The Theory of Multinational Enterprises - Case Study Example

?Running head: IMPACTS OF TNCS ON HOST ECONOMY Was the Takeover of Cadbury By Kraft in Good News for the UK Economy? Insert Insert Grade Course Insert Tutor’s Name 22 March 2012 Was the Takeover of Cadbury by Kraft in 2010 Good News for the UK Economy? Introduction Globalization has been on the increase in the past decades with different business organizations striving to extend their operations onto the global market. Foreign investment by the transnational corporations becomes one of the essential components of the current global economic system (Norwot, 2011, p.804). The current concept of trans-border business operations began to intensify after the Second World War, even though such business operations have been in existence for some centuries (Ietto-Gillies, 2012, p.7). The wide coverage of these organizations cutting across cultures make them have positive and negative impacts on, and become a point of concern for, their employees, the competitors, the domestic customers, the host government, alongside the other international organizations that may operate in the country (Sat, 2009, p.41; Fuller, n.d). The effects realized will be determined by the nature of operations by the TNCs. This paper focuses on the economic impacts that the foreign direct investments established by the transnational corporations have on the economy of the host nations. It examines how the workers, the suppliers, the domestic competing organizations, and the host communities are affected by the operations of a transnational corporation within a given country. Particular attention is given to the effect that acquisition of Cadbury by Kraft had on the economy of the United Kingdom. The Positive Contributions of TNCs to the Host Country’s Economy The operations of transnational corporations have certain positive impacts on the economy of the host nations. One of the benefits of TNC is transfer of technology into the host economy (Berger & Diez, 2008). The transnational corporations often get into a given country through different entry modes such as exporting, joint ventures with the domestic firms, foreign direct investments, or licensing among many others (Rugman, 1996, p.29). They develop various linkages that form the basis for technology spillover (Berger & Diez, 2008). The local employees will get to learn the modern technologies that the TNCs apply in their production operations. The learnt technologies can than be transferred to the domestic companies when these employees move on to take employments with the domestic firms. In this way, the technology shall have been transferred into the economy of the host nation at a relatively lower cost than other methods of acquisition such as buying the technology from the developers or domestic development of the technology. Similarly, the transnational corporations can acquire or enter into joint ventures with domestic firms. The transnational corporations have better responses to organizational changes. The organizations work in different cultural, institutional, and regulatory environments and they are forced to modify their organizational structures continuously (Lowe & Wrigley, 2010, p.382). The management approaches may be copied by local managers (Berger & Diez, 2008, p.1049) who would transfer the techniques to the management of other organizations if their tenure with the TNC comes to a halt. A manager who has worked for a significantly long period for some TNC may develop new ideas (owing to the research and development carried out by the TNCs) to go ahead and establish his or her new investment scheme. The transnational corporations producing goods locally may help reduce the imports to a given country if the domestic customers are attracted to their products in preference to the alternative imports (Fuller, n.d). The goods made locally by the TNCs are likely to be cheaper since other costs like shipment and duties have been reduced considerably. On a similar perspective, the TNCs can help increase the export from a given economy if the TNC exports goods from the host economies. The TNCs may link with the local suppliers within the country and exporting these goods becomes a good avenue for foreign exchange earnings. The other advantage of the TNC is that it may enable transfer of pricing by the governments (Fuller, n.d). The potential benefits associated with the foreign direct investments drive governments into creating environments that attract foreign investors, among them reduction on taxes. When governments are prompted to reduce business taxes within their territories, the small business organizations within the country will benefit through reduced operation costs. Similarly, the establishment of foreign direct investment or any other entry mode used by the transnational corporations increases the inflow of capital into the host economy, as the firms need to finance their operations. The inflow of capital increases the balance of payments The inflow of capital by transnational corporations also increases employment in the host countries (Fuller, n.d). In the establishment of foreign direct investments, the TNCs will engage the local/domestic employees in their operations. The level of employment opportunities created will depend on the nature of technology used by the TNC, its profitability within the host nation, its linkages to the locals and the scale of activities (Fuller, n.d). The jobs created by the TNCs in the poor nations may be different from those created by the TNCs in the developed nations. TNCs operating in the developing countries are prompted to apply labor-intensive technologies that target unskilled and semi-skilled labor. However, these laborers may be paid lower wages than the laborers in the developed economies. The Negative Impacts of TNCs on the Host Economy TNCs also have negative impacts on the host nation. The TNCs are largely capitalist enterprises that are concerned with their profit maximization (Sat, 2009, p.45). They fall in the category termed as transnational capitalist class with globally linked economic interests of its members and ability to influence politicians and keys stakeholders in the society (Sklair, n.d). This class exercises economic and political control in the local and global scenes towards their interests. The benefits associated with foreign investments in a given country drives governments to develop a business environment such as reduced trade barriers, reduced taxes, and improved infrastructure to attract the foreign investors (Berger & Diez, 2008). The governments lose a lot on such tax reduction and much fund is spent on infrastructural developments that could be channeled to other domestic projects. The reduced government revenues due to low taxes do not favour the expansion of necessary social facilities like schools and health centers within the country (Berger & Diez, 2008). TNCs are praised for technology transfer. However, it is also likely that the TNCs will not allow for full transfer of technology to the host economy. It is observed that in several cases, the TNCs will simply expose the results of their innovations while reserving the background (the technical know-why) of these developments in the home countries (Fuller, n.d). Thus, despite the technology spillover that may occur, the host nation may not be positioned to carry further research for improved production using similar technologies. TNCs provide competition to the domestic firms in terms of resources (Berger & Diez, 2008) and the customers. The organizations may be using locally obtained materials, in which case they are known to exploit the host countries with little focus on environmental impacts of their operations. Other than injecting foreign capital, the TNCs may make use of the capital markets in the host countries due to their market power putting pressure on the domestic firms (Berger & Diez, 2008). As such, the domestic borrowers are left with less available credit forcing small domestic firms to pull out due to low profitability. Effects of Acquisition of Cadbury by Kraft The UK is a developed nation and some of the positive or negative impacts of TNCs witnessed for the poor nations may not be observed in the country. Cadbury was taken over by its US rival Kraft at ?11.9bn after the company accepted defeat while struggling to remain independent (Roberts, 2010; Morris, 2010). Immediately it became apparent that the shareholders accounting for 71.7% of the company’s holdings accepted the approval by the board on the takeover, some key issues arose with the union of workers protesting against the takeover. The major concerns were job insecurity due to TNC’s economic control of the workplace (Sklair, n.d), lost investment due to lost British brand, and further acquisition of British companies by foreign organizations (Morris, 2010). Several such acquisitions had occurred in the UK companies before (Roberts, 2010) and the employees and other stakeholders felt that soon their next generations would have nothing of their own. The union members argued that the company had been profitable and its acquisition by the foreign company would lead to low profitability, as the foreign company would focus on its original brands (Morris, 2010). Before the acquisition, Cadbury employed 6000 individuals in the UK (Roberts, 2010). The acquisition of the company by the US food company affects the employment of these individuals. The workers union at Cadbury feared that a good proportion of the employees would lose their jobs as the US organization focuses more on the payment of its debts (Roberts, 2010). The company has been known to cut down operating costs in the past through shedding jobs, stopping some operations, and transferring its operations abroad, and as such, it is not guaranteed that the organization will have its operations for long period in the UK (BBC News, 2010). It was noted that ‘between 2004 and 2008, the company shed 19000 jobs and closed 35 sites to help reduce its debt’ (Roberts, 2010). It is also likely that the organization will provide lower wages for the employees as compared to what was provided under the former management. Besides, this acquisition has no guaranteed benefits like introduction of new technology or management skills. The companies have been rivals in the Food industry for long, most likely applying similar technologies and management strategies. The other benefits like reduced imports are also not likely to be realized. Thus, the acquisition of Cadbury by Kraft Company has no net positive benefits to the economy of the United Kingdom. It has accelerated the increasing unemployment witnessed in the country as more professionals are introduced into the labor markets. Conclusion The operations of transnational corporations have negative and positive impacts on the economies of the host nations. The impacts will depend on the level of development in a given economy and the operational procedures and processes employed by the TNC. While TNC may lead to job creation in the poor countries, it can lead to increased competition for professionals in the developed nations on one hand or joblessness on the other hand. The acquisition of Cadbury by Kraft was of little positive significance to the UK economy, with likely negative consequences of job losses. Little management or technology transfer can be realized through the acquisition since the companies belong to the developed nations and they have been in the industry for long. References List BBC News, 2010. Cadbury agrees Kraft takeover bid, [online] Available at [Accessed 22 March 2012] Berger, M. & Diez, J., 2008. Can Host Innovation Systems in Late Industrializing Countries Benefit from the Presence of Transnational Corporations? Insights from Thailand’s Manufacturing Industry. European Planning Studies Vol. 16, No. 8. Fuller, C., n.d. The impact of global business activity, F1108GGB-NEWS3, (Attached material). Ietto-Gillies, G., 2012. Transnational Corporations and International Production: Concepts, Theories and Effects, Edward Elgar Publishing, Cheltenham, UK. Lowe, M. & Wrigley, N., 2010. The “Continuously Morphing” Retail TNC During Market Entry: Interpreting Tesco’s Expansion into the United States. Economic Geography, Vol. 86 No. 4, p.381-408. Morris, S., 2010. Kraft secures Cadbury as workers travel to London to lobby MPs. The Guardian- UK, [online] Available at [Accessed 22 March 2012] Norwot, K., 2011. Transnational Corporations as Steering Subjects in International Economic Law: Two Competing Visions of the Future? Indiana Journal of Global Legal Studies, Vol. 18 Iss.2; p803-842. Roberts, D 2010, ‘Brown warns Kraft on jobs as Cadbury's board recommend ?12bn deal’, The Guardian-UK, Viewed 22 March 2012, . Rugman, A 1996, The theory of multinational enterprises: the selected scientific papers of Alan M. Rugman, Edward Elgar Publishing, Cheltenham, UK. Sat, NA 2009, ‘Revisiting Transnational Corporations’ Literature: The Implicit Emphasis on Spatial Reflections’, G.U. Journal of Science Vol.22, No.1, pp 41-50. Sklair, L n.d, ‘The Transnational Capitalist Class and the Discourse of Globalization’, Global Dimensions, Viewed 22 March 2012, . Read More