How Multinational Corporations Affect Economic Development in the GCC - Case Study Example

HOW MULTINATIONAL CORPORATIONS AFFECT ECONOMIC DEVELOPMENT IN THE GCC Introduction This study aim at determining how Multinational Corporations Affect Economic Development In Gulf Cooperation council members. The paper will describe the factors that affect economic development in Gulf Cooperation council members. Background of the Study G.C.C is a political union consisting of Arab states These countries are among the richest as per the per capita rating with their headquarters in Riyadh in Saudi Arabia and rely largely on energy exports generating enormous revenue use to finance development of infrastructure and diversification of their economies. Their political system is based on Islamic beliefs, formed to create a cooperative framework, nurture unity in the Arab world and establishing a common currency by 2010. Gulf Cooperation Council (GCC) economy has realized rapid growth of economy couple with sufficient human capital, adequate infrastructure, stable economy and market liberalization this benefits as attracted several Multi-National Corporations (Multinational Corporations) with the aim of locating new profit opportunities (Hansen and Rand, 2006), it also plays a main role in economic development in the world. Recent studies shows by estimation of over one-fourth of the world’s output that one third of the world trade is attributed to the productions and Investments by multinational enterprises commonly known as the Foreign Direct Investment (FDI), Multinational Corporations are major players in international trade it is a business that has direct investments for example marketing of industrial subsidiaries abroad in multiple countries. They have help to boost growth of the economy in the host country provided the host country is able to take advantage of its profits, also they are an important tool for technology transfer and contribute comparatively to economic growth than domestic investment. Multinational Corporations are the key players in international business, According to Ghoshal and Bartlett, it is an organization that has significant direct investment in foreign countries that it actively operates. The worth of their output in host countries surpasses the worth of a country trade both imports osand exports. Free economic trade policies is an essential component in which it was a common feature among the GCC member countries,thus many multinational companies started to focus in this region to expand their business positioning. Hence these corporation became the mainstay of the foreign investment directly. With the view of the benefits from Multinational Corporations that has been realized by gulf cooperation council in their economy there are several effects on its economic development both positive and negatives. The study aim at establishing the effects of multinational corporations on GCC countries and the relationship between investment growth and economic growth. Effects of Multinational Corporations on economic development in the GCC Multinational Corporations exploit the economies of scale and deals with economic efficiency. This has resulted in Multinational Corporations moving their branches from those countries which have stringent regulations to other countries with a lenient legislation. In order to break this process, hence the gulf cooperation council have been forced to reduce the restrictions for multinational corporations entry by restricting its taxes, labour laws and environment protection. Romer (1993) stated that potential multinational corporations have increased their foreign investments in countries with a dizzying array of the host government incentives. Result in knowledgeable and skilled personnel and brings in improved Technology in communication and production of goods within the Gulf Cooperation Council countries since many foreign firms normally train and educate their staff on needed skills to leading to efficiency thus benefiting both the firm and the Gulf Cooperation Council countries. Leads to growth in exports of the Gulf Cooperation Council countries as their gross domestic product (GDP) and gross national product (GNP) will increase which is an indicator of industry development attracting potential investors in the same industry as well as in others resulting in a multiplier effect where all of the the county benefit as a result of the mixture of improved technology, capital, and skilled labor. Improved welfare of the citizens: Multinational Corporations create of jobs. Normally local labor is used hence national economy is boost and the living standard of the citizen is improved as the jobs will also pay more than existing domestic companies. Increase in resident income, therefore citizens have the ability to purchase and consume better product and services as a result of the rise in income level also citizens are motivated to buy even luxury items to show their status. Multinational Corporations exploit and drain on the host country’s resources for example petroleum they also use scarce local capital to finance their subsidiaries rather than bring desirable from their countries to the host country, Multinational Corporations Involvement may results in underdevelopment of local research and development which hinder innovation since they bring into the host countries their own technology which may not be applicable in the host country at the same time they use capital intensive technology which result in reduces employment leading to overdependence on Multinational Corporations. It result in imbalance of trade since financing from foreign countries required to offset existing balance of payments deficits and finance domestic investment will confines the host country’s capacity to import the required goods and service for its industry development as a result they will depend mostly on import than export It hinders development of local industries and destroys competition by acquiring monopoly in trade: Multinational Corporations discourage stiff competition among their subsidiaries and prefer a few option of market sharing principle hence have the advantage of the market and may even drive out of the market local industries and also produce substandard goods. . Model To establish a relationship between the economic development and the effect of Multinational Corporations in the GCC, a model has been presented supported by the fact that investment by the Multinational corporations in any country contributes directly to the total investment of that country, The model shown below constitutes combination of domestic and foreign investments by the multinational corporations. Miguel and Mayer (2000) states that MNCs direct investment affects the overall investment since it's part of it,thus Total investment = domestic investment + Foreign Investment I= Id + If whereby investment, I, is the total investment in an economy which adds up to the countries national income. Theoretically, National income = investment+ government expenditure + consumption that is Y= I +G +C Let G + C be t Therefore, the model is Y = kI + t, When k is constant and I is the investment which is constituted by If. This explain that with the introduction of If,(foreign investment by MNCs),hence multinational corporation affect the capital arrangement of the country because domestic producers may at some learn through the activities undertaken by the multinational corporation. This model is supported by Romer’s (1993) paper on the contribution of FDI to development. Regression Consider the table below that showing the inflow of FDI by Multinational Corporation from the year 1996 to 2007 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 1: 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 2 : Regression result from the above table 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 Conclusion From the above results it shows that there is a positive relationship between growth of real GDP and FDI in GCC countries. The adjusted R square of 54% signifying a strong relationship between growth of GDP and MNCs investments in the the GCC countries within a given duration. Conclusion Multinational Corporations have led to improved foundations of Gulf Cooperation Council (GCC) economic development environment through the distribution of technology, capital and skills workers development they have direct effect on the development of a democratic aware government. As a result, there will be increase in jobs, consumer spending and tax revenue despite the existence of some negative effects like exploitation of natural resources and unfair competition in the domestic market. To maximize on the benefits Gulf Cooperation Council countries should set up investment agencies which will help to improve the regulation of local business environment, develop financial market and enhance transparency in macroeconomic policies also a central body should be set up to help in promoting and marketing investment opportunity to attract genuine Multinational Corporations. References Ghoshal Sumantra and Bartlett A. Christopher.(1990). “The Multinational Corporation as an Interorganizational Network“, Academy of Management Review, 15, 4, 603–625, p. 603. 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 Hansen, H. and J. Rand, (2006). On the Causal Links between FDI and Growth in Developing Countries, World Development 29, 21-41. 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. Abed, George T.; Erbas, S. Nuri; Guerami, Behrouz. The GCC Monetary Union: Some Considerations for the Exchange Rate Regime, International Monetary Fund Working Paper No. 03.66, April 1, 2003.  Read More