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Impact of Multinational Corporations on Developing Countries

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Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.

Published: Tue, 31 Jul 2018

Introduction

“For too long, citizens have been content to follow where government and multinational corporations lead. The profit motive has become immune to attack. It is understood that as long as something is profitable for shareholders, nothing else matters enough” Occupy Protester CTV Op-ED – RT News.

The word “Multinational” is a combined word of “Multi” and “National”, which when combined refers to numerous countries. A Multinational Corporation is a corporation that has its facilities and other valuable assets in at least one country, which is other than its parent country. It is a organization or company that both produces and sells services and goods in a multitude of countries. Some MNCs have a budget which is greater than some small sized countries GDP’s. [1]

Some of the major examples of MNCs today are Nokia, McDonalds, Microsoft, Exon Mobile and BP.

One of the initial MNCs was the East India Company (1600 – 1874), which is an excellent examples of both the benefits and drawbacks of such ventures. On one hand there existed a dynamic profit making entity, on the other existed a company operating on foreign soil, under very little control of the British government, having, operating and running their own private armies, utilizing military power and ultimately taking over administrative functions of India.

MNCs have come a long way since then and have seen a sharp increase in the past few decades. The numbers of active MNCs went from being roughly 7,000 in the 1970’s to 78,000 in 2006, being responsible for over half the global industrial output. [2]

Multinational corporations usually bring with them foreign direct investment, which is direct investment in a country by the company for expanding their existing business base or for buying of raw goods and inputs from them.

Multinational corporations were the vital factor in globalization, where local and national governments competed against each other in order to incentives and attract more MNCs and ultimately, investment in their countries. An example of such incentive is the Free Trade Zones, where goods may be manufactured, handled, landed or even exported without any intervention of the local custom authorities. Most of these free trade zones exist in developing countries such as Pakistan, Mexico, Sri Lanka, Madagascar, Brazil and India, as they are eager to attract more foreign investors. [3]

Definition of MNC:

Economists are not in unanimous agreement as to how best define trans or multinational corporations. Most MNCs are multidimensional and can be viewed from a multitude of perspectives. These include: Ownership, strategy, management and structural.

According to Franklin Root (1994), that though some argue that ownership is the key criterion amongst all of the above, a firm truly becomes multinational given its parent company or headquarter is run/owned by nationals of varying countries. Examples that fit this category are Unilever and Shell, which are owned and run by Dutch and British interests.

However via this test, very few companies would fall under the banner of being a true Multinational company, rather most are uninational.

According to Howard Perlmutter (1969) [4] multinational companies might pursue either world oriented, host country oriented or home country oriented policies. He uses these terms as geocentric, polycentric and ethnocentric, however the last is misleading since it focuses upon ethnicity and race, but most countries are themselves populated by a variety and mix of races, whereas Polycentric means the MNCs operations only take place in a couple of foreign countries.

Franklin Root (1994) [5] states that MNC is a parent company which:

  1. Shows implementation of strategies of finance, marketing, staffing and production in its business.
  2. Has direct and binding control over its affiliates and their policies.
  3. Uses those affiliates to conduct foreign production in several countries.

Advantages of MNCs

Increased Investment:

The primary argument in favor of MNCs is that they enable investment into less developed countries which is essential for their growth. According to this argument, there exists a huge gap between the optimal investment levels and the levels of savings in a country. This gap can be minimized via foreign direct investments, i.e. transfer of resources from a foreign source in the form of economic injections.

Technological Transfers:

Another important aspect is the issue of technological transfer. Any MNC operating in a certain country needs to have an agreement with the host country about its operating guidelines. This can be both beneficial or harmful, depending upon the negotiations. If done right, the MNC would agree to a transfer of technology which would turn out to be very beneficial for the host country, since technological advancements require huge research and development funds that the developing countries just do not have. So it makes sense for them to open up their markets in exchange for a technology that could make them self reliant and self sustaining.

Transfer of skills:

Like a transfer of technology, MNCs also bring with them a wealth of knowledge and experience. Their staff is amongst the best in the world and employees from the less developed countries learn plethora of skills from them, enabling them to train others and have a trickledown effect. Foreign firms pay for and provide world class training to its employees and stimulates intellectual as well as capital growth.

Trickle down effects:

MNCs, via their broad investments enable linkages backward, forward and horizontally. Not only does the MNC provide a FDI, but it also benefits companies that it collaborates with, such as industries that produce complementary goods. The service industry also benefits via the increase in investment. It creates additional demand and improves infrastructure abilities.

Increase in Tax revenue:

An increase in tax revenue is also an added benefit, since the host country gets to tax them and includes it in their public revenue. This can be used to finance projects that lead to development of infrastructure, causing economic development.

Reduces gap between capital and labor:

Less developed countries are also highly labor sensitive. As in the ratio of capital to labor is very low. MNCs employee vast numbers of the local population reducing this gap, creating jobs and employment and revenue means for the populace. There are two effects, direct and indirect. Job creation is direct, while the increased stimulus in demand and supply is the indirect employment effect.

Encourages competition:

This investment encourages entrepreneurship and breeds a culture of competition, increasing competitiveness amongst local companies, causing them to improve their own goods and services by increasing their efficiency and ultimately quality in order to better compete.

Improves Balance of Payments:

An added benefit of foreign direct investment is that it helps the Balance of Payments of both, the capital and current accounts, of the host country.

 

Criticism of MNCs:

“Multinational corporations do control. They control the politicians. They control the media. They control the pattern of consumption, entertainment, thinking. They’re destroying the planet and laying the foundation for violent outbursts and racial division.” Jerry Brown

There are two sides to every coin, and this is no different. Critics of MNCs state that the cons far outweigh the pros that MNC involvement brings to host countries. The primary concern for them is the high levels of unmonitored influence these companies have on host countries.

Colonialism:

MNC’s are seen as a offshoot of western colonialism, albeit in a more subtle manner. Far from improving the balance of payments on both the current and capital accounts, critics argue that MNC’s worsen it. This they argue happens when the profits are repatriated to their own countries. Though the local governments may come to an agreement that a certain portion of their inputs be bought in the local market, this however may come at a cost with negative impacts upon the less developed countries current accounts.

Unmatchable influence:

The power, influence and reach of these MNCs have enabled them to have considerable and highly influential affect on the political dynamics of numerous governments and their countries. The MNCs have been known to use this influence to pressurize governments into letting them become more competitive via the implementation of national policies that is conductive to their end goals, which is ultimately a hefty profit. One major drawback of such reforms is a vast decline in any socio-economic reforms.

The regulation and responsibilities of states is growing in number as MNCs’ continue to expand economically and geographically. A set of new difficulties have taken rise as MNCs’ continue to take over most economic activities. Today, they outnumber states in terms of size and power. General Motors is an outstanding example to explain this phenomenon. The MNC is run at a scale larger than seven nations together. The power it has in terms of economics and politics, allows it to control a huge chunk of the world. Hence, it is worthwhile to note that since the 1990’s when there were only 3 MNCs controlling the world’s economies, the number jumped up to 15 within the span of 10 years.

Their large investment portfolios make MNCs a powerhouse when it comes to the negotiating table and most developing countries cannot match up to their level, enabling the MNCs to get the upper hand. This leads to them coercing the government into implementing policies that favor their needs at the expense of the local industry and market.

Technological fraud:

Technological transfer agreements are not always kept, and when kept they are usually skewed in favor of the MNC. Even though most do not agree to a full transparent technological transfer, even if that comes to pass, the technology passed onto the country is usually obsolete in nature or is patented so it would be of little use to the host country on a global scale.

Little or No accountability:

MNCs comprise of international bodies which function beyond the state authorities, in terms of decision making power and the power they hold over monetary assets. Though this legitimate challenge has been out there for thirty years now, yet only slight developments have been noted in terms of accountability. The old-fashioned regulatory body and the MNCs’ significant economic and political power have resulted in a clash which makes the regulation of states turn into a major problem. The MNC has surpassed the national legal structures and disregarded the delicate international bodies, increasing the already existing burden of fulfilling the basic norms of human rights.

Undermine Social and Economic Rights:

The MNCs’ dominant and significant position within the international forum increases its opposing competencies. MNCs’ can easily promote or undermine economic and social rights, which can in turn affect the international community, positively or negatively, depending on the local market of an economy. Though the State still holds much power over the laws and regulations on an international level, MNCs’ have a considerable impact over the decision making process of nation-states. As MNCs’ continue to grow economically and politically, the shift in power is gradually becoming visible. It is a must that the MNCs’ take into consideration the impact that they are leaving in developing countries. As MNCs’ continue to grow, their interference in the public domain also continues to increase. Their interference, leads to social and economic hazards for the public, i.e., the shareholders, employees, consumers and local populations. There is increasing support that calls for a more rigid and stricter regulation of the responsibilities of MNCs within their new assumed role. The world order is determined via deregulations of economics in nature and the lessening of government responsibilities when it comes to the public domain. This new reality has highlighted the growing need for regulation, as the influencing powers of various private organizations is increasing. This needs to be done in order to manage policies and reduce the gap. This extends to the customarily governmental realm of political and social policy, which are areas in which the Multinational Companies hold particular sway.

Their contribution, be it positive or negative, will affect the economies, accordingly. Hence, a positive outlook on their part is a necessity if economic, cultural and social rights are to be promoted in this growing world of evils.

Stifles Competition:

The superiority of MNC’s shines through their competitive nature as the stifle competition by getting subsidized inputs, lowering their costs and then competes with local manufacturers who cannot realistically match up to their prices. This results in a lot of them leaving the field, leaving the MNC’s to monopolies the economy and then once in power, to jack up prices.

Although FDI is supposed to foster growth, with the inclusion of MNCs it might lead to a loss of jobs as more businesses are put out of work. Although host countries require foreign investors to have a fix percent of local workers, this requirement is on the decline due to WTO’s agreement on Trade Related measures on investment.

Unmatched budgets:

An offshoot of their influence on the government, the MNCs also have a huge advertising budget, which enables them to portray a much better image in the eyes of the local populace. With budgets that run in the millions, MNCs almost always succeed in gaining mass market shares of their products since the local companies cannot produce/hire production companies to do the same. This again alienates the local entrepreneurs and makes it harder for the majority of the population.

Human Right abuses:

The Multinational Corporation is an adaptable and established entity that profits from the principles of neo-liberal economics, as well as the predicament of the “home and host” state, the combination of which with restricted levels of liability and a decentralized decision-making hierarchy allows for abuses of human rights to take place internationally, by having doubt standards. Moreover, polices of MNCs such as the WTO, OECD, IMF and the World Bank, have enabled MNCs to gain a position of considerable influence on agendas of social and economic nature.

In this never ending race to be the most economical, one major aspect that has not been given much due consideration is linked to the capacity that a state has to meet the terms and conditions of different forms of human rights obligations, i.e. economic, cultural and social rights. In order to meet this challenge, IMF and the World Bank have imposed economic reforms that allow production of goods and services to be worth exporting along with being deregulated and privatized. Foreign investment has become a must. Today, all states are inclined towards easing labor standards and modifying legal taxes to attract foreign investors. This inclination of states, in turn has led to a major destruction of human rights principles and the capability of states to self-sufficiently regulate their progress. Cooperation is required not only on an international level but also from non-state actors to safeguard rudimentary societal and financial privileges. As nations continue to fight over sovereignty and the power shift continues to impact human rights negatively, the international legal structure is fast becoming inadequate to regulate and control the growth of influential non-state players, i.e. MNCs’.

Environmental impacts:

Economic globalization has had quite a destructive impact on state regulation. People have been affected negatively and gradually the impact is increasing and becoming more obvious. The more competitive a nation, the lesser the regulations. Though this tactic is almost perfect in attracting multinational corporations, it is quite destructive in nature. In order to compete with such nations, other states are also forced to decrease their regulatory measures if they wish to get foreigners to invest in their country. No nation wishes to reduce its competitiveness or power. Foreign investors are now consuming the money that should have been legally invested in maintains the rights of the public socially, economically and culturally. Hence, MNCs are free from any legal obligations which may bind them and put a stop to the activities which are prone to destruct the communities that are subjected to the MNCs treatment.

 

Moving Forward:

With the growing economic power of corporations, an increasing number of domestic and international systems have started relinquishing control over their business over to their locally dominant MNCs. This leads to economic power having a say over political influence, which can be dangerous if left unchecked.

The MNCs have complete power over national development, i.e. on matters such as trade, patent and monetary strategies. While regimes remain divided due to contradictory interests (effectiveness versus social modification), MNCs have a terse, vibrant and single-minded aim of creating as much profit as possible – profit which allows them to control all parties a national and international level.

The abuse faced by developing countries at the hands of MNCs has now become almost unbearable. The international financial structure that accentuates the free market way of thinking, denationalization and a decrease in the involvement of the public sector is thwarting many developing and underdeveloped countries from sanctioning a fair and reasonable progress, on the basis of human rights. MNCs have uncountable funds, are only inclined to maximize profit, use the least amount of employees possible, jump from nation to nation without much consideration , import employees rather than using the local labor, and refuse to acknowledge the social requirements of the state they operate in. All these activities directly impact the socio-economic rights of the public. As a consequence of these elements and several other international monetary problems such as inadequate technology transmission, absence of external investment and the brain drain, various developing countries need guidelines in order to react efficiently to the circumstances. [6]

There is a growing mistrust and anger developing in the developing countries where the economic and environmental impacts have started to show.

Conclusion:

“I was initially recruited while I was in business school back in the late sixties by the National Security Agency, the nation’s largest and least understood spy organization; but ultimately I worked for private corporations.” John Perkins

In his book, “Confessions of an Economic Hitman” (2004) [7] , John Perkins states how he was hired by such organizations to coerce leaders of developing countries to take high levels of un payable loans in favor of a quick short time gain. He states that by doing so, the country would eventually default or ask for more time, upon which these multinationals would sweep in and monopolize the markets.

This practice, he emphasized was being carried out globally and under the guise of various fronts. The public must be made aware of such fraudulent activities and they should demand an end to such exploitations.

A few sweeping observations can be made. With trade and investment barriers on the verge of being dissolute globally, the penetration of MNCs across the globe, especially in developing markets is bound to increase. This would lead them into further clawing their way into the inner workings of weak governments and increase their socio-politico-cultural influences. With numerous MNCs merging, they are increasing their powers and would be harder to resist.

Foreign direct investments has its pros and cons. However they should not be ignored for fear of their adverse effects. Instead policies should be made to better utilize them as the host country sees fit. Foreign capital is one of the primary catalyst of encouraging development, but it should never been treated as an alternate to domestic investments, but rather a helping supplement.

Developing countries need to develop more indigenous industries that are capable of competing on a global scale, in a market full of MNCs. This cannot be done if local industries are considered infant industries and given subsidies so they could play safe, rather they should be forced to compete with the best of them, which would enable them to increase their efficiency.

Less developed countries should focus internally and improve basic areas, so as to better compete against mega organizations and prevent them from dominating the market. This can only be done if they are made to come to economies of scale and plan on operating on a global scale, rather within the confines of a few local markets. [8]

Multinational Companies are a reality and they are here to stay for the forseeable future. It is time for countries which have been exploited to start making changes and amend their ways for the better and the sooner the better.


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