The Effects That Multinational Companies Can Have on the Host Country - Term Paper Example

 Effect of Multinationals on Host Country and Local Companies Introduction Globalisation paved the way for significant rise in the number of established and resourceful firms outsourcing their business operations across national boundaries. The largest and internationally recognised firms from the developed world have been in the forefront of such strategic planning, propelled by economics of production, availability of raw materials and trained manpower, demand saturation at home and rising incomes levels and therefore demand, in select overseas destinations. Emerging economies like Brazil, Russia, India and China attracted wide attention in the past two to three decades and have become the preferred destinations of multinationals for globalising their operations. While expanding into new territories, multinationals have to analyse and face the complex socio-economic, political and cultural factors that prevail in the different countries they choose to enter. Entry of such firms disturbs many of the existing practices, not the least being the compensation and therefore competitiveness for the country as well as its home grown businesses. The threat of a more resourceful foreign competitor is not taken lightly by the local firms who are hitherto competing with other local firms to secure due market share. New entrants will change the rules of the game and pose new challenges that would lead to emergence of new equations and new strategies for survival. At the country level, economic downturn in the parent country, as at present, can have undesirable contagion effect in the host country. In short, Effect of multinationals ….. 2 multinationals provide opportunities as well as pose threats for the host country and its local businesses. Globalisation The term globalisation is used both as a description as well as a prescription. In descriptive way, it is used to mean the ‘process of integration into the world economy’ and in its prescriptive way, it is used to mean ‘strategy of development based on rapid integration with the world economy’ (Nayyar, 2006). Deepak Nayyar puts it best in his words: “It is, in part, an integration of markets (for goods, services, technology, financial assets and even money) on the demand side, and, in part, an integration of production (horizontal and vertical) on the supply side (Nayyar, 2006). When discussing the impact of multinationals on host countries and local businesses, strategic considerations are relevant. Strategy Strategy is best defined as the attempt to reap the highest benefits from out of the natural endowments of a country / business – be it in terms of raw materials, technology, skilled manpower etc. and reach the world markets with greater competitiveness. Viewed from this perspective, the term globalisation defines both a threat and an opportunity; a threat if a dominant economy or a business house commands the world markets, and an opportunity when even a small player can look at the entire world as his potential market to exploit, as did Psion when it confronted Microsoft (Held, 2004). Strategically, firms expand their businesses internationally for reasons such as better profitability of the expanded operations (overseas markets may be more profitable), or to exploit new Effect of multinationals ….. 3 opportunities (particularly if the local markets are already saturated), or for establishing raw material linkages, and of late for reasons of cheap but skilled manpower. Changes in the wake of entry of multinationals (i) Generic changes In this strategic process money, materials and manpower move freely across national borders, resulting in ever increasing global economic activity. Trade and industry flourishes; incomes rise; employment opportunities increase, and in general the standards of life style and prosperity are set to rise. Developed countries reap the benefits of cheap labour and access to markets apart from the significant insights into how business processes can be performed better and more economically as a result of cross fertilisation of ideas. Developing countries gain access to newer technologies and markets, and witness strong GDP growth rates. More importantly, such challenging competition enhanced the confidence level of local business houses and gave birth to the growth of host country multinationals, as will be seen later. (ii) Stirring up local competition When one talks of multinationals, well-known brand names like Coco-Cola, Pepsi, McDonald, Sony, Nokia, Microsoft, GEC, Toyota etc. come to one’s mind. These companies cover fast moving consumables, consumer durables, capital goods and services – meaning the whole spectrum of economic activities. Such firms have their headquarters in the Western world or in other highly developed nations like Japan. These firms are in the forefront of research and development in all areas of business like Effect of multinationals ….. 4 financing, technology and management, and quite naturally these best practices are the first choice for implementation in the new geographical areas of operation. Depending upon the local situation, such transplantation of highly developed technologies and systems might create its own problems due to incompatibility of support services available from the local resources. Dawar and Frost give graphic narration of such a situation while discussing the entry of the much respected Honda brand motorcycles into the Indian market, which was till then dominated by Bajaj Auto scooters (Dawar and Frost, HBR Mar.-Apr.1999). While the technological superiority of Honda bikes is readily apparent, Bajaj Auto countered the new entrant by enhancing its existing network of sales, service and trained mechanics for repair and maintenance of its vehicles in the cities and towns of the vast Indian subcontinent – a feat which was difficult, expensive and time consuming for Honda to replicate. In this case, the multinational entry transformed the marketing, sales and servicing programme of the local business and has significantly added to the economic activity. If entry of Honda churned up the marketing strategies of Bajaj Auto in India, the experiences of Shanghai Jahwa, the leading cosmetics producer in China or Grupo Industrial Bimbo, the largest producer of bread and confectionery in Mexico were not much different either, say Dawar et al (ibid.). In both cases, entry of corresponding rivals (Revlon in China and Pepsico in Mexico) led to the awakening of the competitive and survival instincts of local businesses by way of improved marketing and distribution systems, offering differentiated products that are in line with local demands etc. Effect of multinationals ….. 5 (iii) Changes in wage structure and working conditions Multinationals bring in their wake significant changes in the compensation systems that prevail in the host countries. In the seventies and eighties, many of the host countries’ economies are underdeveloped or developing, and there was a significant difference in the wages and therefore the lifestyles of employees of multinationals and locals. In fact, this vast difference is one of the prime reasons for migration of manufacturing industries to countries like China and India, a reversal of the brain drain of the earlier years when talented people migrated to the West in search of higher earnings. The compensation offered by the multinationals in host country operations, though not matching the Western standards, are much higher than those of local companies and hence attracted the best of talent. Globalisation phenomenon added a new dimension to this change. Services sector dominated by the information and communications technology revolution, offered significantly higher wages due to extremely high demand for English speaking and trained manpower. Globalisation took the form of on-shore and off-shore contracting and the high wages offered have impacted the wage structure of other local employment opportunities. In this context, the report of Swaim & Hijen commissioned by the OECD confirms that foreign companies pay about 40% higher average wages than the local firms and that the differential is more in case of low income countries of Asia and Latin America (Swaim and Hijen, as reported in OECD Observer, 2008). The authors proceed to demonstrate with evidence that such increases tend to be much lower in developed Effect of multinationals ….. 6 countries of Europe (8 to 14%) and that as the host country employees gain new skills and experience, the average pay increases even more. Thus the entry of multinational companies alters the wage structure of local employment. Coming to working conditions, Swaim & Hijen report that multinationals either voluntarily or under international pressure, practice socially and environmentally responsible practices (ibid.). But this has not always met with success and contract manufacturing in the wake of globalisation has gained notoriety of sorts for the much vilified ‘sweat shops’ of Southeast Asian countries of China, Philippines, Malaysia etc. engaged by the giant US firms like Leo Mattel, Nike or Wal-Mart. Even though these and similar other firms offered steady jobs apart from non-monetary benefits like training, the long working hours, the pittance of wages and the abject living conditions of the migrant workers in these production shops attracted adverse attention. “There should be a floor beneath which no one has to live” was a most compelling argument put forth by Tom Hayden and Charles Kernaghan in their article ‘Pennies an Hour, and No Way Up’ which appeared in NYT of July 6, 2002 (Hayden & Kernaghan, 2002). However, there have been supporting voices also, like for instance, “Two Cheers for Sweatshops” which appeared in NYT of September 9, 2000 authored by Kristof and WuDunn of NY Times, who have made several trips to China, Thailand and India from 1987 onwards and found the economic development and increases in the wages even in sweatshops, a pleasantly surprising reality. Effect of multinationals ….. 7 (iv) Opportunities exploited Globalisation has opened the doors for hitherto large national companies to venture out and become multinational firms themselves. Large Indian firms like Infosys, Tata Consulting Services, Tata Motors, Tata Steel, Mittal Group are some well-known examples. This development can at least partly be attributed to the exposure of these firms to international business practices as a result of the entry of the US, European and Japanese multinationals into India. In his report of January 2007, the BBC’s economics reporter Schifferes, the Economics Reporter of BBC News outlines the growth of the Indian IT industry with its headquarters in Bangalore – a city that has attracted more than 500 international companies (Schifferes, BBC News, 2007). The combination of local talent and the requirements of these multinationals resulted in transforming India into a global hub for IT and IT enabled services, all in the space of just two decades, since Texas Instruments opened its offices in Bangalore in 1988, as Schifferes report mentions. The contribution of this service sector to the overall growth of the Indian economy in terms of exceptionally high wages, realty and automobile sector demand growth, new lifestyles etc. has been very significant. Corporate governance practices of the Western world became the norm since many of the Indian companies were also listed in stock exchanges abroad. “Developments in information and communications technologies have the power to change the spatial frames within which we live and work,” says David Held in his book A Globalizing World? Culture, Economics & Politics (Held, 2004). This is evident Effect of multinationals ….. 8 from the way the Indian IT sector has grown and helped to transform the image of India from one of being an underdeveloped nation to that of a fast growing and technology savvy giant. Conclusion Global economic activity has moved from the days of international trading of the colonial era through the stages of international, multinational and now globalised businesses. Liberalisation and globalisation is enabling businesses to tie-up various resources across the globe into the most cost-effective operations. This very process is leading to all round growth of economies of countries that are endowed with the required resources. These resources include not just scarce raw materials but socio-economic and demographic factors such as big populations, low wages, young and trained manpower, English language skills etc. The advent of information and communication technology has greatly contributed to the globalisation phenomenon, itself being a prime mover as well as beneficiary of the trend. Entry of multinational companies and globalisation of economic activities has led to significant changes in the employment opportunities, income and knowledge levels, competitiveness and overall prosperity of host nations and local businesses. Effect of multinationals ….. 9 References Dawar N & Frost T., (1999). “Competing with giants: Survival strategies for local companies in emerging markets”, HBR, March-April 1999. Hayden, T., Kernaghan, C., (2002) “Pennies an Hour and no Way Up”, NY Times (07/06/2002).Retrieved on March 25, 2009 from: http://www.vaxpower.org/~toups/national/1355.html Held D., (2004). “A globalizing world? Culture, economics & politics”, Routledge, New York, Excerpts retrieved on March 25, 2009 from: http://www.questia.com/PM.qst?a=o&d=108557645 Hijen A, & Swaim P. (2008) OECD (2008), “Do Multinationals Promote Better Pay and Working Conditions?”,OECD Observer, October 2008, p.15-17, issue 269. Kristof, N.D., WuDunn, S., (2000) “Two Cheers for Sweatshops”, NY Times (09/24/2000). Retrieved on March 25, 2009 from: http://www.eco.utexas.edu/faculty/Hamermesh/sweatshops.htm Nayyar, D. (2006), “Globalisation history and development: A tale of two centuries”, Cambridge Journal of Economics, 2006, 30, pp.137-159, Oxford University Press. Schifferes S (2007), (Economics Reporter, BBC News, Bangalore), “Multinationals lead India's IT revolution”. Retrieved on March 25, 2009 from: http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/6288247.stm. Read More