Transnational Corporations and Investment in Less Developed Countries - Coursework Example

Transnational Corporations and Investment in Less Developed Countries Your name Course name Instructor’s name Institution Date of submission 1.0 Introduction The transnational corporation is an enterprise which has operations in more than one country. These operations include the production and delivery of both products and services. In the modern days, the transnational corporations have more offices in a majority of the developing countries. However, their headquarters are based in developed countries. Transnational corporations (TNCs) are flexible geographically, and have the ability of locating their factories in various countries based on the factors of production. TNC are normally based on the foreign direct investment which has a great influence on the local and international economy. In particular, FDI provides employment, enhance exportation and increase the productivity, as well as generating economic development in the less developed nations. The major reason why TNCs invest in less developed countries is due to the fact that the less developed economies offer low wage and other advantages, such as the availability of raw materials. This essay is focused on arguing what is right and wrong with respect to the statement that cheap labor is the primary cause of transnational corporations investing in less developed nations. 2.0 The Transnational Corporation and Foreign Direct Investment The reason for investing in less developed varies among various transnational corporations. The fact that the transnational corporations are based on foreign direct investment tends to involve the overseas management in relation to the indirect foreign investment; as a result, the major causes of the transnational corporations’ investment in less developed nations has drawn attention among scholars. Various factors, including cheap labor in the less developed countries, are usually associated with the presence of FDIs in various economies (Gygi and Zachry, 2010, p.361). The foreign direct investment represents the capital investments in a different nation; consequently, the transnational corporation obtains an opportunity to provide the manufacturing as well as the services capabilities for the world markets and its home country consumers. 3.0 Arguments for the Low Wages as the Primary Cause of the TNCS’ Significant Investment in Less Developed Nations 3.1 Low Wages in Developed Nations Being a Primary Reason for Transnational Corporations in Developing Economies The transnational corporations invest in the less developed countries in order to keep their cost low while maintaining a high profit. This type of corporation is therefore more likely than not to reduce their cost of operations through various means, such reducing the number of unproductive employees as well as investing in regions that are associated with low level of wages. The fact that researches by Okeahalam and Wood (2009, p.517) indicate that Transnational Corporations are likely to have a positive effect on the poverty levels in the less developed countries has also increased the level of TNCs acceptance in developing economies. Due to the warm reception in less developed nations, companies that face heavy costs of operation are increasingly shifting their manufacturing plants and other facilities to less developed nations in an attempt to maintain their sustainability in the future. As a result, a number of western firms are attempting to device ways that would enhance their production processes to be successful in the developing economies where there are various problems, such as lack of skilled labor. 3.2 The Urge of the TNCs to Invest in Less Developed Economies by Using Various Techniques TNCs have the tendencies of using various techniques in their efforts to initiate operations in less developed countries following the high wages in their home country’s labor market. Specifically, TNCs invest in the less developed countries by the use of the production techniques that requires low level of education, low wage, and attracts reduced levels of taxation. If the low wage increases to high levels, the companies would opt to relocate to a cheaper place where the wage is low. The TNCs relocate to a low wage nation in order to match the low skilled-content operation with that of the low skilled labor force. TNCs searches for lower skilled and low waged individuals in the newly developed countries. The overall impact is to suppress wage in the less developed countries since they have the ability to relocate to any labor market that is associated with a low wage. 3.3 Low Wages, Skilled and Unskilled Labor in Less Developed Nations Although a large number of the less developed nations are associated with unskilled labor, various developing nations such as China have a large skilled labor market which demands a low wage comparable to that of the developed nations. This has seen a consistent expansion of various firms, such as HP (Computer Company) to China. This situation is also witnessed in other nations such as India. India is currently ranked as the most favored region for Foreign Direct Investment. The major cause of the high level of FDI in India is the population of 1.2 billion which provides a large labor market at a cheaper cost (Wood and Reynolds, 2012, p.16). Researches indicate that a majority of the Indian people are unemployed and are seeking for jobs. This has seen a number of foreign direct investments take advantage of the Indian’s labor market, and invest in it; India has enough labor at a low wage. As a result, the transnational corporations perceive it convenient to use the experts in china since they require a low wage. This motivates the companies especially when dealing with the production of electronics as well as the firms that use computers to perform their activities such as accounting. This has seen various TNCs across the world invest in China, India, Africa and other less developed regions. 4.0 Arguments against the Low Wages as the Primary Cause for the TNCs’ Investment in Less Developed Economies. 4.1 Concentrated markets in developed countries and Opportunities for Growth in Less Developed Economies Markets of different products and services in the developed countries are more concentrated in relation to those in developed countries. This is due to the fact that there a large number of dominant firms on the market. As a result, it is difficult for a new firm to penetrate the market with products that are similar to those existing on the market. This situation forces a number of novel firms to choose markets that are associated with an opportunity to expand. This has seen a number of firms invest in Africa and other parts of Asia. For instance, Artlett and Beamish (2011) shows that the technology sectors, due to the existence of old and dominant firms in the UK’s tech sector, such as the Vodafone, a number of firms have opted to merger or acquire the tech firms in Africa where there is an opportunity to expand. In various industries, firms in the developed countries resolve to invest in less developed countries since the market is underexploited. New firms are provided with a chance to begin their operations, and, later, sell their services and products to the immediate market. In this regard, the shift of firms from the developed nations to less developed countries is majorly caused by the concentration of markets in developed economies. Additionally, the expansion of TNC enterprises to less developed economies is highly caused by the market opportunities that exist in the less developed countries as opposed to the availability of cheap labor. 4.2 Stability The foreign direct investments consider the political stability of the less enveloped countries before investing. The political as well as the economic stability facilitates the influx of the foreign direct investment. The stability represents the opportunity for the business to do well in future. In this regard, rioting, social unrest, rebellions, as well as the social turmoil comprise of setting that negatively affects the business. The economic stability can as well contribute to the hyperinflation. As a result, the economy may be rendered virtual. To encourage the foreign direct investment, the citizens as well as the workers and the businesses should respect the laws and order of the country. The instability factors that undermine the efficiency FDI include kidnappings, black mail, the criminal activities and violence. The foreign direct investments look for a developing country that has a justice system that has an effective mechanism which reduces and eliminates corruption. In this regard, the low wage in developing nations cannot be the major cause of expansion in less developed nations since a TNCs cannot invest in developing economies where there civil wars despite the wages being relatively low. 4.3 Raw Materials In a number of cases, the transnational corporations are coerced to have their operations in less developed countries due to the need of raw materials. In most cases, firms desire to establish their plants in a region where there is an availability of raw materials. In other situations, firms invest in less developed countries due to the availability of cheap raw materials. The transportation of raw materials from the developing nations to the firm’s home country tends to be expensive. In this regard, firms deem that investment in an area where there is availability of raw materials is likely to reduce the cost of operation. This forces a numbers of firms to expand their manufacturing plans to less developed countries. For instance, firms that manufacture pesticides are likely to invest their plants when there is an availability of adequate pyrethrum and other raw materials. In this respect, East Africa can be considered as a destination where there is availability of cheap and large quantity pyrethrum. As a result, the major cause of the TNCs investing in less developed countries is not the availability of cheap labor; raw materials have emerged as a major factor of expanding to developing economies among various firms. 4.4 Openness to international and the regional trade The openness of markets is significant in the attraction of foreign direct investments. The ability of an enterprise to sell its product both locally and in the foreign markets would encourage investments. If the developing countries, for instance, the Chinese based business, have limited or nil access to the foreign customers, specifically, the united states, western Europe Japan and other developed countries then local markets may not offer enough as far as warranting a significant investment in money as well as energy is concerned. According to Gillies (2012), the American products that are a subject of tariffs are perceived as disincentives by other countries. Those products that are subjected to high tariffs in china have less demand in the Chinese markets. This is due to the fact that the prices are artificially inflated. Such aspects typically encourage retaliatory tariffs on the Chinese products from the US or burn of specific services and goods. 5.0 Conclusion Although a number of scholars can argue that the availability of cheap labor is the major cause of the high number of TNCs investment in less developed nations, it is notable that in the present world the major causes of the high level of FDIs in developing economies differs among various TNCs. However, the export friendly-polices plays a major role as far as deciding whether to invest in a developing country is concerned. Foreign direct investments is attracted by the export friendly-policies especially for the business that holds a big portion of the expected market share that is located outside the local market. To create more enterprises and friendly environment, the regional and the international free trade contracts are often initiated by the market progressive governments as a significant mechanism for encouraging the economic activities as well as the growth. In this regard the transnational corporation does not primarily seek low wage but also the openness of the markets in order to make profit through the sale of their products both locally and internationally. List of References Artlett, C. and Beamish, P., 2011. Transnational management: text, cases, and readings in cross-border management. New York: McGraw-Hill/Irwin. Gillies, G., 2012. Transnational corporations and international production: concepts, theories and effects. Cheltenham, UK: Edward Elgar. Gygi, K. and Zachry, M., 2010. Productive Tensions and the Regulatory Work of Genres in the Development of an Engineering Communication Workshop in a Transnational Corporation. Journal of Business and Technical Communication, 24(3), pp.358-381. Jenkins, R., 2013. Transnational Corporations and Uneven Development (RLE International Business) the Internationalization of Capital and the Third World. Hoboken: Taylor and Francis. Okeahalam, C. and Wood, S., 2009. Financing internationalization: a case study of an African retail transnational corporation. Journal of Economic Geography, 9(4), pp.511-537. Wood, S. and Reynolds, J., 2012. Establishing Territorial Embeddedness within Retail Transnational Corporation (TNC) Expansion: The Contribution of Store Development Departments. Regional Studies, 3(2), pp.1-20. Read More