Multinational Firms are a Force for Progress - Coursework Example

Multinational Firms are a Force for Progress Introduction The question of whether multinational firms are acting as villains or heroes depends on one’s point of view. The governments of various states are seeking to derive foreign direct investments in their states, however, once the companies go international, they start complaining about it (Navaretti & Venables, 2004). At one end, if multinational companies pose great threat to the national identity and local industries, then at the other end, they really speed up economic growth. Therefore, the role of multinational companies in the world economy appears to be a debatable question. This report seeks to clarify this debate by evaluating the work of other researchers. Following the literature work of other researchers, relevant theories including Neo-Classic theory and Global reach has been discussed. Finally the analysis has been done to reach on a conclusion. Literature Cited Multinational companies have been a force for a century and one group of people believe that these companies have their root in the British East India Company of the 18th century; whereas, the other group believe that root of these companies is in 17th century Dutch (VOC) Verenigde Oost Indische Compagnie (Hijzen & Swaim, 2008). The point of Hijzen and Swaim highlights the point that multinational firms have been a force for a century now and their emergence is not a recent phenomenon. It is interesting to note that most of the researchers do agree that multinational firms are a force. A general argument is that inward investments made by multinational firm is a force for political, social and economic progress of the state for improving the rights of people however, this approach is limited because of various governments are very repressive (Kuhn). Multinational firms appear to exert powerful force in the developing country especially in the provision of health and safety and they are even more influential than governments and local cultures (Ladou, 1996, pg. 363-366). Multinational companies not only influence the host countries but they have a strong impact on both home and host states. Japan and United States are two major countries which are either the home countries or sources of FDI in the world, therefore, the role which MNEs are playing in both of these countries are directly influencing the decisions of policy makers and private sector leaders (National Academic Press, n.d., pg.16). The strong influence of multinational firms is insisting the governments to regulate the operations of these giants. Economic regulation of multinational world is a complicated process because it is very technical and political. It is technical because it focuses on technical issues such as regulation of financial institutions and it is political because it focuses on the economic interests between state and corporations, thereby, affecting who gets what in the economic struggle (Moran, n.d., pg. 80). The real point of opposition is whether the force exerted by multinational firms is for progress or not. One group believes that multinational companies are a force for the betterment of the society whereas; the other group highlights the negative influences of these firms. Suzuki et al (2005) report highlights that accumulation of FDI inflows in East Asia has been a force contributing towards strengthening of interregional trade and economic growth. Furthermore, the multinational companies especially those based in Japan have been playing very significant role in the development of intra-regional production and vertical economic integration through extending their activities throughout Asia by FDI. The influence of multinational firms is also evident from their role in the legal structure. Multinational companies are capable to act as negotiators in the international governance because of their influence and by forming transnational coalitions. Moreover, by forming strong state coalitions they can also defend their interests in inter-governmental negotiation process (Sarfati, 2008). The cited work of other authors actually show that multinational companies do have a very strong influence both on the home and host country, however, the opposite views emerge when it comes to debate on whether the force exerted by MNEs is for progress or not. Theories and Implications It is also important to know what theories say regarding the influence of multinationals. The idea of discussing theories is also to learn whether multinational companies are actually created to bring a change for progress or not. The related theories explain the competitive advantage and motivation of multinational companies and in this section; these theories will be discussed. It will be analysed whether ‘force’ is a competitive advantage and ‘progress’ is the motivation factors for firms or not. According to Neo-Classic Theory, the transnational corporations play the role of efficient allocators of resources internationally and they attempt to increase world welfare (Jenkins, n.d., pg. 441). The primary assumption of this theory is that these corporations seek to exploit imperfect markets. Since, these corporations have the control and power and they have the incentive to avail opportunities in imperfect market therefore, they invest in these markets and bring a positive change. Therefore, Neo-classic theory actually supports the point of view that multinational corporations are a force for progress because they avail the opportunities in imperfect markets. The imperfections of the market give a competitive advantage to these multinational firms whereas; the incentive to bring change for progress while generating huge profits becomes the motivational factor for these firms. Therefore, multinational firms appear as a force for progress but in the imperfect markets. The second perspective which explains the topic under discussion is Global Reach. This approach considers foreign direct investment as a component of the strategy of oligopolistic market and it also considers that these companies result in imperfect markets. Hymer is one of the supporters of Global reach approach. Hymer’s theory greatly explains the development of multinational firms, their influence and force and the nature of influence on economies. Hymer’s theory argues that there are different kinds of investments which large corporations make such as foreign direct investment and portfolio investment. Hymer argues that the major difference between these two types of investment is that a company gets more control when it makes foreign direct investment. The firm further increases its control and market power by exploiting the foreign market however, market imperfections allow the firm to achieve advantage and remove conflicts which are the two determinants of direct investment. Therefore, a multinational firm appears to be a strong progressive force which enables the planning and organisation of production at a larger scale thereby, increasing the productivity and spread of technology (Gillies, n.d., pg. 59-61). Hymer’s theory clearly supports the idea that multinational firms are the force for progress and they start their operations with the strategic aim to expand however, to attain market power they become a strong progressive force. Moreover, the overall framework of Global reach approach argues that MNCs create market imperfections and they produce substitutes rather than complementing the local factors. Therefore, Global reach approach does not really support the view that multinational firms are a force for progress but it only supports that multinational firms do appear as a strong force. The above two theories have been presented to show that two different views exist regarding the role of multinational firms in the world. However, these two theories and many other do support the idea of force possessed by these multinational firms. Analysis When it is argued that multinational firms are a force of progress, then it means that multinational companies are positively contributing for example, the impact of multinational companies on working conditions and wages is fairly positive. Before analysing the role of MNCs in the real word, it is also important to learn how multinational companies get the power and force. Multinational companies are the firms which have their headquarters in one country and their operations in several other countries. In order to exploit cheap labour, more resources, increase market shares and expand business, firms go international and get the label of multinational firms. The resources, capabilities and market imperfections (Neo-classic view) actually put these firms at competitive advantage. Since most of the MNCs are the companies of capitalist states and operate in developing countries, therefore, their contributions to the economic development of these countries, make the host countries dependent on them. It is also evident from the point that countries are actually struggling for foreign direct investments. Obviously they must be finding some benefits through FDIs therefore; they seek to attract more investments. The role of multinational is expected to grow further because governments have always been trying to compete for attractive foreign direct investments. In 2006, foreign direct investment worth was equal to a quarter of world GDP as compared to less than 10 percent in 1990 (Hijzen & Swaim, 2008). The governments are actually becoming dependent on multinational companies because these firms are providing more job opportunities, better working conditions and desirable salaries. Moreover, these firms have good technical know how and they introduce good management practices. However, the point of view that MNEs are at a stronger bargaining position as compared to local companies is also not deniable. However, if multinational firms are a force for ‘progress’ then their role should be found in social and cultural development of a country. Although MNCs are found all over the world but their presence is more visible in the developing economies. In the developing countries like Pakistan, MNCs are primarily contributing to corporate social responsibility however, on a bigger scale; their participation in social and cultural activities is not that much visible (Fatima, n.d.). It means that after finding imperfections in a market, these MNCs exploit the opportunities. The primary goal of MNCs is profit generation and by ploughing profits for the welfare of the people in the host country, these companies get unconcealed economic power and dominance. Moreover, these companies have large production over large scales without having ownership which shows that they cannot escape from the influences in developing country therefore, to ensure their survival they have to prove the benefits which they are actually generating. MNCs do not aim to bring economic developments in a state but their operations indirectly bring such positive changes. For example, these companies do not directly work to influence poverty level in an economy but they do stimulate the government to enhance the economic activities that may positively influence the poverty level. Another thing through which these companies are striving for progress is that they improve the skills of people and participate in economic development. By bridging the gap between private sector needs of public policy, MNCs play a very significant role in national policy. Hymer argues that a firm is motivated to expand its operations at international level because of its institutional nature. The existing companies compete in an oligopolistic tight market with limited technology, large economies or scale and high cost of information. In an oligopolistic market, the companies seek to prevent competitors to enter in their existing product lines, however, the technological advantage of these innovating firms declines over time and at this point the multinational companies find an opportunity to enter into the market (Schwartz, n.d., pg. 224). The arguments given by Hymer predicts that force of multinational companies come from the opportunities they find, their capability to expand and invest in innovation and technology. The force of these multinational companies actually changes the market structure of economies. On the other hand, the role of multinational companies is often challenged because of their threat to local industries and cultural systems. Youngelson-Neal, Neal and Fried found the impact of multinational companies on Canadas media outlets (Wyans, 2008). They found that if at one end, the media outlets in Canada achieved the economic stability, then at the other end, Canada is losing its local cultural variations and it is expected that over the time, the Canadian culture will become americanised. Such threats posed by multinational firms do not favour the idea of ‘force for progress’. Conclusion Based on the above discussion, I am of the view that multinational companies are growing in number. The growth of these companies starts with the individual strategic needs of the firm but ends up with the strong influence on home and host economies. The contribution of these firms in improving the macroeconomic indicators, standards of living, innovation of technology and overall economic growth is proving their ‘existence as a force for progress’ however, I do agree that the threats posed by these firms are also not deniable. Nevertheless, the advantages of these firms overweigh their disadvantages thereby, showing that multinational companies are a force for progress. References Fatima, N. (n.d.) Economic development: do multinational companies influence development? [Online] Available from: http://jang.com.pk/thenews/oct2009-weekly/busrev-05-10-2009/p4.htm [Accessed 26 March 2010]. Gillies, I. G. (n.d.) Multinational Corporations and International Production. London Kuhn, K. (n.d.) Business Ethics. [Online] Available from: http://www.vgtu.lt/upload/urd/ kuhn bus.ethics.ppt [Accessed 25 March 2010]. Hijzen, A. & Swaim, P. (2008) Do Multinationals Promote Better Pay and Working Conditions. [Online] Available from: http://oecdobserver.org/news/fullstory.php/aid/2767/Do_multinationals_promote_better_pay_and_working_conditions_.html [Accessed 25 March 2010]. Jenkins, R. (n.d.) Theoretical Perspectives on the Transnational Corporation. In: Goddard, R. C. et al. (eds.) International Political Economy. 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