Effects of the Multinational Cooperation on the development of the Gulf Cooperation Council - Research Paper Example

Name of the Student Name of the Institution Course Date Effects of the Multinational Cooperation to the development of the Gulf Cooperation Council Introduction The purpose of this study is to determine the effect of Multinational corporations on the economic development of the Gulf Cooperation council members. In this effort, the paper will attempt to analyze the extent to which the Multinational cooperation are important in stimulation and encouragement of economic growth rates in the Gulf Cooperation Council member countries. In close context of the paper, it will analyze the relationship between the Multinational cooperation and the economic development of the members of the gulf cooperation council so as to come up with a reliable conclusion that best explain the topic of study. Background of the Study Multinational Corporation is a corporation that operates in more than one country. In most cases, it is an international strategy to outsource labor and other economic resources in bid to maximize the parent corporation’s goals and objectives. The management is commonly done in one country while services provisions and other production processes are done in at least more than one other country. Multinational corporations are characteristically large and they cross countries over the world in bid of business opportunity. As a result, they own and operate assets in more than one country outside their parent country in which they are incorporated and have their head offices. Some of them include Toyota, BP, Phillips and Coca cola among many others. Characteristically, they are large in size and employ many employees in thousands across borders. Their annual sales and capital expenditures often are bigger than those of many African countries and Asian and Middle East countries. Most importantly, they have unique overseas expansion motives since they expand their operations in the overseas due to different reasons. The most common reason is to just continue expanding after they have exhaustively grown in their domestic market. In search of profitable investment opportunities, multinational corporations often strategize in expanding in the overseas to avoid tariff barriers in the host country. Economically, they have great positive impacts on the economic development of the host country since they are often one of the largest investors that create jobs and wealth in the host countries. This study is driven by these economic impacts of the Multinational corporations in particular to the Gulf Cooperation council member countries. Conversely, the gulf cooperation council constitutes six member countries such as the United Arabs Emirates, Bahrain, Saudi Arabia, Oman, Qatar and Kuwait. This council was formed in 1981 with an aim of creating an economic, scientific and business cooperation among its oil-exporting members. These countries are among the richest as per the per capita rating, and with their head quarter in Riyadh in Saudi Arabia, they supply a third of the US oil. With similar political system based on their Islamic beliefs, the Gulf cooperation council was formed to enhance this special relation to pursue common objectives and destiny. Their geographic positions and general adoptions of free trade economic policies are some of the factors that promoted the formation of the gulf cooperation council. Multinational corporations (MNCs) generally play major role in economic development in the world. Recent studies show that an estimation of over one-fourth of the world’s output and one third of the world trade is attributed to the productions of the multinational enterprises. Investments of multinational enterprises commonly known as the Foreign Direct Investment (FDI), have great economic effect in terms of growth, transferring technology and management expertise as well as providing capital. According to Hussein (2009), political institutions that provides commitments to these market-friendly policies for multinationals, will systematically attract higher levels of foreign direct investments inflows. In this case, such institutions create incentives for governments to pursue policy changes that favor multinational corporations likewise. The coming together of the GCC countries in 1981 made the region a welcoming investment zone for many multinational enterprises. Therefore, the members of the GCC have an advantage of sourcing their national income from some avenues like Foreign Direct Investments (FDI) other than from oil production alone. It is important to note that through free trade economic policies, which were a common feature among the GCC member countries, many multinational companies had their focus in this region to expand their business orientations. These companies became the backbone of the foreign investment directly, hence having different impacts in the GCC regions economically. This paper seeks therefore to analyze these economic effects to the development of the member countries of the Gulf Cooperation Council. Goals and importance of the study The study will pursue a general goal of examining the effects the Multinational Corporations to the economic development of the Gulf Cooperation council’s member countries. In this case, the primary goal of the study is prioritized on the specific investment increments and other infrastructural development brought by the foreign multinational corporations in the GCC countries. To effectively address the topic of study, effects of these companies in GCC, however, the following specific objectives of the study shall be pursued: a) Analyze to what extent MNC’s contributes to the economic growth of the GCC b) Identify available resources in the Gulf Cooperation Council region that determines the operations and expansion of MNC’s. c) Look into the relationship between the growth of investment, thus economic growth, and the presence of multinational corporations in the GCC. This study is important in the sense that it will add to the body of knowledge of the facts about effects and importance of multinational corporations to the host countries they are operating in. more than that, with specifics to the Gulf cooperation council regions, the study will actually highlight the effects to the economic development. Many nations, especially the developing nations, have objectively demonstrated competitions in trying to attract international companies, more so the multinational companies. They do this in recognition or perception of the fact that these corporations are one of the key sources of economic development in their countries (UNCTAD, 1999). This study will put more light to this fact in respect to the countries forming the Gulf Cooperation council, hence adding to its importance. Literature Review Foreign investment has been one the best and important resource for economic development. According to Hussein (2009), it’s arguable that inflows from the foreign investments, in this case arising from multinational corporations, could fill the gap between the desired investments and the domestic investments. With respect to this case, the country hosting these multinational corporations may be in a position to break the vicious cycle of underdevelopment (Miguel and Mayer, 2000). Many studies have been focused on the general contribution of the foreign direct investments in a host country’s economic growth, thus development. The arising truth is the fact that multinational companies present in a country do not only add to the infrastructural development, but maintains or increases the desired and the given investment Romer (1993) noted that the potential multinational corporations increase the foreign investments and are now faced with a dizzying array of host government incentives. More than those, with relations to the GCC region, recent economic and social developments agendas have been ultimately related to its ability to attract most of these multinational corporations. The recent years have seen the number of MNC’s increase by more than 30%. Maybe this figure may have been the result of the lifting of the trade barriers in the GCC regions, but the GCC countries have individually and generally at the same time adopted long term visions that highlight most of their development objectives. Diversification of the sources of national income and economic development from oil production is one of them (Hussein, 2009: p. 362-376). One of the advantages of the Multinational Corporations is that due to their ability to operate in multiple countries having different taxation system, they take the advantage of tax variations. Therefore they may be able to place their businesses officially in countries with the lowest tax rates notwithstanding the location of the management (Hussein, 2009: p. 54). Running a multinational corporation therefore benefits businesses from countries that require companies to have a physical presence to be able to get the low taxation rates. The Gulf Cooperation council members have very favorable tax systems to these MNC’s. They therefore strategize more on establishing their businesses in these regions. The United Nations Conference on Trade and Development (UNCTAD) - World Report of Investment (1999) indicates that the growth of the GCC due to investments brought by the MNC’s had grown to 1.3 trillion US dollars. Thus, there is a clear and a growing trend to invest across borders through the corporate transactional processes and thus aiming to locate in GCC. The table (Table 1) below shows a summary of the investment flows by the MNC’s in the GCC member countries. Table 1: GCC MNC’s inflow to member country (in million US dollars) Country/Year 2003 2004 2005 2006 2007 Kuwait 67 20 234 122 123 Bahrain 517 865 1049 2915 1756 Oman 528 18 1688 1623 2377 Qatar 625 679 1298 159 1138 UAE 30 840 10900 12806 13253 Saudi Arabia 778 1867 12097 18293 24318 All GCC 2545 4289 24801 35918 42965 Source: World Investment Report of UNCTAD 2008 The trend therefore shows a tremendous growth of investments across all borders of the GCC members over time. Hussein (2009) put it that the 2007 UNCTAD report showed the foreign investments through MNC’s in the GCC remained a modest accounting for 2.3% of the total world inflows in 2007 compared to the 2.6% in 2006. This showed however, the still available market for more multinational corporations in the GCC compared to other emerging markets. Many studies have identified some of the effects of the MNC’s to the economic development in the GCC member countries. They have gone further in identifying the favorable trading environment and conditions that led to the increase of the MNC’s in the GCC member counties. Some empirical findings, particularly the UN reports, have shown tremendous economic development in the GCC regions following their adoptions of current investments objectives. However, this study seeks to further analyze the topic of study to look into the detailed economic impacts of the MNC’s to the GCC regions. The MNC’s impacts on the economic development of the GCC is strongly positive and therefore, the relationship between economic development and MNC’s in these countries needs a careful analysis as this relationship has extensively explained. The literature review has provided a foundation for narrowing the study to the development effects in the GCC, hence providing a platform to identify the gaps that this study intends to cover through empirical work. Model In order to come up with a reliable relationship between the economic development and the MNC’s in the GCC, the study came up with the following model. Considering that investment by the Multinational corporations in any country directly contributes to the overall investment of that country, the model below constitutes domestic plus foreign investments undertaken by the multinational corporations. Miguel and Mayer (2000) put it that investment by MNCs directly affects the overall investment because it is part of it. Total investment = domestic investment + Foreign Investment I= Id + If Investment, I, is the overall investment in an economy which add to the national income of a country. Empirically, National income = investment+ government expenditure + consumption Y= I +G +C Let G + C be t Therefore, the model is Y = kI + t, Where k is constant and I is the investment which is constituted by If. Introduction of If, which is foreign investment by MNCs, affect the capital formation of the country generally because domestic producers may at some times learn through the activities undertaken by the multinational enterprises in the country, without being displaced. This model is supported by Romer’s (1993) paper on the contribution of FDI to development. According to Romer, the driving force of this endogenous growth model is the introduction of new goods into the economy. Foreign direct investment (FDI) sets in at this point. Regression Consider the table (Table 2) below that shows the inflow of FDI by Multinational Corporation. Years FDI Real GDP Growth 1996 634 4.1 1997 2825 8.0 1998 2630 3.4 1999 (1105) 1.8 2000 (1723) 6.5 2001 549 4.2 2002 336 1.8 2003 2545 4.3 2004 4289 4.3 2005 27266 7.9 2006 35918 7.9 2007 42965 7.3 Table 2: FDI by MNCs inflow and GDP growth in GCC countries (1996-2007 in $ million) Source: World investment report of UNCTAD and the World Economic Outlook Reports 2000 and 2008 Table 3: Regression result based on the table above Regression Statistics Multiple R 0.792643 R Square 0.628284 Adjusted R Square 0.54568 Standard Error 2.430259 Observations 12 The two variables, FDI contributed by the MNCs and the real GDP growth have a strong relationship of 62%.   Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 2001.296 1.953642 1024.392 4.1E-24 1996.877 2005.716 1996.877 2005.716 X Variable 1 0.00021 6.12E-05 3.427175 0.007542 7.13E-05 0.000348 7.13E-05 0.000348 X Variable 2 -0.35974 0.421487 -0.85351 0.415514 -1.31321 0.593726 -1.31321 0.593726 Table 4: Regression result based on table 2 Source: Author Result The regression equation is significant at 5% level and there is a positive relationship between real GDP growth and FDI in GCC countries. The adjusted R square is 0.545 which is equivalent to 54% signifying a strong relationship between GDP growth and investments by the MNCs in the GCC countries within the given duration. Conclusion There is a positive impact of multinational enterprises in the GDP growth of the Gulf cooperation council members. From the analysis above, it is true to conclude that the despite irregular trend of MNCs investment growth in all the members of the GCC, there is remarkable increase in foreign investment. This is owed to removal of certain barriers to trade which was adopted by the GCC. GDP growth rate is supported by investments, which in this case is constituted by the Foreign Direct Investment (FDI) by the MNCs. Therefore, multination corporations promote economic development in the GCC by increasing the level of GDP in a given time. References: Hussein, M.A. (2009). Impacts of Foreign Direct Investment on Economic Growth in the Gulf cooperation council GCC countries. International business Review vol.5 2009 p. 370-376 Miguel, R and Mayer, R. (2000). Foreign investment in developing countries: Does it crowd in investments? University of Chile, Santiago. Romer, P.M. (1993). Two strategies of economic development: Using ideas and producing ideas. Proceedings of the World Bank on Development Economics 1992. Washington DC, World Bank. UNCTAD. (1999) ‘‘Foreign Direct investment and Development’’ UNCTAD series on issues in international investment Agreements, New York and Geneva, United Nations. Read More