Multinational Firms as a Source for Progress - Essay Example

? Topic: International Business. “Multinational firms are a source for progress”. Discuss. The world has seen a growing trend of more and more numberof multinationals being set up in the recent years. Thirty years ago there were 7,000 multinationals worldwide and now there number has increased to more than 60,000. By the year 2000, thousand of the world’s largest multinationals accounted for nearly 80% of the world’s industrial output and the top hundred of these firms contributed to 4.3 % of world’s total Gross Domestic Product. Multinationals are a source of great opportunities for the host country as well as themselves. Multinationals are powerful companies employing many people and earning a lot of money. Often their location is welcomed by governments around the world because of the benefits of employment and wealth they bring to a country. Multinationals are a source for progress. I agree with the statement because of the fact that it gives way to globalization, international relations and sustainable development. The first multinational corporation in the world was the Dutch East India Company and the first modern multinational company is believed to be East India Company. It was a mega corporation holding immense power and control in the sub-continent by coining money, forming colonies and negotiating treaties. Multinationals have power and control, they can use their huge revenues and control over distribution channels and brand loyalty of consumers to push countries to open their markets and lessen their support for local companies. If we talk about China alone, great amount of foreign investment has entered their economy with foreign-funded firms increasing from a number of 470,000 to over 500,000 in just a span of two years, from 2004 to 2006. Multinationals form a major part of this increasing number, employing about 24 million people and representing around hundred of China’s 200 large exporters and monopolize main market segments like soft drinks. With the emergence of multinationals, the world is advancing leaps and bounds due to increasing globalization. Technology and communications have advanced to such a level that it has revolutionized the selling of products all over the world. Multinationals get in touch with new communities in the global market by building production factories in other countries, besides, their home country. Coca-Cola, a huge soft drink manufacturer now sells and manufacturers soft drinks in over 200 countries across the world. Similarly, Microsoft, a computer software company, earns its 27% of annual sales revenue outside of the United States. In many ways the world is becoming one large market than a series of separate national markets. The same goods and services can be found in many countries throughout the world. Globalization is the term now widely used to describe the increased worldwide competition between businesses (Stimpson, 2006). There are several reasons for this increasing global competition. Free trade agreements and economic unions have reduced protection for industries. Consumers can now purchase goods and services from other countries with no import controls. Improved travel links and communications between all parts of the world have made it easier to compare prices and qualities of goods from many countries. This has further developed as the internet has become more widely available worldwide. Many countries which used to have undeveloped manufacturing industries have been building up these businesses very rapidly. Countries in South East Asia and China itself used to import many of the goods they needed. Now, that their own manufacturing industries are so strong they can export in large quantities. This creates much more world competition. Globalization has led to more choice and lower price for consumers. It has forced firms to look for ways of increasing efficiency. Inefficient producers have gone out of business. Many firms have merged with foreign businesses to make it easier to sell in foreign markets. This is one of the reasons behind the growth of multinational organizations. It is important to remember that a multinational or transitional business is not one which sells goods in more than one country. When a business produces goods and services in more than one country, it is known as a multinational firm. Multinational businesses are those with factories, production or service operations in more than one country, although its headquarters may be in one particular country (Stimpson, 2006). These companies are some of the largest in the world, often selling billions of pounds of goods and services and employing hundreds and thousands of workers around the globe. Most of these firms are Limited Companies. A few examples may include oil companies like Shell, British Petroleum and Exxon, tobacco companies such as British American Tobacco and Philip Morris and car manufacturers like Nissan and General Motors (Titley, 2008). Imperial Chemical Industries (ICI) is among the world’s largest chemical groups. The parent company is British and it has manufacturing businesses in over 50 countries. It is interesting to note that the yearly sales of some of these multinationals are greater than the total value of goods and services produced by all the firms together in some whole countries. For example, while ICI made pounds 18.5 billion of sales in 2002, the total value of all the goods and services produced in Kenya was 6.3 billion pounds, in Bangladesh 13.4 billion pounds and Zaire only 4.1 billion pounds. Even the largest British multinationals like ICI are quite small compared to some of the American giants like Exxon, General Motors and Ford motor car company. For example in 1983 each of these companies had a sales turnover which was larger than the total income of all but fourteen companies. Multinationals are able to sell far more than any other type of company. The ability to set up factories to produce goods and services in many different countries increases the number of potential consumers of the company’s products. They are able to expand into different market areas to spread risks. For instance, if sales are falling in one country then the business may move to another country where sales are rising. Multinationals can avoid transport costs. A company that sold goods all over the world would find that it had to pay many transport costs. By producing goods in different countries and selling them in those countries, a multinational can reduce its transport costs. It can also locate factories near to its supply of raw materials. For example, tiles and bricks are difficult and expensive to transport so the producer sets a factory near the market in another country. Multinationals can be in an advantageous position due to varying wage levels in their countries of presence. By locating in a less-developed country, a multinational can often benefit of so-called cheap labor where there are very low wage rates. Many sports clothing like Nike is produced in South East Asia because wages are lower than in Europe. Multinationals can attain great economies of scale. They can lower their average cost of producing each good by having massive production lines and producing millions of goods. They have a less chance of going bankrupt than other companies. Multinationals tend to produce a wide variety of goods so that if demand of one product falls they can have other products to fall back on. Similarly, selling to a large number of countries also reduces the risk of one particular country reducing its demand for the products of multinational companies. These are called risk-bearing economies of scale. These firms can carry out a lot of research and development. In order to improve old products and develop new ones to stay ahead of competing firms, multinationals spend large amounts of money on research and development. There is no doubt that business gain from becoming a multinational. But it can have great impact on the country they operate in. There are both advantages and disadvantages to the countries as a result of multinationals operating there. When multinationals operate in a country, they provide jobs decreasing the level of unemployment. New investment in buildings and machinery will increase output of goods and services in the country. Some amount of their extra stocks is exported to other countries. Also, imports could also be reduced as more goods and services are made in the country, thus improving the balance of trade by fewer imports and more exports. Taxes will be paid by, multinationals which will increase the funds to the government. The disadvantages of multinationals operating in a country are also great. The jobs created are often untrained low earning jobs. Skilled jobs, such as those in research and design, are not usually created in the host countries receiving the multinationals. They may compel local firms out of market. Multinationals are often efficient and manage to have lower average costs than local businesses. Whatever profits multinationals receive, they transmit them to their home country. They may exploit the natural resources by using up valuable primary and scarce resources of the host country. As the businesses are very large they could have a lot of influence on both the government and the economy of a country. They might ask the government for large grants to keep them operating in the country (Parkin, 2006). From a critical point of view, it is argued that multinationals give way to pollution to save their own money, ignore poor working conditions where labor is exploited by working in intolerable condition for long hours on a very low wage rate, encouraging child labor and add to unequal distribution o wealth. But the positive impact they bring upon countries is even greater. They give vital capital and wealth to international markets. Foreign direct investment is brought into a country which can further attribute to improving infrastructure, investing money in research and development organizing equal distribution of income and wealth amongst the poor members of a country. The United Nations Development Programme (UNDP) is forced to restrict the spread of multinationals and the ever growing globalization. But UNDP offers to find new ways to manage multinationals so that their harmful influence is limited to an extent while not over-shadowing their potential for developmental aims and progression. UNDP favors multinationals in promoting sustainable development. Although this issue has been debated regarding the environmental degradation they add up to, by building new factories and using up limited natural resources. They encourage water and air pollution by dumping industrial waste and emitting dangerous chemicals from factories. The availability of more jobs has resulted in more and more people to migrate into cities. This growing urbanization again leads to more pollution in the atmosphere by using more cars and public transport and energy resources. When new factories set up, they require land area and more lumber for factories. This way forests and woodland areas are cut down. Deforestation can have harmful effects on the environment. If deforestation continues to occur at a rate of 3 to 4% a year in countries like Sierra Leone and Thailand, then all tropical forests will become extinct in around 30 years. The point is to regulate new environmental laws to restrict these problems rather than forcing investment and multinational firms out of one’s country. Multinationals those are set up in under developed countries like Vietnam or Kenya, give poor working conditions to cheap labor that they employ. The labor is often not given their due status and wages. And are made to work long hours in factories with no breaks in between. They are not paid for overtime work or any bonus. Multinationals are freely able to exploit labor as they have a certain influence and control over the government. The government cannot do much about their leverage because sometimes there are very less employment opportunities in such third world nations, so the poor people are willing to work even in such poor conditions for a little amount of money to earn a livelihood. It is also important to note that if there was no foreign investment and technology transfer brought in by these firms then the conditions could be worse. The government needs to be more responsible in terms of regulating fair and universal laws, stable political condition to benefit most from globalization. A noted economist, Paul Krugman, has put forward a very significant point that a great amount of successful economic development in the last century has been due to globalization. If it is objected that workers were impecunious by globalization then it is to note that they were in poorer living conditions before the advent of multinationals and exporting jobs. Such businesses have improved the lives of people in general with the arrival of new innovations, sensible business practices and the required investment. When we talk about sustainable development and multinational corporations, let me quote the example of the software industry in Ireland, Israel and India. These countries have seen high growth in the software industry through the advent of multinationals like Microsoft. 75% of India’s total sales and 84% of Ireland’s total sales in the software industry is contributed by multinationals and exporting companies. These firms support the flow of new business ideas, models and technology as well as vital capital and investment. The credit also goes to these three countries for being successful in attracting these foreign firms for improving their market share of national software industry. Some foreign firms have now started to compete with international businesses like US and western corporations by producing the same kind of products that they make. A product by the name of Mecca-Cola has started to replace Coco-Cola in most Arab countries. People have now started to shift to Mecca-Cola because the taste is quite similar to the original soft drink and also because of this certain negativity they have about the western culture and it’s over shadowing influence above other cultures. Multinationals help those countries with relatively weak economies by providing them with physical and financial capital and overcoming their capital shortages. This way wealth is generated and new jobs are created. Moreover, tax revenues are produced as these firms will have to pay all liable taxes be it direct or indirect. Countries can improve their infrastructure and human capital through this money. If we take an overall all, all this helps to reduce poverty levels. The United Nations must encourage developing countries to attract foreign direct investment (FDI) for their economic and political well-being. Countries in the African district, South Asia and Middle East usually lack foreign direct investment because they tend to have economies strictly controlled by government laws and regulations; their economies are monopolized by inefficient nationalized industries and have non-democratic systems. The outcome is increasing poverty, oppressed human rights, unequal distribution of income, low social welfare levels and massive environmental degradation in these countries. Multinationals can be criticized for their monopoly power but I believe that they bring competition. As long as the completion is healthy and non-destructive, it helps to the consumers worldwide by providing them with a variety of high quality and low-priced goods. Competition alongside free trade provides mutual gain to both the countries to produce products efficiently. As we have seen earlier that some monopolies are very huge like Microsoft, Wal-Mart and Intel and have a monopoly to some extent but it has done more good than harm to the domestic economies in the form of foreign direct investment. The UN’s World’s Investment Report of 1999 concluded a study that when FDI increases by one dollar, then domestic investment and crowding-in effect also increases in the developing countries as a number of new firms enter the market (Blomstrom, 2006). The argument that MNC’s do no operate with imperviousness, lacks substance because they are highly monitored and supervised and given almost no liberalization of laws and regulations in UK and USA and some more countries. Almost all multinationals are profit-motivated but their investment decisions are also dependent on the country’s economic and political corruption levels. Usually third world nations have high corruption levels of bribery and inefficiency of government officials. MNC’s do not necessarily contribute to environmental damage; instead they invest money in the production of environmentally safe products and the spread of green marketing and technology. They maintain high environmental standards and social responsibility which also encourage their affiliates and fellow companies to follow the same trend. Small companies do not have enough capital and money to invest into research and development and improving their products from an environmental point of view. It is a known fact that multinationals help in creating jobs and improving employment levels. By the year 2000, they accounted for nearly 100 million jobs created indirectly – it is known as the multiplier effect. When foreign direct investment comes in, both, the multinationals and domestic country become better-off. The company benefits from profits. Domestic country benefit in the form of jobs created, tax revenues generated and capital formation. The USA witnessed its lowest unemployment rate in 2000 in 30 years (Birdsall, Graham, 2005). In countries where multinationals is present, poverty levels persist and continue at an alarming rate. These companies help to improve poverty levels by providing jobs and welfare to people. From the years 1960 to 2000, literacy rates in developing countries increased from 48 to 70%, except for some African and South Asian countries but they were able to increase their life expectancy rates from 50 to 60% and infant mortality rates dropped by 56%. East Asia and Latin America are more welcoming towards MNC’s and have managed to improve their life expectancy to that of industrialized nations. The production and consumption of food has improved over the last 15 to 25 years in developing countries at all levels of human development. There have been improvements in food and diet intake and the malnutrition rates in the Sub-Saharan African district has also gone better. With strict child labor laws and health activists’ pressure, multinationals have curtailed their child employment to quite an extent. Multinationals and them being a source for development and progress is closely linked together. They provide the developing nations with much needed jobs and capital. They bring in environmentally safe technologies. They provide equal distribution of income and wealth and help developing countries to escape severe poverty levels. They help improve the education levels, infrastructure and future markets in the developing countries. UNDP must realize that they have both positive and negative impacts on globalization. Other countries must welcome the foreign direct investment brought in by multinationals, and then allocate it properly into responsible programmes to improve their infrastructure, political stability and economy and make sure that no harm is done to their environment or culture. Strict environmental and social laws should be implemented. UNDP can advice developing nation how to build strong legal system and government. Third world countries should also be encouraged to take part in the process of forming multinationals. References: Blomstrom, M. and Kokko, A. (2006) “Human Capital and Inward FDI”, Discussion Paper 3762, CEPR, London, February. Brian Titley and Dan Moynihan. (2008) Economics: a complete course. Oxford University Press. Castellani, D. and Zanfei, A. (2007) “Multinational Experience and Linkages with Local Firms. Evidence from the Electronics Industry”, The Cambridge Journal of Economics, 26, pp. 1-25 Daveri, F., Manasse, P. and Serra, D. (2002), “The Twin Effects of Globalization”, Centro Studi Luca D’Agliano Development Studies Working Papers, N. 171, November. Haddad and M. and Harrison, A. (1993), “Are there positive spillovers from direct foreign investment?” Journal of Development Economics, 42, pp. 51-74. Gary Quinlivan, “The Multilaterals,” chapter in Globalization of the Economy: the Effects on Politics, Society and Family, edited by Lee Edwards, Paragon Press, and expected publication date are 2006. Gorg, H. and Strobl, E. (2006), “Multinational Companies and Indigenous Development: An Empirical Analysis”, European Economic Review, 46, pp. 1305-1322. Grimes, S. (2003) “Ireland Emerging Information Economy: Recent Trends and Future Prospects”, Regional Studies, 37, 1, pp. 3-14. Karen Borrington and Peter Stimpson. (2006) IGCSE Business Studies. London, John Murray publishers. Michael Parkin. (2006) Economics, university of Western Ontario, fifth edition. Nancy Birdsall and Carol Graham (EDs). New Markets, New Opportunities? Economic and Social Mobility in a Changing World, Brookings Institution Press, Washington D.C., 2005. Read More