Mncs As A Force For Development - Essay Example

? MNCs as a force for development College: Introduction The last few decades have seen dramatic increase in foreign directinvestments and multinationals in terms of geographical spread, size and activities multiplicity. This growth has been associated with the generation and command of resources across the world as well as been a positive force for economic development and growth. The unprecedented increase and expansion of multinational corporations has seen increase of interest among the media, scholars and the public who have explored the subject. Multinationals are deemed as key instruments in maximizing economic welfare across the globe while in other aspects they are deemed dangerous agents of economic imperialism (Ietto-­Giles 2012, p. 33). These are issues and basic facts that have been examined by different scholars using different theories and have had different views and conclusions through different opinions and ideologies. Growth in multinational enterprises has been associated with growth in world economies through development of technology, information and communication as well as distribution of resources across the globe (Buckley 2009, 132). Multinationals have also been deemed vital in creating employment in the world markets and enhancing economic development in the economies where they have invested. However, these positive aspects have not been free from the possible perils that come with foreign investments and growth of multinationals. For instance, growth of multinationals in third world nations has been associated with the uneven development; this has mainly risen from overpricing of technology (Rodriguez-Clare 1996, p. 852). Aim of the study The main aim of this study is to explore the growth in multinational corporations and their spread across the world, with a view to examine the extent to which they are a force of development and progress. The study will explore the current trend in multinational corporations and identify how the growth has been associated with economic development and progress. The study will also examine possible perils associated with growth of multinationals. This will help identify whether the positive results of multinationals growth far outweighs the possible perils. Growth trend in multinational enterprises According to Buckley and Casson (2009, p. 1563), Multinational enterprises or the MNEs are defined as firms that own and control activities in more than one country through mergers joint ventures or franchises. These are businesses that are started in one country and later on start investing in foreign countries by establishing their market operations in the existing and emerging markets. There has been enormous growth in multinational enterprises or the MNCs and the international direct investment in the recent decades (Buckley, P & Casson 2003, p. 219). Companies based in industrialized nations have been leaders in establishment of multinational operations due to their strength in ownership advantages that is derived from innovation and highly advanced technological applications. Multinationals have been strongly associated with economic growth and trade. United States, Japan and Sweden among other developed nations are identified as leading home countries for most multinationals since the countries are mainly the source of the foreign direct investment (Dunning & Sarianna 2008, p. 182). FDI is one of the most common mechanisms used by MNCs to start and maintain business operations in foreign countries. Few companies were investing overseas in the early and mid-1960s, however, the trend of growth changed and there was significant change towards foreign direct investment activities. Since 1990s, there has been significant growth in international trade and production that has not only been reflected by the magnitude of the multinational firms but has also had sectoral composition of inflows and outflows. The significant change in sectoral composition and geographical investment activities has been argued to result from the changing motivations of businesses to export supporting operations rather than market seeking operations. This has raised various issues at the international level particularly in terms of international trade and the practical policies. The theory of international trade and investment suggests that growth in multinationals is grounded on three principles. The first principle is that firm boundaries are set where benefits associated with further internationalization are offset by costs. The second principle is that multinationals select location of their businesses based on the least-cost location of their activities taking into account the linkages of other activities (Ietto-­Giles 2012, p. 94). The third principle is that firm’s profitability and growth dynamics are based on continuous innovation that stem from research and development. Innovation in this context is construed globally to include technology, new products, commercial applications of knowledge and new ideas and skills and new business methods. The theory suggests that interaction of the mentioned three principles determines the strategies and location selected by MNEs. According to orthodox theory of business location, there are always constant returns to the scale of business and that firms act as price takers in the factory markets. These factors determine how a firm will expand its business activities to optimize location and the related production benefits. MNEs evaluate regional production costs, which enables the firms to select locations that minimize production costs. One of the factors that has seen multinational enterprises increase is the least cost factor. For instance, so many multinationals have established their operations in China where they take advantage of the least cost labor and increasing technological advancements that at are not overpriced as compared to the developed nations (Carkovic & Levine, 2002). The other factor that has so much driven establishment of multinational corporations particularly in third world countries is the opportunity to innovate and explore new business opportunities. In addition, modern businesses are performing many activities as opposed to the routine production, for instance, they are producing goods and services, marketing, and they are also carrying out research and development activities. Multinationals select locations that enable them to integrate production, R&D and marketing activities since these activities are interdependence and the transport costs and information costs and flows must be considered. Combining both the location effects and internationalization explains why businesses chose to invest in different markets. Internationalization theory explains how a firm identifies its external markets and boundaries in effort to configure its production plants, distribution centres and R&D laboratories. Multinationals as a force for progress MNCs and FDIs are central to establishment of international economic relations between countries, FDIs and MNCs have played a great role in building a strong economic relationship between Japan and United States (Markusen & Venables 1999, p. 335). For instance, Japanese subsidiaries in U.S. and U.S. subsidiaries based in Japan report foreign revenue that is higher than total value of the two countries’ bilateral trade. Trade liberalization The common motives for MNCs investment particularly in developing nations include market seeking for their production, resource seeking for their industries, export-oriented and also technology seeking. Such motives differ from one market economy to another. MCs however is a force for liberalization of markets, this has been the case for certain economies such as Africa, Middle East and East Asia (Buckley & Casson 2009, p. 1576). The benefit of liberalization of these markets has been decreased non-tariff and tariff barriers to capital flows. Development of links such as the ASEAN Free Trade Area that has linked South East Asian nations forming one united market that has few investment and trade barriers. Such links have increased investment opportunities for some market economies particularly the Malaysian economy whose corporations have speeded up their international expansion taking advantage of the liberalization in trade (Buckley & Casson 2009, p. 1578). The effect of MNCs in trade liberalization has opened up economies into new markets where they are able to export their produce and import raw materials at reduced tariffs. Employment and knowledge transfer Most developing nations have small populations and have low per-capita income and this makes them less likely to attract market-seeking multinationals. Market-seeking multinationals focus on higher-end distribution of income, marketing policies and product offerings that bypass poor consumers. However, developing countries attract asset-exploiting multinational investments that comprise of low value activities and low technology in the economies where labor is mostly cheap and unskilled (Barry & Hannan 1995, p. 21). These multinationals play an important role in creating employment in these countries. The individuals in the host countries and the domestic firms as well gain knowledge and productivity advantages for free. Unemployment, lack of skills and the required knowledge are some of the problems that hinder the growth in developing nations. NCs thus play an important role in transferring skills and knowledge to the local labor market through employment of host country’s nationals and the linkages with the host country’s firms. Change of labor markets With rapid industrialization in the developed nations, labor market has been becoming more tight as labor costs increase. MNCs seek international expansion in effort to reduce their costs of production particularly labor costs, transport costs, and information related costs among others. Investment of these firms in other countries like Malaysia has been a source of transformation for the country’s labor market (Barry & Bradley 1997, p. 1799). MNCs work with global business policies, for instance, most MNCs do not have a standardized remuneration policy that is applied across nations but rather set their remuneration policy according to the demands of the host country’s labor market. However, they set their remunerations in a way that they give the best in the labor market in order to attract the best talents and skills giving the employees the best possible salaries to maintain them and remain competitive. The result of their practice is that the labor market is improved and the cost of labor in the host country goes up. This is an advantage to the host economy since it no longer remains a cheap labor economy. Malaysian was a cheap labor economy, as a result of rapid MNCs’ growth that resulted in industrialization. The country’s labor market has been transformed and is no long a cheap labor economy. Technology development MNCs play an important role in enhancing technology development; MNCs transfer technologies from their home countries to the host countries introducing new systems of enhancing business operations and production of goods and services (Xu 2000, p. 477). They also transfer management techniques that contribute in expanding production capacity of the firm in the new foreign locations. Domestic firms learn from these technologies and the management techniques and in turn improve their operations and production capabilities. Such technology capabilities and management techniques form competitive advantage for the multinationals in the host country (Balasubramanayam et al 1996, p. )93. However, as domestic firs learn from the MNCs, the result is an improved competitive environment with increased production and growth for both domestic and multinational firms. Infrastructure development Growth of multinational enterprises is contingent on existence of good infrastructure in the host economy. Lack of a good infrastructure negates potential positive effects of income and productivity growth, this explains why the effects of growth of multinationals and FDI is more stronger and highly positive in the developed countries where infrastructure if good (Yamin & Sinkovics 2009, p. 145). Good infrastructure acts as a hallmark for economic development. Multinational enterprises are also key in driving the development of infrastructure. In less developed countries, Multinationals establishing subsidiaries in the rural or urban set ups plays a critical role in improvement of health and education institutions in the location. The employees and managers working at the subsidiary require education for their children and good health. While MNCs may not directly invest in infrastructural development, their presence motivates the government to establish schools and hospitals to serve the surrounding population. Sometimes the multinationals together with other local private enterprises invest in the institutions establishment to serve their workers (Dunning 2001, p. 176). MNCs that are resource seeking creates market for the host countries resources like agricultural commodities like tea and coffee, this motivates the government to develop roads that connect the key areas where such commodities are produced in order to improve their marketability. Some multinationals are in the telecommunication sector and their investment in foreign economies result in advanced systems of communications in these countries, which is one aspect of effective infrastructure. MNCs invest in infrastructure through maintenance of existing infrastructural facilities and in new assets and this provide great opportunities for Host country’s to improve their infrastructure. Comparative advantage Multinationals that operate in different lines of production benefit from comparative advantage since they can maximize in production of products that do well in one country than in others and import products that other countries have comparative advantage in thus maximizing all lines of production (Jenkins 1996, p. 447). Through comparative advantage, multinationals enable economies to specialize on what they can produce best and this also plays a critical role in increasing employment and optimizes factor endowments such as highly skilled labor, infrastructure and technology among others (Cantwell 2001, p. 89). MNCs as a threat to countries’ economic development MNCs invest in countries mainly through FDI. Where FDI operates in the context of high level aggregate demand and effective rule of game, the MNC’s destructive aspects to the market competition are limited. However, where the FDI operates in context of low level of aggregate demand, it may have destructive effects to the political and economic competition. This implies that without effective rule of game, FDI offers negative effects to workers in the host countries and also to those in the home countries. MNCs often have strong bargaining power relative to those of workers, host countries and communities that surround then and this yields coordination problems hindering government from making policies to capture the FDI benefits (Desai 2009, p. 1271). When government realize the negative effects of MNCs and take actions through establishing policies that address such actions, the MNCs threat to leave the country. Knowing the that departure of MNC leads to reduced wages, worse working conditions, lower tax revenues to government among other effects, the government whose bargaining position and power is weak finds itself facing coordination problems. Multinationals’ strong bargaining power results in coordination problems that make it hard for communities and nations to avoid a ‘prisoner’s dilemma’. In countries where there is high employment and high economic growth, FDI leads to increased exports for domestic firms rather than substitution by MNCs. This makes replacement jobs easier to find giving the community and the workers some bargaining power even after domestic plant shuts down. However, in countries where there is shortage of jobs and government faces critical budget problems, bargaining power of MNC is high. Countries that have greatly benefited from FDI such as Malaysia and Singapore have had strong institutional rules and structures. Developing countries often have to accept the conditions and rules of game set by MNCs and this makes it easy for the MNCs to dismantle the countries’ institutional structures thus leading to imperfect competition and shutting down of domestic firms (Rodriguez et al 2005, p. 383). As firms continue to shut down, a country’s loses its economic advantage and the labor market becomes under control of the MNCs. MNCs can in such context operate as monopolies setting costs and prices in the market and largely controlling market operations and conditions. Spillover and threat effects of FDI create magnification effects in the developing countries. These effects are minimized where the country’s inward and outward flow of FDI are relatively good since the country’s economy is able to maximize its returns through comparative advantage. Within the context of developing countries, MNCs are strong forces that yield insufficient level of aggregate demand and thus result in coercive competition, chronic unemployment and destructive international and domestic rules. For instance, MNCs that are market oriented exports their products to other countries and offers lower prices and this way leads to shut down of domestic firms that may not be able to compete in prices given their high costs of production (Bailey & Nigel 2002, p. 55). MNCs use advanced technologies and this way are able to scale down their costs of production and thus be able to compete in prices at home country and in overseas. In developing countries, citizens have lower incomes compared to developed countries. MNCs in such countries prefer being production-oriented. In such countries, one will find that the MNCs have invested mainly in agriculture so as to enjoy reduced production cost and the less input in technology. This way, the MNCs does not influence the economy of the country towards growth but only maximizes on taking advantage of the cheap labor (Hymer 1970, p. 446). In addition, the MNCs import the agricultural output as raw materials that they process and later export to the same countries not forgetting that they buy the raw materials at poor prices and sell their processed products at high prices. These impacts on production and growth depict MNCs as destructive force of growth. Conclusion The study has examined the argument that MNCs are a force to development within the global context and the national context of development. From the study findings, MNCs invest overseas mainly through foreign direct investment or what has been mainly referred to as FDI. These FDIs have varying effects on the development of the home country and the host country. Some of the factors that depict MNCs as a force for development include infrastructural development, technology transfer, maximizing of comparative advantage of countries through specialization according to factor endowment among others. However, MNCs have also their own perils to development, which include magnification effects and weakening of coordination power of the governments of the host countries and dismantling of institutional rules and structures of trade and commerce (Krugman & Venables 1995, p. 858). MNCs can also optimize their trade on imports and exports and thus exploit the host country without benefiting its development. While the benefits of MNCs are core such as creation of employment, technology transfer and infrastructural development, it is important to understand their perils to growth and development so as to know how to handle them and what institutional structures to put in place in order to maximize benefits. 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