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Multinational Corporations And Local Economic Development Processes Relationship Economics Essay

In recent years some excellent volumes have emerged dealing with many of the different effects of globalisation upon behaviour of governments (Dunning,1997); upon the dynamics of the firm(Chandler et al., 1998); upon technology and competitiveness strategies (Casson,1991); and upon institutional and regional development (Amin and Thrift,1994). While several of these collections touch on aspects of this volume, the approach here more specifically addresses the globalisation of multinational enterprise activity and economic development. The process of globalisation has drawn attention to the growing significance of the coordinating and transaction functions of the firm. At the same time it has raised questions about the role of national and subnational governments as to how they are able to influence the spatial organisation of economic activity in directions consistent with their economic development objectives.

Recognising that there are many different ways of defining globalisation, this volume views it as the process by which the world economy is transformed from a setoff national and regional markets into a set of markets that operate without regard to national boundaries.

The central thrust of this volume is towards developing a deeper understanding of the ways in which the globalisation of business impacts upon economic development. One element of this is therefore about the political economy of globalisation. Strange, 1997 observes that from that perspective globalisation means the coincidental effects of three major changes: namely the accelerated internationalisation of production; the sharply increased mobility of capital; and greater mobility of knowledge or information from communication of messages to the transfer of technology. There is little doubt that in various roles the multinational corporation (MNC) has been driver, enabler and promoter of these processes.

INTRODUCTION

The multinational company undergoing globalization needs to reorganize internally. First, the importance of lateral relationships between units in the firm has been stressed (Galbraith, 2000). Second, the importance of disseminating knowledge developed in the subsidiaries' external business relationships has been studied (Andersson and Holm, 2002). The phenomenon “secondary degree of internationalization” (Forsgren, 1989) puts the previous internationalization of the subsidiaries in focus. This has an important and problematic influence on the reorganization for globalization. Havila HYPERLINK "http://www.emeraldinsight.com/Insight/ViewContentServlet;jsessionid=28523FCC32D54A9E8E86676B352F3F60?Filename=Published/EmeraldFullTextArticle/Articles/1770080501.html#idb26idb26"et al.HYPERLINK "http://www.emeraldinsight.com/Insight/ViewContentServlet;jsessionid=28523FCC32D54A9E8E86676B352F3F60?Filename=Published/EmeraldFullTextArticle/Articles/1770080501.html#idb26idb26" (2002) argue that it is not the size of the multinational corporation that is important, but the control of networks that provides their power and influence. Their ability to create global networks and utilize geographically-dispersed resources are crucial. It follows that an important aspect of this is the ability to learn in, and from networks (Håkansson and Johanson, 2001). Thus, learning in the multinational firm from its network context could be influenced by its internal organization.

Third, driven by globalization of customers, suppliers develop global key account organizations (Montgomery HYPERLINK "http://www.emeraldinsight.com/Insight/ViewContentServlet;jsessionid=28523FCC32D54A9E8E86676B352F3F60?Filename=Published/EmeraldFullTextArticle/Articles/1770080501.html#idb46idb46"et al.HYPERLINK "http://www.emeraldinsight.com/Insight/ViewContentServlet;jsessionid=28523FCC32D54A9E8E86676B352F3F60?Filename=Published/EmeraldFullTextArticle/Articles/1770080501.html#idb46idb46", 1999). Birkinshaw HYPERLINK "http://www.emeraldinsight.com/Insight/ViewContentServlet;jsessionid=28523FCC32D54A9E8E86676B352F3F60?Filename=Published/EmeraldFullTextArticle/Articles/1770080501.html#idb5idb5"et al.HYPERLINK "http://www.emeraldinsight.com/Insight/ViewContentServlet;jsessionid=28523FCC32D54A9E8E86676B352F3F60?Filename=Published/EmeraldFullTextArticle/Articles/1770080501.html#idb5idb5" (2001) found that global account management structures allow multinational corporations to increase their information processing capacity and their bargaining position vis-à-vis the global customer. The effectiveness of information processing through global account management was conditional on the presence of high supplier-customer dependence. However, the organizational change to a global key account management structure is both complicated and difficult.

Fourth, globalization influences location and coordination of research and development, procurement and manufacturing activities. A general aspect of reorganization in a firm is that managers located at different points in an organization may have very different attitudes to, and arguments, for or against, a specific change. Melin (1977) found that arguments both for and against centralization of purchasing in a multi-unit firm were well articulated. Managers arguing for, and those arguing against, all related to effectiveness aspects concerning the firm's relationships to suppliers. The managers can be interpreted to argue based on different network theories. Markoczy (2000) reports that the strongest determinant of similarity of beliefs about a proposed strategic change was by being a member of the functional area favored by the change. Neelankavil HYPERLINK "http://www.emeraldinsight.com/Insight/ViewContentServlet;jsessionid=28523FCC32D54A9E8E86676B352F3F60?Filename=Published/EmeraldFullTextArticle/Articles/1770080501.html#idb49idb49"et al.HYPERLINK "http://www.emeraldinsight.com/Insight/ViewContentServlet;jsessionid=28523FCC32D54A9E8E86676B352F3F60?Filename=Published/EmeraldFullTextArticle/Articles/1770080501.html#idb49idb49" (2000), in a four country study, found differences in perceptions about what affects the managerial performance of middle-level management. The existence of such differences could influence the outcome of the globalizing firm's reorganization.

1. Influencing factors to MNC

A multinational is a firm that controls operations or income-generating assets in more than one country. Multinationals are owned in their home economy and invest in host economies. It has sometimes been suggested that multinationality requires operations in a minimum number of countries, usually five or six, or that a firm active across borders should be certain size before it can be called a multinational, but there are enormous problems with such restrictive conditions. Since 1970s the United Nations has used the term translational to describe the same phenomenon. Firms with particularly extensive international operations have sometimes been described as global.

A firm whose sole international involvement is the exporting of goods or services from its home base is not a multinational. A multinational engages in one or two types of foreign investment. Portfolio investment involves the acquisition of foreign securities by individuals or institutions without any control over the management of the foreign entity. Foreign direct investment (FDI) involves management control. Multinationals engage in FDI because they own and control assets in foreign countries. They may do this either through acquiring an existing firm or by making a Greenfield investment involving the establishment of completely new operation.

The most straightforward example of multinational investment occur when a company establishes a wholly owned subsidiary in a foreign country. However , there are a range of intermediate and alternative contractual modes available between wholly owned foreign subsidiaries a and exporting, involving both equity and non-equity arrangements. Firms may share ownership in a joint venture. Nonequity arrangements include licensing, which involves a contract between independent firms to transfer technologies, rights or resource; franchising , when a company grants another company grants another company the right to do business in a certain way over a certain period of time in a specified place; cartels, which are agreements between independent firms to maintain prices or limit output, and strategic alliances, which are arrangements between firms to share facilities or cooperate in new product development.

Crossing borders raises major strategic and organisational issues for firms. This is because they encounter alien policies culture, languages and laws. As a result, foreign firms experience the ‘liability

of foreignness’ (Zaheer 1995). The scale of this ‘liability’ rests on the distance between the home economy of a multinational and the host economy. Distance increases costs and risks. Ghemawat (2001) identified four dimensions of distance: political; geographical; economic; and cultural. Political distance includes the multiple barriers to foreign trade and investment flows which governments have traditionally maintained. Geographical distance includes not only the physical distance between countries, but also a country’s transportation and infrastructure. Economic distance includes the income differences between countries, as well as differences in supply chain and distribution channels. Cultural distance includes differences in language, religious and ethical belief, social norms.

Multinational corporations are torn in two directions. On the one hand, they must adapt to local circumstances in each country. This call decentralised decision making. On the other hand , they must coordinate their activities in various parts of the world and stimulate the flow of ideas from one part of their empire to another. This calls for centralised control. They must, therefore, develop an organisational structure to balance the need for coordination with the need for adaptation to a patch-work quilt of languages, laws and customs. One solution to this problem is a division of labour based on nationality. Day-to-day management in each country is left to the nationals of the country who, because they are intimately familiar with local conditions and practices, are able to deal with local problems and local government . These nationals remain rooted in the spot, while above them is a layer of people who move around from country to country, transmitting information from one subsidiary to another and from the lower levels to the general office at the apex of the corporate structure.

Another way in which the multinational corporations inhibit economic development in the hinterland is through their effect on tax capacity. An important government instrument for promoting growth is expenditure on infrastructure and support services. By providing transportation and communications, education and health, a government can create a productive labour force and increase the growth potential of its economy. The extent to which it can afford to finance these intermediate outlays depends upon its tax revenue.

However, a government’s ability to tax multinational corporations is limited by the ability of these corporations to manipulate transfer prices and to move their productive facilities to another country.

2. MNC’s domestic economic development

Servan-Schereiber’s analysis of the American challenge provides a useful starting point. His analysis rests on three basic propositions. First, modern technology requires large corporations. The large corporation, because of its ability to concentrate capital and administer it effectively, is an essential requisite of growth and modernity. The parallels on this point, between Servan-Schreiber’s analysis and that Galbraith in The New industrial State, are of course obvious. Second, country (continent) without its own multinational corporation will become colony. If Europe does not create corporate capitals to match the Americans giants it will be reduced to plating a secondary, colonial role, not just in the economic sphere, but in the political, social, and cultural spheres as well. Third, the appropriate remedy lies in positive rather than negative measures.

During the nineteenth century thousands of British, and hundreds of Dutch and other European, companies were formed exclusively to operate internationally with no prior domestic business. There were international venture capitalists, exploiting the numerous opportunities of the booming world economy and expanding imperial frontiers.

Typically, free-standing companies were legally incorporated in their home economy. They would have a small head office where a part-time board of directors met, supported by a handful of other clerical staff. They usually specialized on a single commodity, product or service, often in a single overseas county. They were predominantly located in the natural resources and service sectors, and occasionally in processing. Most free-standing companies invested in developing, including colonial, countries, although many British free-standing firms were formed to conduct business in the United States.

This type of firm was long considered as a vehicle for portfolio capital flows. Yet insofar as management control was exercised from head offices at home, they are more appropriately regarded as a form of multinational. The reclassification of free-standing firms engaged in FDI prompted the large upward revision of the amount of FDI in the world economy before 1914. In fact, there remain many uncertainties about management structure of these firms. In some cases, most managerial decision-making was located in host economies. Some firms were engaged in a form of property development. Once the short-lived need for their specialized project management skills dried up, management control shifted to locals, and the investment ceased to be FDI.

Nominally independent free-standing companies were often part of wider business networks. There were “clusters” linking different firms around original promoters, financial intermediaries, solicitors, accountants, mining engineers, merchant banks, trading companies, and influential individuals. Common to all clusters was the provision of service. The small head offices of the free-standing companies typically outsourced much managerial function. Insofar as firms formed parts of networks, the description “free-standing” might be misleading.

As companies grew across borders they were transformed from national firms to international producers. However, the national origins of firms shaped strategies and organisations. There were also persistence variations between countries in multinational propensities and timing, and industrial and geographical distribution.

A number of models have related the national differences in multinational investment to the stage of a country’s economic development. In the investment development path model, a country’s international investment development as measured by its GNP per capita. A developing economy passes through four stages. In stage 1 of the pre-industrialisation there is no inward or outward FDI. In stage 2 , if the economy has developed, the country will begin to attract inward FDI as domestic markets increase and the variable costs of servicing those markets are reduced. In stage 3 , a country’s net inward investment per capita begins to fall. This may be because the original ownership advantages of foreign firms has declined or because local firms have begun to improve their competitive capacity or because local firms have developed their own comparative ownership advantages which they have begun to exploit through FDI. In stage 4, a country is a net outward investor, with its investment flows abroad exceeding those of foreign- owned firms in its own country. This reflects the development of strong ownership advantages by its firms and /or in increasing propensity to exploit these advantages internally from a foreign rather than domestic location Dunning (1981).

The view that manufacturing FDI is associated with technology leaders is supported by considerable historical evidence. These has been a strong correlation between the innovatory competitiveness of countries in particular sectors and the propensity of their firms to engage in multinational activity. Since the nineteenth century, new waves of multinational investment in manufacturing have originated from technologically leading firms clustered in specific home economies which were either present or former world technology leaders (such as the United States and the United Kingdom), or else highly technologically developed (such as the Netherlands, Switzerland and Sweden). The home country distribution of outward FDI has reflected the fact that countries differ in their technological capabilities, and that these differences- and differences in the patterns of technological specialisation among countries- have been stable over long periods of time (Pavitt and Soete 1982, Cantwell 1989).

3. Globalisation as a main factor of local economic development

The continuing of the home country environment in even the most globalized of industries was the theme of Porter’s “diamond” model of the sources of international competitive advantage (Porte 1990 ). Porter argued that four sets of attributes of a home economy are critical for the competitiveness of its firms: the level and composition of natural and created resources ; the quantity of demand by domestic consumers; the extent to which its firms are able to benefit from agglomerations or external economies by being grouped in clusters of related activities; and firm strategy, structure and rivalry. These four sets of attributes are interlinked and interact with one another in a “diamond”. Government and chance are too other determinants which may affect the primary four attributes.

Internationalisation – or “globalisation” – is the interaction of two phenomena: the mobilisation of resources at the world scale and the international dimension of economic competition. It has been deregulation of financial markets, the liberalisation of trade, and the developments of communications technologies have accelerated the trend.

This model does not seek to explain patterns of multinational investment. The international activities of firms are seen as primarily exporting rather than investment . However , the model can provide a powerful means to identify factors behind national strengths in particular industries(Dunning, 1993). It is evident in broad terms how factor endowments have influenced the historical evolution of multinational activities. Capital ability was important. The leading European capital exporters of the nineteenth century – the United Kingdom, Germany and France- were also leading homes to multinationals, while development of the United States as the world’s largest creditor after World War I was accompanied by that country’s emergence as the largest home economy in terms of FDI flows. However, United States, Sweden and Japan grew as direct investors before 1914 while their economies were net capital importers. Britain remained a major outward investor long after it ceased to be a net capital exporter.

The existence of natural resources in home economies helps to explain national variations in the sectoral distribution of the FDI. The existence of natural resources provided companies with access to skills which could be exploited abroad in mining or agriculture, and sometimes in manufacturing .

The combination of human capital and institutional arrangements which facilitated knowledge acquisition from abroad seem to have given the country a high “absorptive capacity”(Lundgren,1995). During the twentieth century US leadership in computer and information technology industries reflected not only size of the US market and US defence spending in particular, but the web relationships and information flows between companies and universities, and between venture capitalists and entrepreneurs, which provided a unique environment for creativity and innovation.

The industrial structure of the economy was probably among the most important such variable. Depending on its particular complement of industries, it can therefore be predicted that a small nation will have either a very large amount of FDI or a very small one (Caves, 1996)The industrial structure in turn resulted in differences in concentration levels. British companies may have possessed advantages in capital-raising derived from their large size, as well as the large size of the British capital market (Clegg, 1987).

Government regulations and trade barriers have shaped outward multinational investment. Japanese consumer electronics and automobile industries grew to s large scale within a Japanese market protected by import controls and strict limits on inward FDI.

As a result, a ”double diamond” approach has been proposed which suggests firms now build upon both domestic and foreign diamonds to become globally competitive(Moon, Rugman, and Verbeke, 1998).

The relevance of the “double diamond” framework may not be confined to the contemporary global economy. Within these companies, managers were able to make choices between the different “diamonds” in which they were based.

While large multinational corporations face variety of strategic issues the focus in the direct consequence of globalization. This is not the setting in which to enter into a detailed discussion of the drivers of globalization, but in brief they include:

economic change, specifically increasing free trade within and between trading blocks, increasing mobility of capital, and increasing openness to inward investment;

technological change, especially the rapidly-increasing ability to coordinate international activities such as product development through electronic media; and

global competition, driven by the growth ambitions of firms in both developed and developing nations, and the never-ending search for economies of scale and scope.

Expressed in a slightly different way, Dunning (1998) has argued that the world is in the midst of transition into a new phase of market-based capitalism, marked by 1 a shift in the source of wealth-creation form land, labour and finance to knowledge; 2 a broadening spatial context of assets-creation and usage from local to national to global; and 3 an evolution in organization form from the individual entrepreneur through the managerial hierarchy to an alliance-based capitalism. Taken together, these trends are having significant impact on the strategies and structures of individual multinational corporations. In the contemporary business press, globalization of firms and markets is of significant interest, mostly as they relate to strategic initiatives by firms in terms of mergers and acquisitions, strategic alliances or green-field investments. Of greatest interest are initiatives aimed at reorganizing distribution for greater effectiveness in a global market. Often “logistics” or the “supply chain” are explicitly or implicitly alluded to. Firms specifically mentioned are of many different types: manufacturers, distribution specialists, service firms, software firms, etc. Taken together, these hundreds or indeed thousands of strategic initiatives signify major efforts to change firms and relationships between firms.

Risk has been suggested as a major reason for the internationalization or globalisation of firms as well as a major obstacle to international investment. While at first glance these may be seen as contradictory views, when the concept of comparative advantage is used to “unpack” them in terms of the now traditional breakdown of drivers of global integration and drivers for local embeddeness, the story becomes much clearer.

Institutional risks are the most salient in the industry – and not just in emerging markets, as witnessed by the events in California in 2001. Whether these institutions favour globally integrated firms, locally based firms or locally embedded and globally linked firms is a complex question to which there is no ready answer. If global institutions are at stake, powerful players from major countries will win. If local rules are in play, then local influence will dominate expect in colonial cases, for example external triad jurisdiction via IMF, World Bank, or other financial linkages. If ideology and institutional change follow a diffusion pattern internationally, then ability to carry learning regarding institutional risk from one location to another will reinforce the knowledge-based advantages of the globally integrated firm.

Local ownership, or some other meaningful mechanism for creating local stake –holders, in contrast, is extremely important in all three vertical stages, given the ex-post monopoly nature of many of the services provided. Once a concession granted, once a system for transmission or distribution is built, it tends to be natural monopoly and it tends to be generating positive cash flows.

Critics argue that the current neoliberal global economy allows MNCs to utilize Southern workers as cheap labour and to exploit lower standards on working conditions, basic worker rights, and environmental regulations. MNCs have provoked considerable debate around the conflicting issues of

“efficiency” and “fairness,” and the resultant balance of economic growth and social injustice. The simultaneous surge in economic growth and inequity has led to serious implications for human rights in the developing world.

The MNCs’ advocates, in contrast, regard them as benign engines of prosperity—enhancing local living conditions by generating employment, income, and wealth, as well as by introducing and dispensing advanced technology to the developing world. There are three emerging perspectives

that inform corporate social responsibilities. First is the so-called “reputation capital” view that sees corporate social responsibility as a strategy to reduce investment risks and maximize profits. The second view, referred to as the “eco-social” view, considers social and environmental sustainability crucial to the sustainability of the market. The third perspective is the “rights-based” view, which underscores the importance of accountability, transparency, and social/environmental investment as key aspects of corporate social responsibility. Using a rights-based perspective, we argue that in the human rights domain the responsible party is generally the state, and that, especially in the context of neoliberal globalization, the wrongdoers are often corporations. Some experts have argued that states are not and should not be the sole target of international legal obligations and that reliance on state duties alone may not be sufficient to broadly protect human rights.6 A consensus has emerged that certain corporate behaviour is detrimental to internationally recognized norms of human rights. This paper examines the possibility of an outside governing body to hold in check unfettered global capitalism and to bring accountability to MNC policies that are socially detrimental. Through

an examination of the mixed results of globalization and an increased awareness of social responsibility, this paper concludes that MNCs will not address specific human rights violations if assigned only to a voluntary set of principles set up in the UN Global Compact of 1999.

CONCLUSION

We introduced the major concepts of globalization, distribution and culture and how they relate to each other. The reorganization aspects of globalization and distribution are discussed as they relate to multinational corporations, mergers/acquisitions and strategic alliances.

One of the most important trends in the world economy in recent years has been the globalization of economic and business activity. World trade has grown significantly faster than world output over the last few decades and FDI flows have grown faster than world trade.

Some of the major features of the globalization phenomenon have been the development of global finance and financial markets, the spread of knowledge facilitated by improved communication, the wide spread availability and use of technology , the active expansion of multinational corporations, the decoupling and decentralization of economic activities within and between firms, the bluring of nationality of multinationals, the development of global oligopolies, reductions in barriers to trade and investment, the increased importance and power of supranational organizations such as the European Union, and the emergence of regions and regional identities that transcend borders(Amin and Thrift, 1994; Dicken,1994;Dunning,1998; Hagstrom,1990;and Reich,1991)

Transportation, information, energy and financial infrastructure of the first global economy were put in place by business enterprises. They financed , insured and transported world trade in manufactures and resources. Trading and shipping companies, banks and utilities facilitated the expansion of world trade, constructed the infrastructure of a global economy, and spread technologies.

The persistence influence of nationality on international firms is one of the paradoxes of multinationals. The ownership of international business has always been concentrated in a small number of home economies, whose firms have differed considerably in the industries and countries in which they invested, and how they organized their businesses. The factor endowments, the size regulatory system, and cultural values of their home economies shaped the nature of their multinational firms. In these ways, geography and culture have shaped the dynamics of international business.

However, the best way to ensure the cluster-development programmes are tailored to the local economic and social reality. This implies careful identification and characterisation of local clusters in all their dimensions, explicit recognition of their needs, and programmes that clearly target specific market failures. It implies an understanding of the motivations and needs of multinational corporations that are though competitive environments as well. It implies a growing differentiation of regions and further geographic division of labour. When viewed in this way, cluster-development programmes can be useful tools for policy-makers as they seek to maximize the potential of their own economies to effectively deal with a globalizing-localizing world.

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