Multinationals in Developing Countries - Essay Example

26 February Multinationals in developing countries Introduction Multinationals have been called agents or obstructers of development in the third world, in equal measure. It is possible to find arguments that fit into either side of the debate. However, a holistic examination of the economic changes in these host countries shows that multinational corporations (MNCs) are allies in development. Western observers need to refrain from comparing third world countries’ wage situations to that of the first world. If wage earnings for workers in multinationals are analysed, one will realise that MNCs are agents of growth. Their investment in developing nations have improved the material well being of the people in these nations through access to better goods or services and improved wages. Evidence Studies conducted by the OECD reveal that developing nations tend to receive higher wages from multinationals than their local counterparts. The OECD report found that a person working for a multinational is likely to earn 40% more wages than their counterparts in local firms. This is especially true for workers in Latin America and Asia. MNCs are motivated by the need to retain more workers in order to reduce turnover costs (OECD 44). Not all such organisations intend to pay workers more for similar work. Instead, they do so because the nature of industries they invest in is capital intensive. Additionally, a number of them have fairly large operations which may require committed employees. It is for this reason that they tend to pay better rewards to workers than their peers in firms within the same industry. Irrespective of their motivations, the end result is better earnings (Dunning and Sairanna 5). Analyses conducted in developing nations concerning how wages change over time after foreign direct investment show that wages may increase by close to 20%. Indonesia enjoyed a 19% increase in wage labour owing to foreign acquisitions of local firms. The increase emanated from the use of modern techniques of production. Parent companies in the first world already had the technical expertise needed to enhance production. Therefore, workers accumulated new skills that were eventually used as a precursor for better pay (Hijzen and Swaim 8). If a person moves from a locally-owned firm to a foreign-owned one in a country like Brazil, they are likely to enjoy a 21% increase in earnings. The OECD Employment outlook report also shows that those who make the same transition in a country like Portugal can enjoy increases of about 14%. It is for this reason that many third world countries seem to be so attracted to MNCs. A case study into the operations of a multinational such as Nike indicates that the average Vietnamese employee earns about “three times the minimum wage for a state-owned enterprise.” (Norberg 5). If one examines the standard of living for these workers over a relatively long period of time, one finds that it has improved owing to their status as Nike employees. A staff member who initially used to walk to work often gets the opportunity to purchase a bicycle from their salary, three years after employment at the multinational. A number of them may purchase a scooter and even a car later on. A number of locals in developing countries are so content with the pay and working conditions at multinationals, like Nike, that they ask employers to expand the factory in order to hire their family members. To an outsider, this may seem like a case of ignorance on the part of the locals. A critic may argue that these individuals do not know any better so many of them tend to appreciate what they have. However, the typical Vietnamese employee appreciates where they were prior to the existence of multinationals. Many of them used to work for up to fourteen hours in the hot Asian sun until their body parts hurt. Sometimes, others would have to farm in rice fields, which are laden with insects and other uncomfortable conditions. Factory work is clearly an improvement for these people as not only do they get better pay than their counterparts, but they also enjoy the opportunity of eating subsidised meals, getting free medial cover and improving their educational credentials. Spill over effects tend to benefit other stakeholders other than employees who work for multinationals. Local firms that subcontract or supply materials and goods to these MNCs also gain from their presence (World Bank 12). A number of suppliers from poor countries tend to report more thriving business after partnering with these foreign investors. Therefore, MNCs do provide more work to local business entrepreneurs. Aside from firms that directly work with multinationals, another group of businesses also benefit from their presence; local businesses that hire former MNC employees. Once employees acquire greater skill and expertise from foreign firms, they are likely to transfer that knowledge to other local organisations. In essence, these companies become more efficient producers and thus boost their prospects for expansion. Therefore, entire industries may be transformed due to the ripple effect created by better production methods from MNCs (Dunning and Sairanna 93). In line with the above assertion is the availability of better quality goods. The technical knowhow needed to create better quality goods is made available to countries that would otherwise not have been exposed to the same. It may be a fact that top-tier commodities are often reserved for first-world countries that can afford them, but second-tier goods are made available to poor countries that may not have enjoyed such products. This is possible due to the technological developments in those countries that are responsible for local production of second-tier goods. During the first phase of foreign investment in third world countries, a multinational is likely to control other partners that do business with it. They have the technology, markets and finance need to bargain with their partners. Over the long haul, many of the locals may have learnt the technologies that give MNCs a competitive advantage. They may also tap into their former workforce pool as well as access new pools of global markets and finance. This strengthens their competitive edge and helps them negotiate for better outcomes. Nye states that “over time, as the poor country develops a skilled workforce, learns new technologies and opens...it is often able to capture more of the benefits.” (Nye 22) In the end, these countries do report greater economic outcomes. As soon as productivity and the economy improve, it is likely that other facets of life may get better, as well. Several developing nations that liberalised their economies have recorded greater investment in education and healthcare. There is simply more money to go around in these countries. Multinationals have created a wave in which people now have more money to invest in other areas of their lives. Countries, such as Vietnam, now export more rice and coffee than they ever have before. Capitalism, as reflected through multinationals, has catalyzed improvements in other areas of the economy (Ahiakpor 18). It is currently possible for citizens of third world nations to enjoy better healthcare and education because of the payments they get from MNCs. Most of them have improved buying power, which eventually increases the amount of money they can contribute in taxes. Governments in these nations then use the additional taxes to invest in social welfare programs like healthcare and education. They also use it for development activities such as the building of infrastructure (Warosinchai and Bechina 171). The other side Some opponents of MNC presence in Third World countries seem to make valid arguments about their danger to host nations. A number of them state that multinationals are the face of capitalism in those parts of the world. These are Marxist thinkers who believe that capitalism only serves to keep the wealthy wealthier while the masses are left to drown in poverty (Brown 9). To them, the only motive driving multinational presence in these countries is profit. Such organisations only stay in a country if its resources; human or natural, are the cheapest they can find. Governments that become too humanistic often lose business to less-stringent ones. Modern-day Marxists claim that multinationals have taken jobs away from them\ west and spread them strategically in different parts of the world. It is not one particular country or region that benefits from this transformation, because production processes have been dismantled and extended across various nations. Therefore, no single area is really benefiting from this era of globalisation. Instead, the poor continue to live in deplorable working conditions while a few government officials in those nations enjoy the fruits of foreign investment. Furthermore, these neo-Marxists also believe that MNCs perpetuate dependency since most of the profit earned in host nations is repatriated back to headquarters, which are almost always in first world countries. While the above assertions seem to hold some water, it is still prudent to look at the overall well being of the people in MNC host nations. This argument rests on the premise that in order to succeed, one has to destroy the prospects for all other stakeholders involved in the equation. All entrepreneurs are motivated by profit; however, this does not mean that the people they come in contact with do not benefit as well. Part of the problem with most modern-day Marxists is they want humanity to be equal. In an ideal world, it would be possible to level out earnings and pay every worker equal wages. Rules of economics do not permit this state of affairs. It is natural for MNCs to seek out countries with the lowest taxes, cheapest labour and the most affordable raw materials. In order to satisfy shareholder expectations, MNCs need to submit annual returns that are substantial (Abdul-Gafaru 9). It may be true that MNCs keep most of the profit they derive from the countries that they target, but this does not take away the fact that persons in poor countries are still better off financially than they were before entry of the multinational. These individuals would still be working for long hours in farms that could only generate meagre earnings for their family needs. Furthermore, many of them would have to engage in child labour because their children would need to go to work at the farms too (Norberg 20). Even employees who are fortunate enough to work in similar jobs in third world countries would still be getting slightly less-than-average wages from local employers. Comparing the wage earnings of locals in poor countries to that of their western counterparts in rich countries misses the point. The cost of living in the third world is much lower, so these worker’s absolute labour earnings need not be equal. Furthermore, western workers have greater educational and skills levels than employees in poor countries. Therefore, they are getting wages that are equivalent to their output during production (Ahiakpor 18). If analysts truly want to understand the effect of MNCs on poor nations, they should focus their comparisons on relative earnings within the same demographic group over the period of time just before MNC entry and after. Conclusion The literature indicates that Multinational corporations do indeed improve the well being of host nations. They are able to pay locals better owing to their superior technology and access to larger global finances. Furthermore, the money they pay these workers has a ripple effect on other areas of the economy like agriculture, education and healthcare. Local businessmen supplying or subcontracting often enjoy better earnings when they partner with MNCs. Furthermore, firms in similar industries to the multinationals are likely to adopt new technologies and methods of production from foreign investors. This essentially boosts overall production throughout the economy. Workers in third-world country may not be the epitome of emancipation; they however live a better life owing to the involvement of MNCs in their countries. Works Cited Abdul-Gafaru, Azzis. Are Multinational Corporations Compatible with Sustainable Development in Developing Countries? Atlanta-Georgia: McMillan, 2006. Print. Ahiakpor, James. Multinational corporations in the Third World: Predators or allies in economic development? Religion and Liberty 2.5 (2014): 1. Web. 26 Feb. 2014. Brown, Rajeswary. Chinese Big Business and the Wealth of Asian Nations. Basingstoke: Palgrave, 2000. Print. Dunning, John and Lundan, Sairanna. Multinational Enterprises and the Global Economy. Northampton, Mass: Edward Elgar, 2008. Print. Hijzen, Alexander and Paul Swaim. Do multinational promote better pay and working conditions? 2008. Web. 26 Feb. 2013. http://oecdobserver.org/news/archivestory.php/aid/2767/Do_multinationals_promote_better_pay_and_working_conditions_.html OECD. Do multinationals promote better pay and working conditions? OECD Employment Outlook. Paris: OECD Press, 2008. Print. Norberg, Johan. The noble feat of Nike. 13 Jun. 2003. Web. 26 Feb. 2014. http://yaleglobal.yale.edu/content/noble-feat-nike Nye, Joseph. Fear not globalization. 7 Oct. 2002. Web. 26 Feb. 2014. http://www.newsday.com/fear-not-globalization-1.343498 Worasinchai, Lugkana and Aurilla Bechina. “The role of multinational corporations in developing R&D in Thailand: the knowledge flow between MNC’s and University.” Electronic Journal of Knowledge Management 1.8(2010): 171-180. Print. World Bank. Global Development Finance Report 2004. Washington, DC: World Bank Group, 2004. Print. Read More