not, and what should be forgone in order to obtain what seems to be better. Very much like the simple theory of opportunity cost, losing certain things in order to gain other alternatives. It will be up to these developing countries to decide what is worth it and what should be prevented.

References

  1. UK Essays. November 2013. Advantages And Disadvantages Of Transnational Corporations Economics Essay, https://www.ukessays.com/essays/economics/advantages and-disadvantages-of-transnational-corporations-economics-essay.php?cref=1 [Accessed 8 June 2016].

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The Role of Multinational Corporations (MNCs) in Developing Countries and Economies. (2021, Sep 28). Retrieved from https://studymoose.com/the-role-of-multinational-corporations-mncs-in-developing-countries-and-economies-essay

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