Multinational Corporation and State Relations in Emerging Markets - Essay Example

?Multinational Corporation and Relations in Emerging Markets Introduction The development of the economy is a major goal of ities. For developing countries which lack capital and technology, the fastest and most effective way to develop is by attracting capital from abroad in the form of foreign direct investments (FDI). Multinational corporations (MNCs), on the other hand, are always looking out for new, emerging markets for their products. Usually the potential markets are also find in economies that are rich in raw materials and supplies and that have an large supply of labour at a low cost. The situations suggest that a possible synergy exists between an MNC and an emerging state. There are strong advantages in multinationals setting up their operations, or at least part of it, in emerging countries, since this may establish a mutually beneficial arrangement. At the beginning, this is usually the case. Time passes, the country’s economy develops and the increasingly affluent population creates higher demand for the firm’s products. With the rising standard of living, the state finds the need to raise legislated wages, which usually works against the interests of the multinational corporation – because after all, MNCs seek to lower their costs. The MNC’s costs rise and their reason for setting up operations in a developing country slowly goes away. Other sources of disagreements emerge, such as the exploitation of natural resources, the repatriation of earnings out of the host economy and to the MNC’s headquarters in the home country, the regulation of certain policies and processes considered standard by the MNC but unacceptable by the locality, and so forth. There is therefore a difference of roles and interests between the MNC and the host state, which may sometimes lead to conflicting goals; to maintain their working relationship, a balance of these interests must necessarily be achieved for the MNC to continue its productive and marketing activities in the country and for that country’s economy to continue to reap the benefits of the MNC’s presence. This study examines the dynamics and implications of the relationships between MNC and host countries. The purpose is to understand how these relationships are changing over time in response to the increasing globalization, and how problems about them may be addressed and resolved. Multinational corporation defined There is no formal definition of what a multinational corporation essentially is (Ajami, Cool, Goddard & Khambata, 2006, p. 6), and the term is often applied to a variety of business entities which have nothing in common except that they have some form of international participation or involvement. Some see multinationals loosely as companies that have parts of their production located in two or three different countries (Hoos, 2000), and some with markets in two or three different countries. Some see the MNC as “a number of affiliated business establishments” (Logar, 1980, p. 7), while others define it as “a single organization with a need to coordinate its operations across multiple environments” (Haghirian, 2010, p. 46). The presence of multinationals in a country need not be directly through wholly-owned subsidiaries. MNCs can operate through joint ventures with local firms, or by acquiring controlling interests in businesses already strategically located in a particular country. MNC interests with the least commitment to the country is in the form of exports where the products are shipped to the country in completion of orders from institutional customers, followed by franchises or licenses which the MNC may extend to established firms that would like to operate under the license and with the trade mark of the MNC. In these cases, the multinational corporation could extend their presence in another country without directly investing in it (Johnson & Turner, 2009, p. 247). An example of such MNC operation is seen in the Taiwanese market. Quanta Computers, Inc., a Taiwanese firm, served as contract manufacturer to Dell, Compaq/HP, Gateway, Apple, IBM, Sony, Sharp, and similar brand-name multinationals for nearly two decades, although its own corporate name is not known to many (Leng, 2005, p. 65). This type of arrangement allows for the MNC to maintain a degree of flexibility particularly if the environment of the host country poses significant risk for the MNC in case it enters as a foreign direct investment. In the case of Taiwan, particularly in the 1990s, for an MNC to be directly associated with Taiwan may mean that it will be denied access to China, with which Taiwan has strained relations (p. 67). Thus, while the actual presence of the firm may not be established in the host country, a multinational may still conduct business in another country through any of the other modes of entry. Influence of the state on MNC strategies The state is capable of formulating national development strategies which in turn impact upon firms’ international strategies. It appears that the steps taken by some governments can cause some companies to change their organizations structure and their medium to long-term plans. This capability and the degree to which governments can influence MNCs depends upon how strong the government is, and if it can integrate and motivate the social, political and economic institutions within its borders. When a government is relatively weak, though, although it issues laws and regulations forbidding MNCs from doing certain things, they would not be able to influence MNCs much, because the latter could simply afford to ignore these regulations and laws without suffering much consequence, compared to suffering a drop in competitiveness if they do follow the laws and regulations (Murtha & Lenway, 1994, p. 113). The implication of this observation in the case of emerging economies is therefore not favourable for the developing country with weak control over its institutions, or with institutions too weak to bring strong pressure for MNCs to comply. On the other hand, when a country is seen to have enhanced status in the international community, such as when it gains its independence, its bargaining power against MNCs becomes stronger. This is the case of the independent state of Namibia in relation to the diamond monopoly firm DeBeers. In this case, Namibian independence significantly changed the bargaining power and interests of both the firm and the state. The fact that Namibia was independent meant it was able to create more effective legislation and the economic structures necessary for the state to limit and guide how its domestic diamond industry should be administered. It was also fortunate for Namibia that the international diamond industry changed at the time, with the growing diamond production out of Russia and Canada and development of synthetic diamond production. These events weakened DeBeers’ power to control the diamond industry, and therefore also its bargaining power with Namibia (Kempton & DuPreez, 1997, p. 585). Other than the exercised power of the state, there are aspects of state capabilities and objectives which affect the capabilities of multinational corporations to manage certain operations that are interdependent. Lenway and Murtha (1994) framed these more as cross-cultural differences between the government of the host state, and that of its own home state. The study developed four dimensions of state organizational attributes that act together to influence the development of international economic strategies. The first dimension is concerned with the impact of cross-cultural difference in domestic policy capabilities, and the interplay between political authority and the market forces. These involve monetary and fiscal policy measures, the granting of loans and subsidies, and the degree to which the market forces are allowed to operate in the market. These are usually manifested in the way the state may exert influence over the control of interest rates or currency exchange rates. The second dimension concerns the policy networks and the domestic autonomy of the states, which is seen in the degree the host and home states differ in their degree of individualism and communitarianism. It refers to the extent to which the state government is able to act independently of domestic interest groups in terms of ideology and the strengths interest groups exert over the legislative and executive branches of government (Lenway & Murtha, 1994, p. 516). A government capable of prevailing over interest groups will usually not be susceptible to MNC pressures, but may exert greater influence over MNC strategy. The third dimension involves the state’s international autonomy and foreign policy capabilities, which is seen as the balance between economic and political objectives. It is manifested in the degree of sovereign control of access over a territory, sovereign prerogatives in managing inter-state relationships, and the effective exercise of power and responsibility in safeguarding national security and autonomy in the international system (Lenway & Murtha, 1994, p. 516). Again, an MNC pitted against a government that has effective exercise of its international autonomy will be more difficult for an MNC to influence in favour of its business strategies, unless it is aligned with the country’s own political agenda. The fourth and final dimension is the balance between equity and efficiency, which shows the legitimacy and balance struck between economic and noneconomic values. “For any given state, this substantially depends on the degree to which the dimensions above [dimensions 1-3] embody its society’s political culture” (Lenway & Murtha, 1994, p. 516). While these four dimensions are only one way by which the different factors may be classified, what is important here is the fact that there are so many complex influences that determine how much a state can actually influence MNCs and the different tools within its power. States are not actually powerless to act against an MNC, as some studies tend to suggest. Influence of MNCs on states and governments The influence of MNCs on states is partly determined by the degree of bargaining power existing between them, being more extreme the more imbalanced the bargaining power between them is. Before their country gained its independence, Namibians viewed De Beers’ diamond mining operations in their country as a form of exploitation and abuse. However, after Namibia gained its independence, the government saw that it needed De Beers’ technology, investments, and its access to international markets. The firm’s operations were seen as vital to the nation because of the export revenues it contributes to the country and the salaries and wages it pays to its Namibian employees (Kempton & Du Preez, 1997, p. 585). The case of the Republic of Kenya in the 1990s presents similar circumstances to Namibia before it gained it independence. Kenya’s laws and policies are pro-capitalist and have attracted numerous investments by MNCs as well as in the form of international loans extended by financing entities in developed states. In the urban areas, particularly the capital city of Nairobi, there are signs of Western style prosperity such as luxurious hotels, corporate and government offices, late model automobiles and large sports stadiums, and most importantly numerous stores. But the larger part of Kenyan society works in the agricultural sector, from subsistence level farming to wage labour on large estates. And even though Kenya has already achieved independence, the distribution of its economic resources remains largely unchanged from its colonial period, with the rich minority gaining the benefit of most of the economic opportunities. In this case the government has granted MNCs and their subsidiaries a high level of protection for their (urban-based) investments, thereby allowing them monopoly control that has artificially inflated prices. These protections include: tariff protection against other foreign companies that may try to enter as potential competitors; and quota protection, to limit competitors are limited as to the number of products they can produce in Kenya or import into Kenya (Bradshaw, 1990, pp.12-13). As a result, MNCs made large profits in Kenya, both before and after it gained its independence (p. 17). There are instances where the MNC may influence future state policy and activity by means other than direct lobbying or negotiation. One way is through the transfer of technology from the MNC to the host country. In Taiwan, for instance, there have been numerous multinational companies which have set up and co-organized with local firms new research and development facilities (Leng, 2005, p. 65). Naturally, the research and technology to be used in these facilities are those which the sponsoring MNC is using or intends to use, since that particular area is the area of its expertise. Transmission of important aspects of this technology will influence the host country (in this case, Taiwan) to rely on its use, particularly if this is the first of its kind to be introduced in that country. This therefore aligns the interests of the host country with that of the MNC when it comes to international policies, and where the technology employed is affected. This may be particularly true in R&D on goods with a particular chemical technology, or the design and manufacture of industrial or agricultural systems. Importance of state-firm relations in international relations At one time, international relations used to refer only to the political relations among states, governed by treaties and signalled by the exchange of diplomatic officials. More recently, the growing interdependence of countries and MNCs and the increasing influence this has on the development of the national economy has made state-firm relations an important factor in international relations (Kempton & Du Preez, 1997, p. 585). There have been studies that sought to determine the strength of states in determining international policy, and the likelihood of MNCs, non-governmental organizations (NGOs), and other pressure groups to gain sufficient bargaining power to supersede the role of states in determining international relations. One study found that the nation state still remains the principal actor when it comes to international politics and economics. This was visible in the recent Copenhagen conference, where despite pressures from NGOs and MNCs, states such as India had been able to enforce their realist positions and reduced the influence of those other parties (Sklias, 2010, p. 6) Another point of view in looking at this problem is proposed by Dean and Fischer (2008). This article observes that because of the widespread predominance of trade globalization, it has come to the point wherein the lines that divide consumers and producers have come to coincide with the lines that divide national borders and interests (p. 35). This is particularly true of strong developed countries on one side, and strong emerging countries on the other side. A classic example of this is the United States on the side of consumers, and China on the side of producers. One of the most important (if not the most important) consideration in the relations today between the two countries has to do with inter-country as well as international trade. The point of controversy nearly always centres on the value of the mass-manufactured goods in China and their true value in terms of the US dollar. China’s interests are served by their state’s control of the exchange rate of their currency (the yuan). As a result of controversies in the area of monetary and financial policies, both countries appear eager to prove their own official positions in the purchasing value of the yuan. For instance, since the last years of the past decade, US consumers have mounted a campaign to show that Chinese manufacturers of consumer retail goods do not abide by international safety standards (Dean & Fischer, 2008, p. 35). There have been several product safety recalls of Chinese products which have been reported with interest in the media, which creates the impression that “China’s products choke, burn, drown, trap, and poison Americans” (p. 34). Admittedly, some of these products actually fail international standards, but it is also true that the current tendency to blindly trust these outputs – that they are the product of checking and rechecking of product quality and safety standards, without validating these assumptions – has made it possible for safety violations to occur. For MNCs subcontracting work to China, therefore, there is a need to closely examine the resulting output which the so-called “blind trust” observed by Dean & Fischer is not abused. This is one of the discrepancies between cross-boundary cultures earlier mentioned under the four dimensions, where state regulation (or rather the lack of it, in this case) affects MNC strategies and operations. Conclusion This study sought to investigagte the dynamics and implications of the relationships between MNC and host countries, for the purpose of understanding how these relationships are changing over time in response to the increasing globalization. Recommendations shall be made as to how problems that were observed may be resolved. The dynamics between MNCs and their host state are complex and multifaceted. MNC-state relations directly operates in the five major issue areas that concerns a business, which are ownership, marketing, revenues, employment, and production (Kempton & Du Preez, 1997, p. 585). Aside from these direct effects, however, there are indirect effects that influence the state-to-state relations as well as the states’ international relations which are impacted upon by MNC operations. Although MNCs have become quite influential in the past decades, studies have shown, however, that states still exert more of the power and influence over international affairs, particularly those including international trade and environmental issues. Within a developing country, the MNCs continue to occupy a significant portion of economic activity. Where the country’s institutions are weak or its political status is uncertain, the MNC has a tendency to override national interests in favour of its own. However, where the developing country has gained a level of political strength over its own institutions, the MNC evolves into an entity that works for the mutual good. Multinational corporations provide a great deal of the capital, technology, expertise, and access to global markets that states need in order to convert their manpower, raw materials, and natural resources into part of the country’s economic wealth. Thus, there is the need for both the states and the MNCs to cooperate with each other, bargain over the conditions that govern their relations to come up with a working solution, and thereby form alliances (Kempton & Levine, 1995, pp. 81-82). This way they both achieve what they want in a sustainable way. 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