Role of Multinationals on Productivity of Firms - Essay Example

?Role of Multinationals on Productivity of Firms Insert Introduction From an economic standpoint, governments have realized the importance of cross border investments thus the clearly visible attracts and tilting of balance for multinational corporations. For a multinational to be successful it must have location advantage, internalization advantage and ownership advantage. Statistical analysis on available data on several economies acts as evidence to this cause. In the 1990’s, Venezuela’s largest contribution of foreign income was from external investments Aitken and Harrison (1999). A benchmark model to contrast income from local and multinational corporations is an insight to the contribution of multinational corporations on technology spillovers that benefit local firms. However, results from the case study's contribution of multinationals on growth of firms are quite confusing with both positive and negative contributions. Pertinent questions on the issue of technological advancements attributed to multinationals perturb the numerous stakeholders in this field. Uncertainties lie on whether the technology can be used effectively, competition and the market success of the new technology (Kafouros, 2008). There is evidence of recent appraisal for multinationals with hostilities based on factors such as globalization (Gorg and Greenway, 2004). The caveat of bipartite connection of multinationals and positive effects is always present. Some authors state that these are just effects from subsidiary factors such as inflation tax, currency stability and difficulties by most communities to embrace change (Reinert, Tajan & Glass, 2008). Technology transfer and multinationals Theoretically, the fact that competitive edge given by technological superiority not only improves a firm’s productivity, but also its general economic performance is widely accepted. Kafouros (2008) looks at technology transfer to encompass techniques involving the use of better machinery. This definition is quite constrictive and does not give better insight to the varied advantages of multinationals in technology transfer. A more knowledgeable and pedagogical approach interfaces this concept with innovative organizational, technological, managerial as well as more efficient production processes. More striking, is its recent contribution to globalization and an increase in demand for better produce by consumers. Technology in this context can be looked at in the essence of a form of embodiment. It can be looked at as general information, specific information, practice and hardware. General information involves conceptual know how on a method of operation or system. For example; learning how to operate machinery. Specific information is just as the title explains; it involves details on the whole process of a technology. For instance, information on what a software is made of, how it operates, in what instances it is used and for what purpose. Procedures are codified instructions in the operations of a certain technology. Lastly, hardware involves information in physical form for example a piece of equipment originating from the source of technology. These technology transfers are usually obtained from spill over channels (Gorg & Greenway, 2004). Imitation, competition, exports and skills acquisition from multinationals are said to be ways of improving productivity. Imitation was successfully used in most Asian countries and Latin America in the manufacturing industry (Aitken & Harrison, 1999, 618). This is more of the transfer of knowledge and should not be confused with replication (Gorg & Greenway, 2004). As noted by Freeman and Shaw (2009), the complexity of a process in conjunction with duration of exposure, greatly determine imitation. Research done by Freeman and Shaw (2009) shows that the presence of multinationals in Japan was an insight to the country’s initial engagement in exportation. The sentiments are shared by other scholars such as Grog & Greenway (2004) who state how countries like Morocco and Mexico benefited in this sense. The role played by competition is the pressure it exerts on efficient utilization of available technology to increase yields or productivity. Analogous to these gains are further explained by Jensen (2008) as embracing and/or imitation of new technology by local firms. Learning is a process that lasts a long period of time and occurs throughout a person’s lifetime. In work places, training on the job is one way of bringing a new employee at par with an organization’s work processes. In some countries, it is mandatory for a percentage of available opportunities to be set aside for local employees. A salient feature of this process is acquisition of new knowledge, thus the development of a concept known as human capital. Studies done by the International Labor Organization (ILO) in many countries produce viable evidence for this. Other studies such as those done by Gerschenberg (1987) in Kenya and Hoekman (1999) in Czech republic offer comparisons on training done by multinational companies in those countries. The evidence leads to the conclusion that multinationals engage in the training of human capital than the local organizations. The similarity is projected in both developing and developed countries. Boundaries on how far a country would go in terms of incentives determine the location of a multinational. Some organizations are usually well prepared up to the level of provision of labor. Within this typology, spillovers are hindered because of the lack of bridges required for this purpose. The process is hindered by multinationals partly or completely avoiding local labor, limited sub-contracting and incentives by multinationals to protect their knowledge. Multinationals and Host country The best environment to do any business is one with the low competition and available market. It is thus no surprise that most multinationals are located or prefer being located in stable developing countries where there exists a clearly defined economic gap and the potential absorptive capacity of the specific multinational produce. This is further explained by a model developed by one of the pioneers in this field known as the Findlay’s Model ( Findlay, 1976). Therefore, Freeman & Shaw (2009) state that such economies provide the much needed opportunities to be exploited by the multinationals. Critical research on quantitative data on multinationals in big economies reveals the ever dwindling numbers of such organizations were attributed to unhealthy competition from domestic firms who have almost the same or sometimes even better technological advancement. The scope is focused on the missing technology on the investment decision (Reinert, Tajan & Glass, 2008). Putting it in another way is that multinationals take advantage of the weaknesses of developing countries. The host country is generally characterized by a high degree of antiquated technology. Plant Level Studies Jensen (2008) state that multinationals have a positive impact in productivity of local firms. Productivity of domestic plants with influence from multinationals is more efficient and products are of high quality. Using panel data set, the International Labor Organization show that there has been an increase in productivity in Scottish subsidiary firms, attributed to the American multinationals. Apparently, this is due to adoption of technologies related to human capital, organization skills and general processing. Kafouros (2009) is contented that multinational concentration on local labor has been one of the ways of achieving this. Giving a broader view of this issue Jensen (2008) further states that productivity is also improved. Voluminous case studies indicate that this is quite pervasive, for instance, the improvement of Korean automotive manufacturing industry and Mexican auto parts industry. More than often, organizations focus on what their competitors are doing that is different from them by engaging in surveys. Local organizations that face competition from multinationals tend to research on methods used by the multinationals in their production processes. As a result, they gain more knowledge and technology transfer occurs. Aitken and Harrison (1999) do not fully agree on the issue of productivity due to technology transfers brought about by multinationals. A foreign firm may increase production where the problems of fixed production costs are faced by local competitors. In the process, demand shifts from local produce to foreign produce reducing sales. Echoing these sentiments is Wolfgang (2009) who further states that foreign firms become the main producers in the market. In this way, domestic firms concentrate their fixed costs over a small market regardless of technology transfers occurring. Skill Upgrading As mentioned above, technology transfer incorporates skills. This is probably one of the reasons why host countries court multinationals so eagerly. Kafouros (2008) employs an empirical perception to evaluate the effects of multinational corporations on upgrading of industrial skills. Apparently, the variables when studied both quantitatively and qualitatively have strong evidence of a significant positive relationship. Further inquiry into this issue by Gorg and Greenway (2004) suggest that the effects are more evident in developing than developed economies. Recent studies reveal the exact opposite of what was previously seen as skill upgrading. More updated studies arguably provide support that multinationals focus more on unskilled labor, information that is quite disturbing. The International Labor Organization did a survey on skill upgrading in the United States and it was clear that foreign affiliates concentrate less on skilled labor reducing the skill mix in that country. Multinationals are characterized by a strong incentive to focus on less skilled workers who are much cheaper and easier to manipulate. There is still not much evidence on the development of skills and investments in human labor by multinationals. Multinationals and Management The relation of technology transfer and better management programs is seen as non-spurious because it is correlated with multinational success to use the same or almost the same management skills over a number of countries (Freeman and Shaw, 2009). Their conclusion in this matter is supported by evidence of studies they conducted in Europe, Germany and United States. Another variable included in this study is the ability to balance work and life. Apparently, American based multinationals tend to bring or introduce their better management tenets that benefit their host countries to a great extent. For instance; United States firms have better management practices than domestic firms in Europe, over the years, domestic firms have realized this. They adopted American based management practices which have improved their operations. From another point of view, the United States has also benefited from this in another way. The International Labor Organization has it that unemployment rates have fallen in Europe and especially in the United Kingdom shifting focus from quantity to quality of employment. United States based multinationals in this country are forced to adopt more employee friendly policies including full contracts, job sharing and even flexibility. In turn, these multinationals transfer these practices to their country and the result of this is a more contented workforce and their benefits including better and increased productivity. Multinationals, Capital Gains and technology transfer At the center stage of contributions made by multinational corporations to a host country is the continuing influx of capital. Voluminous formal and empirical studies have shown that countries engage in these activities majorly for income advantages. This is one indirect way with which technology transfer can occur (Jensen, 2009). The capital obtained can be used to improve the nation’s technology by acquiring improved and up to date technologies. Operations are different in each and every country and multinationals become an eye opener on these comparisons. A prime example of this is a study done in multinational corporations in Japan (Kafouros, 2008, 287). Apparently, most multinationals in this country contend to have learnt better and more efficient processes. This is especially evident in manufacturing industry. For instance, most Australian automotive industries have borrowed processes from Japan they consider more efficient. Multinationals and scientific knowledge In the process of investing, multinationals do extensive research either on the economic, political and most importantly, the business environment of the country they intend to invest in. In the process, a lot of information is unearthed on all the issues above. Sometimes, they place it upon the host country to do this research by themselves. This information can be infused to other organizations through formal reports such as published reports and sometimes through informal sources. Information is always power and such information has been used by local firms in many ways. Domestic firms utilize this information to prepare for the incoming competition and do an internal survey on how to better themselves (Rugraff and Hansen, 2011). A prime example is Romanian based organizations who utilize these surveys effectively. This has been purported as one of the many reasons multinationals shun developed economies. If possible, the local firms critically examine all the information about the multinational. Their product, how it is produced, how will they pay their workers and also the working conditions and the effects such an organization will have on the local firm. The importance of such reports is the pressure it ignites in local firms to improve their products, adopt better technologies. In the process, technology transfer occurs (Jensen, 2009). Multinationals and globalization The 1990’s are characterized by globalization of many markets and multinationals have been stated as one of the causes of this is through multinationals. Globalization is characterized by advanced and/or diverse lifestyles among them better and recent technologies (Attewell, 1992). According to Freeman and Shaw (2009), technologies and information are obtained through technology transfers from multinationals. Two works by the same authors suggest that hardware and specific information acquisition as discussed above are the initial processes of globalization. Due to the changing environments, adoption of the new technologies is almost inevitable. In this way, people become more inquisitive and informed in their day to day lives. This is what generally incorporates globalization and it comes with both positive and negative effects. Most authors on this issue agree on the fact that technology transfer of any form is dependent on many factors. It is therefore possible to find countries where successful multinationals are present, but technology transfer has not taken place. Kafouros (2009) states that the eagerness with which a country adopts a technology is a determining factor on technology transfer. Culture is an important factor in this case especially when it comes to gender roles in the society. A good example was a study done in Qatar where multinationals are appreciated, but technology transfer occurs only to a certain extent (Cited in Allewell, 1999, 243). Another factor is on econometric issues where developed countries are more cautious in adopting technologies than developing countries. A reason purported to be the preference of multinationals on developing countries. A variable measured during technology transfer processes is the distance difference (Reinert et al, 2008). The greater the distance, the more difficult it is for technology transfer to occur. According to Reinert (2008) technology transfer occurs to the extent that both the local and multinational organizations are at par with each other. However, technology has the weakness of becoming obsolete over time a good reason why technology transfer will continue to occur. References Aitken, B., and Harrison, A, E. (1999). Do Domestic Firms Benefit from Foreign Investment? Evidence from Venezuela. American Economic Review, 89, pp605-618. Baldwin, R, E., Braconier, H.and Forslid, R. (2005). Multinationals Endogenous Growth and Technological Spillovers: Theory and Evidence. Review of International Economics, 13, pp945-963. Fenestra, R, C. (2004). Advanced International Trade: Theory and Evidence. New Jersey: Princeton University Press. Gorg, H and Greenway, D. (2004). Much Ado about Nothing? Do Domestic Firms Really Benefit from Foreign Direct Investment? The World Bank Research Observer, 19, pp 171-197. Freeman, B, R., and Shaw, K. (2009). International Differences in the Business Practices and Productivity of Firms. Chicago: Chicago University Press. Jensen, N, M. (2008). Nation States and the Multinational Corporation: A Political Economy of Foreign Direct Investment. New Jersey: Princeton University Press. Kafouros, M, I. (2008). Industrial Innovation and Firm Performance: The Impact of Scientific Knowledge on Multinational Corporations. New York: Edward Elgar Publishing. Rugraff, E., and Hansen, M, H. (2011). Multinational Corporations and Local Firms in Emerging Economies. Amsterdam: Amsterdam University Press. Reinert, A, K., Tajan, R, S., and Glass, J, A. (2008). The Princeton Encyclopaedia of the World Economy, 1, pp412-420. Wolfgang, K. (2009). Multinationals Enterprises, International Trade and Productivity Growth: Firm-Level Evidence from the United States. The Review of Economics and Statistics, 91, pp821-831. Read More