The Role of Multinational Corporations - Essay Example

Concerning Multinational Corporations and Indonesia as a Host Country Multinational corporation, or simply MNC, is succinctly defined as a type of business entity that “incur[s] expenses in one country that support[s] operations in another country” (Cordes, et al., 2005). In the economic jargon, the former (i.e., one country) is technically called as the “home country” while the latter is commonly known as the “host country.” Based from the term “multinational,” Cordes et al. (2005, p.7) essentially describe MNC as a corporation that operates and maintains business transactions to many and varied nations or nation-states. On the other hand, Maheshwari (2006, p.53) generally postulates six characteristics of a multinational corporation: (1) operates and carries direct investment to several nation-states; (2) formulates and maintains an industrial organization; (3) widely functions on the basis of globally owned assets; (4) largely transfers capital, goods, and services from home to host countries; (5) transfers resources but does not trade such resources; and (6) manages not its local subsidiaries but the nationals or people from the host country. Maheshwari (2006, p.52) notably provides several examples of MNCs such as Goodyear, Pepsi, and Nestle Corporations. These multinational corporations function and operate in numerous nation-states -- particularly those so-called Third World nations such as Indonesia -- as their host countries. Many of the MNC’s home countries are highly industrialized nations of which the United States is highly prominent. Multinational corporation fundamentally originates from a humble beginning, so to speak: firms. When firms firmly decide to become multinational corporations, there are necessary factors that they systematically fill-up or comply to. Maheshwari (2006, p.53) strongly argues that the underlying reason why certain firms become multinational corporations is because of their desire for vertical expansion. It implies that these firms wanted to substantially expand their business enterprise from production towards distribution. In setting up subsidiaries in other nation-states, these firms -- which ultimately become multinational corporations -- greatly endeavor either to accumulate raw materials from the resources of their host countries or to acquire global markets for the distribution or sale of their capital, goods, and/or services (Maheshwari, 2006). First, firms pursue an expansion business in order to acquire raw materials from the countries whose natural resources are exceedingly abundant. Normally, these firms are grounded or established in the highly developed nation-states; for them to succeed in becoming MNCs, such firms vitally require host countries that considerably possess rich materials, which are empirical for the production of their patent products. Undoubtedly, expansion of a particular business enterprise intrinsically demands for an expansion or accumulation of a much wider material resources. In the conventional economic paradigm, resources of any kind are significantly scarce and limited. Since firms provide finished products -- at least in the classical sense -- expansion of whatever direction or degree empirically needs a source or sources for an accumulation of additional and numerous raw materials. Secondly, firms greatly engage in physical and geographical expansion in order to capture or acquire markets outside the home country. In doing so, the products and services offered by these firms largely gain a number of consumers who will substantially consume the said products and services. Furthermore, in creating subsidiaries from other foreign countries, the firms turning into multinational corporations indispensably profit from them. In the traditional economic worldview, the capitalists -- a term gravely used by political economists to refer to the firms or the multinational corporations -- systematically acquire, if not invade, lands and territories for the primary purpose of shaping and transforming a foreign or probably savage geography into an economic hub; these so-called capitalists heavily dump their surplus products into the “host countries.” Nevertheless, Maheshwari’s thesis is not without limitations. Apparently, Maheshwari’s economic paradigm is generally traditional, if not outmoded. First, a number of firms who turned into multinational corporations do not require acquisition of natural resources from the host nation-states essentially because such firms considerably provide technologies that are non-material or non-hardware in composition/structure; in the age of software technology, for one thing, firms or MNCs who offer and serve said technology to their host countries do not generally need an increase of material resources. For instance, software-based (i.e., Net-based) multinational corporations widely operating in Indonesia do not require buying stuffs from their host country’s natural and even man-made resources. Moreover, what is apparently lacking in Maheshwari’s thesis is the fundamental element of labor -- specifically the need for an increase of personnel or workers -- in an attempt for vertical expansion. Secondly, Maheshwari’s reason why firms become multinational corporations -- that is, because of expansion of their foreign markets -- essentially sounds Materialist (borrowed from Marx’s terminology). It does not, however, satisfactorily answer the subtly question of why firms become MNCs. On the other hand of the scale, Nathan Michael Jensen basically gives a valuable insight on why firms become multinational corporations. Jensen (2006, p.1) rigorously argues that the firms that turn into MNCs are due fundamentally to the political institutions that provide “commitments to these ‘market-friendly’ policies.” Indeed, the political sphere of a particular host country greatly affects the economy both locally and globally. The economic policies made and pursued by the host government substantially influence the “investment decisions [of] today” (Jensen, 2006). Jensen adds up that foreign direct investment or FDI, as we shall see, involves an aspect of ownership in the host nation-state that is substantial and lasting. During Suharto’s regime in Indonesia, for example, political and economic programs of the country extremely impacted and shaped the decisions of certain firms to heavily invest in such seemingly fascist government. In essence, why firms become multinational corporations is because of the host country’s “market-friendly” economic program and policy that considerably attract firms. Foreign direct investment is actually the process performed or practiced by the multinational corporations in their host countries. Imad A. Moosa (2002, p.1) categorically defines the foreign direct investment as the process in which a particular firm from a home country (also known as source country) “acquire[s] ownership of assets for the purpose of controlling the production, distribution, and other activities” in the host nation-state. Moosa (2002) admits, however, that there is no fixed consensus concerning the definition of FDI. The International Monetary Fund (IMF) and the United Nations (UN) have even slight differences in defining the concept of foreign direct investment. For instance, the IMF calls the firm or the MNC as the “residents of one country” while the UN designates it as “resident entity in one economy.” Moreover, the UN’s 1999 World Investment Report includes the phrase “long-term relationship” in defining the notion of foreign direct investment; meanwhile, the IMF’s Balance of Payments Manual substantially views the idea of FDI merely as a “lasting interest.” Nonetheless, Moosa (2002, p.1) perceives a shared theme or concept between the UN’s and IMF’s notions of foreign direct investment: “The common feature of these definitions lies in terms like ‘control’ and ‘controlling interest’, which represent the most feature that distinguishes FDI from portfolio investment.” This control or controlling interest substantially refers to the minimum ten percent (10%) shareholding of a multinational corporation to its subsidiary corporation. There are apparent impacts of the multinational corporations that are operating in the developing countries such as Indonesia. Three of these generally include impacts on the levels of the host country’s export-based macroeconomy, the skills formation of its manpower, and the local business sector’s subcontracting networks. First, the presence of the MNCs on the Indonesian soil is, borrowing from Hal Hill’s (1991) phrase, “a spectacular one.” Hill (1991) rigorously illustrates how foreign direct investment in Indonesia, particularly in the decade of the 1980s, has enormously contributed to its export-oriented macroeconomy. He notes that the said developing country has a very small quantity of manufactured goods for exportation purposes in the early years of the 1980s; Hill (1991) states that these goods only “accounted for just 2 per cent of the total [manufactured products].” Surprisingly, however, Indonesia’s export-oriented products dramatically rise from two percent (2%) to thirty-two percent (32%) in just a little span of a decade. From the years 1986 to 1989, in fact, Indonesia’s economic projects tremendously increase from ninety-three (93) to two-hundred-four (204) projects. According to Hill (1991, p.40), the formidable increase of economic activities in the said nation-state’s macroeconomy is due primarily to the presence of the multinational corporations. In 1986, for instance, twenty-two percent (22%) of the 93 projects heavily undertaken or pursued in the Indonesian territory are substantially export-oriented (Hill, 1991). From these data, they could be interpreted that the rise of the manufacture-oriented projects in such country is due simultaneously to the rise or presence of the MNCs. In essence, foreign direct investments -- which were heavily carried by the multinational corporations -- significantly impact on Indonesia’s export-oriented macroeconomy. Second, the presence of MNCs in the Indonesian landscape highly contributes to the improvement and advancement of skills formation of their local managers, technical personnel, and employees. Thee (1990 cited in Hill, 1991, p.43) reports that native Indonesian managers and employees who are employed in a multinational corporation systematically receive on-the-job training and “additional training by working for a certain period [of time].” Hill (1991) further notes that certain MNCs with subsidiaries in Indonesia vitally provide their senior staffs, who are Indonesian by birth and nationality, with advanced courses abroad. Evidently, these trainings and courses are heavily shouldered by the multinational corporations. Thus, local managers and personnel remarkably benefit from such training programs both financially and technically. On the other hand, Manning observes a quantitative pattern between MNCs and domestic firms within the cigarette and textile industries, which operate and manage their enterprise in the said nation-state. Manning (1979 cited in Hill, 1991, p.43) states that half of the subsidiaries of multinational corporations -- at least those that are within the scope of his surveyed MNCs -- in the said host country provide “special training courses for production workers;” meanwhile, the rest of his surveyed subsidiaries notably give formal on-the-job training. As it appears, Thee’s and Manning’s research studies substantially imply that multinational corporations via their subsidiaries operating and functioning in a particular host country -- in this case, Indonesia -- have a visible impact to the Indonesian populace in particular and the national economy in general. The transfer of knowledge technology is one of the many contributions of MNCs to the native people of their host country. Finally, the presence of multinational corporations in the host country such as Indonesia largely contributes to the development of linkages between MNCs and the domestic firms. According to Thee (1990 cited in Hill, 1991, p.44), several multinational corporations remarkably undergo subcontracting networks to local Indonesian firms. For the MNCs in the automotive industry, in particular, they are consistently engaged in subcontracting networks or the so-called “deletion programme.” In this programme, the multinational corporations are lawfully mandated to purchase parts and components from local automotive industries. MNCs in this line of industry are crucially prohibited to produce or buy finished products from outside non-Indonesian firms. However, Thee (1990 cited in Hill, 1991, p.44) remarks that linkages between MNCs and the local industry are generally mixed up. In the food processing and chemical companies, for example, foreign subsidiaries based in Indonesia largely acquire and procure locally made raw materials; nonetheless, the linkages between these foreign companies or the MNCs to the domestic firms do not appreciably “increase in the technical capabilities of [the] local suppliers” (Thee, 1990 cited in Hill, 1991). Why firms substantially invest in Indonesia -- that is, firms becoming multinational corporations -- is because such host country provides a “market-friendly” policies, especially in the post-Suharto period; the host country’s specific economic program basically attracts, or fails to attract, firms to become multinational corporations. Foreign direct investment heavily exercised by MNCs is very important for Indonesia’s economy to flourish and prosper. In this era of globalization, foreign direct investment is fundamentally empirical. Moreover, MNCs via the process of FDI greatly impact not only the macroeconomy of Indonesia but also its microeconomy. However, the presence of multinational corporations in this nation-state does not threaten Indonesia’s sovereignty for the reason that political institutions affect its macroeconomy, not vice-versa. References Cordes, J.J. Ebel, R.D. & Gravelle, J., 2005. The encyclopedia of taxation and tax policy. 2nd ed. Washington: Urban Institute Press. Hill, H., 1991. Multinationals and employment in Indonesia. Geneva: International Labour Office. Jensen, N.M., 2006. Nation-states and the multinational corporation: a political economy of foreign direct investment. Princeton: Princeton University Press. Maheshwari, R.P., 2006. A complete course in isc commerce. vol. ii. New Delhi: Pitambar Publishing Company. Moosa, I.A., 2002. Foreign direct investment: theory, evidence and practice. New York: Palgrave Macmillan. Read More