The Opportunities for Multinational Companies to Shift Resources around the World - Term Paper Example

Global Economy Examine the opportunities for multinational companies to shift resources around the world and the implications of this for nation states Multinational companies (MNCs) are business giants, which find benefit in operating across the globe. Thus, they will be on the lookout for any beneficial opportunities available anywhere in the global economy (Dunning, & Lundan, pp. 12-15, 2008). Currently, it is apparent that these MNCs find benefit in shifting their production to developing countries, as companies outsource their work to countries where cheap labor is available. These opportunities are found in major developing countries like India and China, where a large population results in excess of labor demand over supply; leading to comparatively cheap skilled and unskilled labor being available (Dominguez, pp. 5, 2005). At a superficial glance, when a multinational invests in a country overseas, the partnership seems beneficial. Both the parties seem to profit. The multinational company finds a new domain to practice business on, while the country involved benefits due to the creation of jobs in its economy as well as the expansion in the consumer market due to the addition of the MNC’s product. There is however, a more deep-rooted impact of this operation, which implies increased benefit for the MNC and less benefit for the developing country. The nation state, which allows the multinational to operate within its borders, seldom sees the profit from the company’s operations (Chen, pp. 136, 2003). Multinational company, upon earning this profit, will whisk the profit out of the country to its own origin and home. Resultantly, even when million-dollar companies enter a developing country’s market, the million-dollar profit is not beneficial to the country itself in any way. If evaluated by the subjective eye, the situation can appear as if the MNC exploits the hosting country for its cheap labor and consumer market, while paying back only the bare minimum in the form of wages, while earning a massive profit as well as a beneficial expansion in operations. The operations of a multinational consist of combining the expertise (especially new technology) and the stock capital of the multinational with any opportunities the MNC may find in other countries in the form of cheap labor and other resources, leading to an increased output (Toyne, pp. 42, 2009). The result is often a substantial profit that the investors in the multinational divide amongst themselves and take home. While arguments both favor and oppose this distribution to solely the owners, the unbiased spectator has to admit that there is no legal ground upon which one can object to this distribution. The question that follows is that is there no way out of this redundant cycle for the developing countries? Will they continue to serve the multinationals with their cheap labor without ever seeing a reasonable share of the end profit? To answer this question, one has to evaluate the situation objectively. Since only the investors of a business are entitled to profits, the only way a nation state can fairly demand a share of the profit is by being one of the risk takers of the business. Investors in the MNC who belong to the hosting country share the profit of the company, and it is their decision whether to keep their share within the country, or to send it elsewhere (Nagle, pp. 104, 1998). If the nation state makes investment attractive for these stakeholders, they are tempted to keep the profits within the country to invest. This is often not the case in developing countries, where the government policies underestimate the importance of investment. In a country where the government policies promote investment using fiscal and monetary rewards, the country’s economy gains much more benefit through the operations of multinationals. Not only does investment from several sources increase, MNC operations in the country have a two-fold favorable impact on the country. Countries such as China are well aware of this benefit, and thus have policies, which favor investment. These policies attract foreign direct investment to the country, and make the operations of an MNC mutually beneficial instead of just one-sided. Another way in which the exploitations of a multinational can be avoided by a nation state is if the state concentrates on improving its research and development (R and D) sector. When an MNC decides to take advantage of opportunities available to it in other countries, it often ends up exploiting countries, which will sell their natural resources for a low price. Bought at a low price, these resources are then value-added by the MNC until they are much more valuable, and then sold at a much larger margin than the country of their origin was able to earn. Therefore, another major implication for nation states that host a multinational company is that the countries forfeit a profit that could have been theirs, had they been more technologically advanced (OECD, pp. 20-24, 2010). This way they also forfeit potential jobs that could’ve been created in the economy, had there been a set up to utilize the resources instead of just exporting them (Jain, 2006). It is thus advisable for such countries to develop their role in research and development. Countries like Pakistan and Zimbabwe are rigid to innovation and hesitant to invest the adequate amount in R and D, due to higher priorities and steep budgets. It would however, greatly benefit their economies to invest in technological advancement. With this development, they would be able to utilize their own resources more efficiently. Currently, due to multinational corporations, the developing countries are end users of the multinational products, for which they pay a heavy price. However, with the proper technological means, these countries could eliminate the intermediary, and work on transforming their own resources into more valuable goods, which the country may also export (Stephenson, pp. 257, 1924). Developed and developing countries differ in the ways that the multinational operations influence them, due to their different policies regarding investment and growth. Nevertheless, there is even a wide variation in the policies set by different developing countries. Countries such as Pakistan and Bangladesh are rigid to such possibilities, and are thus not able to derive the full potential benefit that would be possible with investment and ‘R and D’. Whereas countries like India and Brazil are upcoming nations, as they have realized the importance of these policies and have acted upon it. They are currently known as leading or emerging nations, and are expected improve greatly in the near future, as can already be seen by their sustained economic growth and promotion of investment. However, these countries have nowhere near reached the sophistication that China has already reached (The World Bank, pp. 11, 2009). China is one of the top nations in this regard, as it has gone as far as to learn how to redistribute economic growth within its own culture. It is thus a very different impact that each of these countries face in the face of multinational operations. References Chen, J. 2003. The role of international institutions in globalisation. Edward Elgar Publishing. Dominguez, L. R. 2005. The manager's step-by-step guide to outsourcing. McGraw-Hill Professional. Dunning & Lundan, Initials. 2008. Multinational enterprises and the global economy. Edward Elgar Publishing. Jain, S. C. 2006. Emerging economies and the transformation of international business: Brazil, Russia, India and China. Edward Elgar Publishing. Nagle, G. 1998. Changing settlements. Nelson Thornes. OECD. 2010. Perspectives on Global Development 2010. OECD Press. Stephenson, J. 1924. The principles of business economics. Sir I. Pitman & sons. The World Bank, Development Data Group. 2009. 2009 World Development Indicators. Washington, DC Toyne, B. 2009. International business: an emerging vision. University of South Carolina Press. Explain the US and Chinese position on global imbalances and the role of the G20 in resolving this issue. Economists hypothesize that part of the cause of the global imbalances is when, in the words of an economist, emerging markets are the ‘new guest at the party’ (Dalibor and Aisen, pp. 1, 2010). This means that countries, which were recently had comparatively balanced current accounts, are now emerging with imbalanced economies, with better or worse trading positions. Moreover, the countries, which previously had leading economies, are no longer the sole front-runners in this global economy. This means that the previously maintained balance in the global economy has altered completely. USA was the sole economic superpower after the cold war, while most of the other countries had a position in the economy that was not comparable to the US. Currently, however, regions like South East Asian countries such as South Korea and Indonesia, as well as African countries such as Nigeria, Egypt, and South Africa are emerging as powerhouses of economic growth. They are fueled by inexpensive labor, high technological development, and favorable government policies (Betts, pp 34-77, 1994). China is one country, which has seen the most favorable change in the onset of this imbalance. From being only a distant runner-up to the US economy a few years ago, it has now emerged as one of the most successful economies. China has become the country with the largest trading surplus in the whole world, with a reported surplus of an average $372 billion between 2005 and 2007, which accounted for 26 percent of all the world’s surplus economies. At the same time, the trade deficit the US faces is large, averaging out to be $749 billion during the same period, which is responsible for 57 percent of the world’s deficit economies (The World Bank, pp. 3, 2009). This shows the massive restructuring that the world economy has faced recently, and how it is now approaching a bipolar economic landscape. The shift in the position of the US is explainable by the fact that it is one of the largest economies in the world, which entails massive operations in the consumer and labor market. While the US economy produces and exports various and several products and services, their imports are even greater in quantity. This results in a trade deficit for the US, which increases with time. The large deficit the US has in its current account is with China, and several oil-rich Gulf States. The large quantity of US imports is due to the consumerist culture of the country, which leads to more consumption of goods, from both the domestic market as well as the global market (Stearns, pp.38, 2006). Apart from this, the demands of the skilled workers in the US are much higher than those of other countries are, and thus the goods produced in the economy are more expensive than those produced in other countries are (The World Bank, pp. 17, 2009). For this reason, the US imports billions of dollars worth of these cheaper goods, to feed its consumer demand. These factors combined, have resulted in the US trade deficit increasing. China, on the other hand, has faced a high and stable GDP for over 30 years. It forms the largest proportion of positive current account balances in the whole world, and has a flourishing economy. This emerging economy has many factors working in its favor, which is why it has been able to achieve this feat. First, due to the large population size of China, labor is available very low rates there (The World Bank, pp. 3, 2009). This not only leads to a low production cost for most products, but also eliminates the need to outsource any work, since the labor available domestically is sufficiently inexpensive. Due to both these reasons, China’s exports are substantially high, and much above the country’s imports. The goods they sell are of reasonable quantity, and competitively priced. The manufacturing base in China is also strong. In addition, while the US, having a consumer-based market chooses to import consumer products, China is more inclined towards importing goods, which it can further add value to and then export at larger prices. This leads to a favorable difference in the values of their imports and exports. Another factor, which indicates the position of China on the global imbalances, is the advanced government policies set by the Chinese government regarding investment and trade (Tung, pp 25, 1982). These policies attract foreign direct investment into the country, further improving the trade position of the country. Finally, another reason that China has seen such a favorable improvement in its position in the global economy is because it realizes its strength to be the competitive prices of its products, and further works to sharpen the edge that it has over other economies. The country achieves this by a tactic it employs of reducing the value of its currency, the Yuan. Once the currency is devalued, the prices of Chinese products are even lower to the rest of the world, resulting in a further increase in exports of this country (Lardy, pp.2, 2005). These, amongst others, are the main reasons for the current economic state of China in the world economy. These imbalances in the world economy have gained a lot of attention in the past years, leading to the formation of a group of 20 countries, which works on global, economic and trade related issues (Kirton, pp. 20, 2001). This team, titled G20, and has a large role to play with regard to global imbalances (OECD, pp. 20-24, 2010). In the G20 summit held in Toronto, the organization discussed the importance of addressing the global imbalances in order to maintain economic growth and development, and eliminating the financial crisis (Yeongseop, pp.2, 2010). In order to achieve these improvements, the G20 laid out some outlines of the actions the countries would need to carry out. These belong to two major categories: domestic adjustments and exchange rate adjustments; both meant for countries sporting a surplus as well as those with a deficit. The exchange rate adjustments would mostly consist of increasing the flexibility of exchange rate in some emerging markets, where the action would be beneficial to the growth of the economy (The G20 Toronto summit declaration, 2010). Domestic policy adjustments planned by the G20 consist mainly of restructuring the policies in the US and China, in a way that is beneficial to all the stakeholders. This will ensure that the major influence of the adjustments is to the countries with the widest role in causing the global imbalances. Economies in surplus will be encouraged to increase self-reliance, and move away from reliance on external demand, in order to restore a balance in their exports and imports. While these plans are more familiar to the public as suggestions or yet-unimplemented solutions, the G20 is determined to work together to solve this issue. References Betts, R. K. 1993-1994. “Wealth, power, and instability: East Asia and the united states after the cold war.” International Security. Volume 18, Issue 3, pp. 34-77. Dalibor, E., Aisen, A. 2010. Global imbalances: Are emerging markets the new guest at the party? Retrieved on January 14, 2011: http://www.voxeu.org/index.php?q=node/4676. Last accessed 2011 Kirton, J. J. 2001. The G20. Ashgate Publishing. Lardy, N. R. 2005. “Exchange rate and monetary policy in China.” The Cato Journal. Volume 25. OECD. 2010. Perspectives on Global Development 2010. OECD Press. Stearns, P. S. 2006. Consumerism in world history. New York, NY: Routledge. The G-20 Toronto summit declaration. 2010. Canadainternational.gc.ca. Toronto, Canada: Retrieved on January 14, 2011: http://canadainternational.gc.ca/g20/summit-sommet/2010/toronto-declaration-toronto.aspx?lang=eng The World Bank, Development Data Group. 2009. 2009 World Development Indicators. Washington, DC. Tung, R. 1982. “US-China trade negotiations.” Journal of International Business Studies. Volume 13, Issue, 2, pp. 25-37. Yeongseop, R. 2010. Global crisis, global imbalance, and G20 summit. Retrieved on January 14, 2011: http://www.e.u-tokyo.ac.jp/cirje/research/conf/3country2010/papers/Rhee.pdf Read More