Multinational Firms Are a Force for Progress - Research Paper Example

Running Head: Multinational firms are a force for progress Multinational firms are a force for progress [Institute’s Table of Contents Table of Contents 2 Introduction 3 Analysis of Costs and Benefits for multinationals 3 Criticisms regarding Multinationals 9 Conclusion 9 References 11 Multinational firms are a force for progress Introduction A multinational is a firm, which has its headquarters in a specific country and business operations in more than one country. A company that exports its products and services to other countries cannot be included as a multinational organization is much more than an exporting business (Marcouse, pp. 242, 2003). The concept is that a multinational corporation has its operations and production facilities in more than one country. Some examples of multinational companies are Coca Cola, Toyota, Honda, Ford and British American Tobacco. Many multinationals have massive amount of turnovers that they have the capacity to manufacture goods comparable to the gross domestic product of some smaller developing countries. Analysis of Costs and Benefits for multinationals The question is that why do firms opt to become multinationals, this is important as almost none of them began its initial operations as a multinational. Firstly, growth into different geographic locations in an attempt to keep away from protectionist policies, and secondly, since the world is becoming a global village these firms are likely to benefit. If a multinational is producing in a specific country, it can avoid the tariffs and quotas levied by that country. This is possible by registering in the respective country directly and by benefiting from policies of most countries that favor the establishment of domestic industrial units as opposed to imported products. Another aspect of globalization is the improved transportation networks that have facilitated speedy transactions and movement of goods. Improvement in communication infrastructure has also resulted in many breakthroughs for the possibility of multinational operations. Multinational corporations (MNCs) have a strong bargaining power with the governments of the respective countries where they operate. If a government changes policies and or does not provide adequate incentives to these corporations they can threaten shut-down of operations and quite comfortably transfer their production machinery and operations to countries that provide a favorable environment for their operation. “As multinational corporations function across borders, business managers have admitted that the increasing globalization of the world economy has allowed these firms greater access to broader consumer markets and delivery networks, as well as organize production and trade transactions within financial clusters or networks involving cross border in-house and out-house relationships” (Eiteman, pp.32-37, 1995). Proximity to local markets is one factor that provides MNCs with an opportunity to benefit from operating in other countries. This results in reduced transportation costs and helps these companies charge prices that are more competitive compared to what they would have charged if they were exporting those products instead. MNCs can save certain tariffs and quotas by producing locally. Many import restrictions originally faced by outside companies do not apply to multinationals while producing locally. In the late 1970s and the early 1980s when many Japanese car manufacturers built the car plants in the US, which was the largest car market in the world at that time they were able to avoid quota and trade restrictions and gain a larger market share of the United States market (Rugman, pp. 8-11, 2005). A similar practice resulted in the Japanese manufacturers taking over market share in the European Union, due to its generous free trade policies. The question is if such behavior of multinationals is healthy for world economy as a whole. Definitely, MNCs are a rising force of today and as far as they can help provide a rather diverse range of products to the consumers at competitive rates their existence seems justifiable. Also another favorable opinion regarding them is that they provide job opportunities for the local markets and therefore the economy’s purchasing power increases in general. If a multinational has been operating in a country for a long time, consumers often perceive it as a local firm. An example for that is in the United Kingdom as many people started believing that Vauxhall was a British firm rather than an American firm. This means that multinationals can certainly gain goodwill of the consumers by producing in the local markets. This goodwill obviously translates into higher sales revenues and stronger bottom-line for these companies. Low labor costs are among other advantages that attract MNCs to establish their production facilities in developing countries. They can employ semi-skilled or under skilled workers to perform the operations and then obviously give them a lower wage, as compared to workers in their host countries. By doing so, they can lessen the labor cost per unit, resulting in a decrease in prices or do not change the price but enjoy a heavy profit. Even governments help the MNCs to establish in their country rather than going elsewhere. They do so by offering those companies selling in tax free zones, different forms of subsidies or loans at reduced rates (Jones, pp. 12-13, 2005). In case of tax rates, MNCs locate countries where corporate income tax is lower, as it benefits these “corporate giants” big time. There are certain benefits for the host countries, giving way to the multinationals. These include inflow foreign direct investment, skilled workers, new jobs, technology transfer, and infrastructure improvement. The poor developing countries burdened by heavy loans from the International Mutual Funds (IMF) and World Bank benefit from the inflow of foreign currency in the form of investment from multinationals. These countries usually have high interest burden that needs to be paid. The problem in this case is that most of the foreign currency inflow from MNCs in the end goes back to the developed countries in the form of interest payments, this result in the vicious cycle of poverty. Since these multinationals operate in the less developed countries and therefore have to start from scratch, sometimes they even support infrastructure development in those countries. New roads constructed to access markets can eventually result in superior infrastructure for local producers and thereby provide an environment for economic growth. In many African countries such as Nigeria, oil-digging companies from China have obtained long-term contracts and in return, they promise sustainable development in the localities that include roads, electricity and other infrastructure (Tugendhat, pp. 152-154, 1971). MNCs bring along a vast pool of jobs irrespective of what nature but there are many jobs available. These developing countries also have issues of unemployment so these corporate giants also help reduce unemployment. Along with creating jobs, these multinationals also help these countries in increasing their gross domestic product, and then raise their standard of living. Adding to it, if the products are imported the country’s balance of payments is going to have a favorable effect, meaning, the exports will be relatively greater in amount as compared to the imports. An example to support such an argument is of Toyota, building up a car manufacturing plant in Derby. Not only did it create jobs for the locals, but also raised the GNP for England. Moreover, eventually the balance of payments got a boost because of them. The next point is in linkage to the above point, related to skills. These employed workers will need training as well according to international standards. The training that these workers get is transferrable to the locals as well. This creates a chain reaction and benefitting all. Similarly, sub-contracting functions may offer a fresh market for the local enterprises. The local small-scale firms are also in the line to benefit from what latest technology these MNCs are going to bring in the area, popularly known as technology trickle-down effect. These small firms can also get their hands on such up to date technology that was previously either never heard of or simply unavailable. “Multinationals are in a better position to capitalize on other new specialized resources such as funds, technological expertise, information, tacit information, and production capabilities required to enhance future product and services improvement” (Anderson, pp. 12-14, 1991). When MNCs start their operations, they usually bring in some skilled staff from other developed nations, but when the factory is established and running, locals get a chance of promotion to top positions. Similarly, management techniques are transferable as well, as Japanese did with their techniques of Just-in-Time manufacturing, the Kaizan approach. Through their nature, multinationals amalgamate production at a global level and, in this way; they take part in a key role in economic development (Hall, pp. 342-345, 2001). These businesses are the main factor in the expansion and spreading of technology, which implies to have a great significance as a determinant of global competitiveness and advancement of the countries. Multinationals add to the shaping of capital, offer expert training and have a vital role in trade. They also play a key role in managing international moneymaking activities and sustain, in a sizeable and encouraging way, the social and monetary wellbeing of both the source and host nations. The host countries accept multinationals as an additional supply of investments, technology, innovation, employment, management modernization, labor training, increase of the control of national competitiveness, a larger integration into the world economy and the opening of new export markets, and revenues from fees and charges. MNCs usually follow higher quality and health standards and improve the wellbeing of the consumers and employees by increasing positive competition in the emerging and developing economies. They also benefit from the unsaturated markets in the developing economies that have a huge potential for increase in demand. The enhancement of interdependency of economies in the world is definitely in link with the progression of liberalization of financial flows (Zanfei, pp. 52, 2006). It is observable that the increasing role of multinationals in the areas of information technology and innovation is the latest benefit provided by multinationals. At the same time, the benefits extended by the growth of multinationals may include their outright challenging position to the policies followed by nation states as they aim to gain ground by turning over the existing order. They often alter current rules and regulations while the nation states try to refuse to accept these revolutions to some extent. Coca Cola international is among the leading multinationals that has spread itself almost all over the globe. In the early 1990s, the then CEO of Coke, Roberto Goizueta said, that in the English speaking countries, the alphabet “C” on the kitchen taps means cold water and the alphabet “H” means the hot water. Mr. Roberto said that he would not rest until that “C” becomes the symbol for Coke. Due to this passion and enthusiasm, the statistics of late 1990s show that Coca Cola had around fifty percent of the share for the overall soft drinks market of the countries in which it operated (Dobson, pp. 171-174, 2005). Criticisms regarding Multinationals The positive role of MNCs is clear, however many in the developed economies criticize these organizations for shifting their manufacturing abroad in order to save on labor expenses. They argue that the jobs created in the developing economies are at the expense of the jobs lost in the developed economies (Albert, pp. 42-46, 1997). However, they fail to account of economic trade-offs involved as it is often more sensible to use automated machines instead of labor for the same processes in the developed economies. While certain machinery is substitutable for labor in the developing economies due to the cheap availability of labor. Conclusion On an ending note, it is clear that these global businesses are not just competing for supremacy in world sales volume or share of the market, but also for larger flow of the capital to support product innovations, investment in hub technologies, and the worldwide supply channel. In due course, these factors have altered multinationals into multi-unit, multifunctional associations, which allow them greater decision-making coordination, while escalating global competition among the rival corporations. Such structural changes would suggest there is increased amount of complication in the global business environment. Not surprisingly, MNCs are facing increasing managerial challenges associated with developing and implementing business line of attack, in order to battle the global economy. In conclusion, the researcher has analyzed some of the noteworthy aspects of multinational firms as forces of progress. It is anticipation that the paper will be beneficial for students in better understanding of the topic. References Albert, Charles. (1997). Strategies for multinationals and competition for FDI. International Finance Corporation. Anderson, Thomas. (1991). Multinational investment in developing countries. Routledge Publishers. Dobson, Wendy. (2005). Governance, multinationals and growth. Edward Publishing Limited. Eiteman, David. (1995). Multinational business finance. Addison-Wesley. Hall, Dave. (2001). Business Studies, Universal Publication. Jones, Geoffery. (2005). Multinationals and global capitalism. Oxford University Press. Marcouse, Ian. (2003). Business Studies, Hodder and Stoughton. Rugman, Alan. (2005). the regional multinationals: MNEs and global strategic management. Cambridge University Press. Tugendhat, Christopher. (1971). the multinationals. Eyre Publishing. Zanfei, Antonello. (2006). Multinational firms, innovation and productivity. Edward Publishing Limited. Read More