Multinational Corporations - Literature review Example

Multinational Corporations Name Student Number Instructor Course Assignment Number According to a survey conducted in the recent past, foreign direct investment has increased rapidly in the past two decades as multinational corporations expand to global markets in different parts of the world. The increased rate of globalization, deregulation policies and alleviation of trade restrictions have been the motivating factors toward the rapid increase in the foreign direct investment by the multinational corporations. Although the multinational corporations invest both in the developed and developing countries, the impact of the trade is hugely felt in the developing countries due to the benefits that culminates from the trade. This paper will discuss the beneficiaries of the foreign direct investment by multinational corporations in developing countries. According to Ghauri (2009), the main beneficiary of the foreign direct investment by multinational corporations in developing countries is the multinational corporations’ investors. Investors benefit by setting up new firms in the foreign countries by having access to a larger market. Multinational Corporations are able to have a wider market for the goods they produce through entrance into foreign market which may had been exploitable due to trade barriers. Production within the foreign country circumvents these barriers. Setting up of a subsidiary leads to production within the country hence more sales by the Multinational Corporation. This increases the profit margin of the Multinational Corporation compared to when they concentrate on developed countries only. The investors then repatriates back part of the profit into their country where it is used to conduct more research and some is re-invested into other industries. Zhang (2008) writes that multinational Corporations’ investors benefit from reduced cost of production achieved through Foreign Direct Investment. Multinational Corporations invest into developing foreign countries where there are plenty of deposits of natural resources. The large deposit and high technology involved in extraction enables the Corporations to operate at economies of scale thus lowering the overall cost of extraction in reference to labor, wages and cost of transporting the raw materials. Low cost of production translates to reduced prices of the final commodities. Lower prices improve the competitiveness of the product in the market resulting into more sales which increases the profit margin of the Multinational Corporations (Zhang, 2008). Additionally, multinational corporation investor’s greatly benefits from foreign Direct Investment through reduction of risks involved in business. For multinational corporations that make investment in other countries, they are usually exposed to different economic cycles. The more investors invest in different economies, the more they become diversified hence minimizing their operational risks. This means that if a corporation invests in 28 countries and 12 are faced with an economic crisis leading to a reduction of profit or even losses to Multinational Corporation, it can offset the losses from the profit made from the remaining 16 countries (Potterie & Lichtenberg, 2013). Although the multinational corporations investors and their countries benefits from the foreign direct investment, the main beneficiary of the trade is the developing countries. The developing countries benefit from foreign direct investment through capital injection into their economies. Entry of a new company into the production means that some equipment, construction materials and some labor force will be needed. The labor force required in these investments is provided by the local population from the developing countries. This leads to employment opportunities for the developing countries thus reducing the high level of unemployment common in developing countries. The payment for wages to the employed workers and materials obtained locally to the corporations bring more money in circulation to the developing economy. This will increase local investment thus increasing the money circulation in the economy. The overall effect will be growth and the development of the developing countries (Borenszten, 2009). The governments of the developing countries also benefit from foreign direct investment through the revenue collected from taxation after the multinational corporation starts generating profit which is subjected to taxation. This increases the funds available for the governments to spend on building and upgrading of hospitals, investing more in education, provision of cleans water, construction and maintenance of the roads resulting in better services to the citizens. Al Large number of people is employed by the governments to provide the above extension services thus resulting in more employment opportunities. This helps in improving the standards of the living for the country’s population (Ghoshal & Bartlett, 2010). Lall and Narula (2004) argue that the developing countries benefit from foreign direct investment through spillover of the new and better technology. Multinational Corporations are usually characterized by use of advanced technology in their production. Their ability to have specialized knowledge, expertise in management and have a variety of capital inputs which are usually transferred to the developing countries through training (Lall & Narula, 2004). This helps the local companies to assimilate the new technology in their production so that their products are able to compete with that of the affiliate in the market. People involved in technical areas of affiliate may also be employed in domestic firms where they are able to transfer the knowledge learnt in advanced technology affiliates. This knowledge obtained may easily be passed to other local organizations leading to overall development of human capital in the developing countries. Favorable competitions ensure that the customers are able to obtain the product at better cost and superior quality than they would with initial technology. According to Borenszten (2009), developing countries benefit from increased volume of export as a result of entrance of multinational corporations into the domestic market. The use of advanced technology especially where the developing countries have sufficient raw materials for production may lead to a multinational corporation producing surplus which may be exported to other countries. The creation of Export Processing zones in the developing countries also plays a significant role in increasing the volume of goods available for export. This helps to maintain a stable currency rate by balancing the characteristic high volume of imports in a developing country to that of export. This ensures that the country currency is relatively stable to avoid an instance of inflation which negatively affects the demand for country’s export in the international market. The entrance of multinational corporations benefits the countries by aiding in development of new industries. In most instances, the affiliate multinational corporations do not own a hundred percent shares capital in the foreign entity. For the purpose of getting easy entry into the local market, a strategic alliance between the foreign corporation and the local firm may have to be developed to enable a new industry to be set up in a developing country. Through the use of integrated technology from the affiliate corporations, the developing countries get to establish new industries and the multinational corporations get access to a new market through the partnership with the local market Foreign direct investment plays a significant role in helping the developing countries have access to international trade. Entry of a multinational corporation helps in getting access to markets that were not available to the country as they are well connected globally in terms of access to financial markets, consumer outlets and transportation networks. Foreign firms can easily help domestic exporters by acting as a source of natural conduits for information about foreign consumers, their state technology, and also provide the distribution channels through which domestic firms may distribute their goods (Ghauri, 2009).This raises the country’s foreign exchange earnings thus its ability to service external debt and consequently stabilizes the host country currency rate. International trade fosters good relationship between trading partners and this enhances foreign relationship between the trading partners. Lastly the presence of foreign firms stimulates competition and innovation as domestic companies fight to maintain their market share. This makes local firms to eventually lower their prices, produce higher quality goods and reorganize themselves so that they are able to operate at economies of scale. This is only possible by the firms making capital investment in plant equipment and investing in workers so that they may gain new skills through explicit and implicit training. This paper has discussed the beneficiaries of the foreign direct investment by multinational corporations in developing countries. Investing into another country’s economy or expanding business operations abroad is extremely financial rewarding as a result of access to a larger market for the goods offered by the company, reduced cost of production that may accrue as a result of easy access to raw materials and the type of investor security offered by being able to spread the business risks to a wider market. The developing countries that are open to foreign direct investment have a higher growth rate because of the transfer of general knowledge of specific technologies and the extent at which capital is injected in the economy thus boosting investments within the country. The labor force has gained experience in modern management resulting in enhancement of better human resource and consequently improved quality of the goods produced. Gaining access to international markets has increased the volume of exports and has enhanced foreign relationship between countries. However, for these benefits to accrue, both the governments and investors should have a mutual understanding to protect their interest so as to reap out of the investment. References Blomstrom, M. & Sjoholm, F. (2009).Technology transfer and spillovers: Does local participation with multinationals matter? European Economic Review, 43 (6): 915-923. Borenszten, E. (2009). How does foreign direct investment affect economic growth? Journal of International Economics, 45 (8): 115-135. Ghauri P. (2009). Revisiting the impact of multinational enterprises on economic, development Journal of World Business 44 (7): 105–107. Ghoshal, S. & Bartlett, C. (2010). The Multinational Corporation as an inter-organizational network. Academy of Management Review 15 (4): 603-625. Lall, S. & Narula, R. (2004). Foreign Direct Investment and its Role in Economic Development: Do We Need a New Agenda? European Journal of Development Research, vol. 16, (8) 447–464. Potterie, B. & Lichtenberg, F. (2013). Does foreign direct investment transfer technology across borders? Review of Economics and statistics, 83 (3): 490-497. Zhang, H. (2008). Maximizing benefits from FDI and minimizing its costs. New York: Sage publisher. Read More