How Do Multinational Firms Affect the World Economy?

1511 words (6 pages) Essay in Economics

08/02/20 Economics Reference this

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Multinational firms engage in foreign direct investments and own or control the value addition activities in various countries. The multinational firms have a large company in one country that produces and sell goods in different countries worldwide (Slaughter, 2010). They are at the intersection of the production of goods, global trade, and cross-border investment, therefore coordinating and internalizing the economic activities of the world economy. The ownership of the multinational firms can be private, public or controlled nationally but they remain to be internationally owned and recognized to be originating from a specific country. For example, Nokia is an international brand, but its country of origin is Finland.

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Most multinational firms enter into the international markets through the acquisition of an existing company. They also enter the market through sequential entry and joint ventures with the firms that are already operating in the market. The multinational firms invest through the foreign direct investments which involve the creation of long-term relationships in the interest in a particular economy. The multinational firm, therefore, has specific roles in the global economy and affect the global economy in both positive and negative ways.

Multinational firms have significant roles in the global economy. The developing countries’ economy and the global economy have had considerable improvement since the emergence of the multinational companies. These firms provide marketing opportunities since their products are available worldwide and some have established brands that make people want to associate themselves with the company (Slaughter, 2010). They also facilitate the improvement of research and development hence producing the quality product that meets international market standards hence consumers have quality and safe products. Multinational firms encourage the use of modern technology and offer technical assistance to the developing countries thus bridging the gap between the developing and the developed countries.

According to UNCTAD (2013), the report on World Investment Report of 2013 shows the multinational firms’ significance in the global economy as of 2012; the firms contributed to a total GDP of 71,707 billion dollars. The Foreign direct investment inflow and outflow were valued at 1,351 and 1,391 billion dollars respectively. Among the top ten foreign investors, the U.S is the largest foreign direct investor in the world with over 329 billion dollars in 2012. The amount of value added products was a total of 6,607 billion dollars which was an increase as compared to the previous year. This significant change indicated that the emergence of multinational firms contributes to the global economy. Furthermore, multinational companies control approximately a quarter of the world’s economy. They have higher sales than the combined sales of at least 182 countries around the world.

The multinational firm generates several effects to the country that they operate in areas of economic growth, innovation, and technology capacity. Also, the multinational companies have an impact on areas of employment, market structure and balance of payment. The positive effects of the multinational firm are that they facilitate the national development of the developing economies through offering financial and technical assistance to the firms and through the foreign direct investments. Also, the multinational enhances the export base of the developing economy by eliminating the need to rely on the export of primary goods but instead focus on value-added products. The entry of the foreign company increases the level of competition and consequently results in improved productivity and availability of quality products at affordable price to consumers. Equally important, the activities of the multinational firms in the host countries generate positive spillovers to the local firms thus reducing the average cost of production of the domestic firms hence increasing its price-cost margin which eventually increases the survival rate of domestic firms in the market.  

Additionally, the multinational firms create employment opportunities with highly skilled and competent workers around the world since they have subsidiary companies operating in different countries with diverse employees hence they integrate the employees into their system. UNCTAD, (2013) indicates that when compared to the previous years, the employment rate increased in 2012 and it had a value of 71,695 billion dollars. The multinational companies also help in promoting a culture of competitiveness thus eliminating the power of monopoly as a result of few companies in the market. According to Slaughter (2010), the U.S multinational firms in the U.S contribute a large share of the productivity level in America by enhancing activities such as research and development, capital investment and trade which eventually leads to creating jobs and high compensation for the employees. Well established U.S multinational companies efficiently compete in the international markets hence gain and maintain a competitive advantage that enables them to position themselves towards the economic growth of America. 

Slaughter, (2010) highlights that most of the U.S multinational companies concentrate their operations in America and not in the subsidiary companies, hence they have the capacity and ability to promote America’s economy (Slaughter, 2010). The U.S parent firms for the multinational companies contribute to America’s productivity. For example, the total output regarding GDP is almost $ 2.6 trillion (Slaughter, 2010). For the capital investments, the parent companies contribute by purchasing new property, equipment, and plant worth $482.5 billion which is 29.4% of the total capital investments by the private sector. The companies also improved the export capacity by exporting $ 515.4 billion in goods to the global market which is almost half of the total U.S export by 45.2% (Slaughter, 2010).On the improvement of research and development, the U.S parent companies performed research and development worth $200.4 billion which exceeds half of the total research and development activities done in the U.S. 

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Moreover, the U.S multinational companies concentrate their activities in the U.S  hence employ over 22 million U.S workers and employ only 10 million workers in the subsidiary companies in other countries (Slaughter, 2010). The ability of the multinational companies to hire a significant number of employees in the country of operations creates more development opportunities and enhances the country’s economy.

Despite the positive impacts of multinational firms, they still contribute negatively to the host countries particularly the developing countries. The existence of foreign firms in the local markets makes it difficult for the domestic firms to match their competitive level and even if they reach the specific level, they are unable to maintain their competitive advantage hence is forced out of the market (Triple-A learning, n.d). Some of the multinational firms also carry out their activities in foreign countries with the aim of gaining tax benefits by avoiding tax as they engage in the transfer of pricing such that the division firms transact with each other hence it becomes difficult to tax the firm. They also reduce tax liability in countries where the tax rate is high and increase prices of their products in countries with low tax rates. By avoiding tax, the revenue for the host country reduces. Hence they lack sufficient income for social and economic development.

In some cases, multinational firms produce using efficient and cheap methods to lower production costs and maximize profits. In such cases, they excessively exploit the natural resources that consequently lead to environmental degradation. They will also lobby for the development and implementation of policies that suit their interest at the expense of the local producers, and the consumers hence continue to produce while making the environment unsustainable for the host country (Triple-A learning, n.d). The multinational companies have a more significant influence on the government policy process and procedures due to the benefits they contribute to the economy of the host country. The government will, therefore, agree to their proposals and implement them even if they have the potential to affect the citizens of the host country severely.

In conclusion, multinational firms have significantly contributed to the global economy. Both the parent firms and their subsidiary firms in foreign countries contribute to the global economic development in one way or another. However, it is their activities in the host countries that have both positive and negative in the economy of the host countries. If there are no safety precautions put in place by the host countries, then the negative impacts have the potential to ultimately affect the economy, social and environmental state of the host country. It is therefore essential that the host country safeguard its interest before entering into a contract with the multinational companies. Moreover, the host country can facilitate the development of local companies to make them able to compete with foreign companies thus being competitive in the market.

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