Effects of Multinational Corporations on Developing Countries - Essay Example

Effects of Multinational Corporations on developing countries Increased Econ-political activities in the world may seem as something expected. This is due to the basic facts that the economy of the country is dependent on the political stability and the relative support from the political system. This interdependence also encompasses the social factors of a country as a dependent of the same system. The presence of multinational corporations in any economy have, therefore, wide and far reaching effects not just to the economy of the host country, but also to its political, social and even religious system. The increased involvement of multinational corporations in politics and their perceived roles in influencing important political events and decisions is particularly an important factor to consider1. As the effects are evident, the countries that appear to bear more weight of these corporations are the developing countries. Their economy grows regulated by foreigners who also have a take in their political system. The focus of this paper is on the effects of multinational corporations in the developing countries. For the purpose of this paper, the focus is narrowed down to China one of the fastest growing economies and a developing country in East Asia. Multinational Corporations Growing businesses expand. The expansion of business is an indication that the business is mature enough in its current position to seek new ventures or new markets. Multinational corporations are those companies that have expanded and have branches outside their home country. These companies, usually, have active markets and operations in more than one country. The economic environment of the target country for the corporation attracts the interest of the company and also determine the mode of entry, the capital structure and also the adjustments required. China is one of the major emerging markets in the world.1 it currently attracts and absorbs the second largest flow of foreign direct investment (FDI) in the world. This has contributed directly to the growth of its economy owing to factors such as the market size, labor cost, infrastructure development and friendly government policies. However, there are also other direct and indirect effects of multinational corporations to the developing countries. As a foundation, this research paper will first discuss the survival of these companies in China and the impact that their presence have in the country. The survival of MNCs in China The entry of multinational companies in China has been made easy by the friendly business environment coupled with the political environment.2 A cost-benefit evaluation of the country indicates that due to the rigidity experienced in the Chinese market, timing strategies are important considerations. Although other factors such as the size of the company and its location also play a part in the establishment and survival of companies in China, companies that enter the market early have an upper hand. This is because these corporations are entitled to incentives such as ease of access to the market, use of land, related taxes and relative flexibility in investment capital size and supply to material and energy. These early entrants are, therefore, able effectively to cultivate early relationships with suppliers, consumers, stakeholders and the local political leadership. The companies that have established themselves in china have used a variety of strategies. Besides taking advantage of the friendly environment and thereby gaining easy access to the consumer base, the companies have used exports as a means of maintaining relevance. While exploring the Chinese market, most of these companies use the country as an important base to reach the larger Far East region. They produce commodities for consumption in the local market and also to the foreign market2. This attracts more companies to the country and effectively influence the government to ease the policies to accommodate more of the MNCs. A study in 2003 identified that more than 40,000 companies in China were by foreign investors. This number has currently increased to more than 72,000 companies by the end of 2012. This rapid growth has been associated to the friendly environment and the expected economic growth in the country. However, the survival of these companies is not without challenges. These challenges have included cultural diversity and other problems that, usually, affect foreign business such as lack of required talents, human resources needs and differences in the social environment. Impacts of Multinational Corporations on a host country The economic impact of the presence of growing and functional industrial sector in any country is undoubtedly great. Multinational companies have been identified as the main drivers of most of the growing and emerging economies especially in the developing countries.4 The part played by these companies in developing the financial infrastructure in the countries as well as positive social development has been noted as one of the most important indicators of positive globalization.3 However, economic research has shown that these foreign institutions may bring relaxed ethical codes that risk exploiting the neediness of the host country for the economic benefit of the company. The Chinese economy and the nation at large benefits from the presence of the multinational corporations in a variety of ways. First, investments of the multinational corporations help the country improve the balance of payments.6 The investment in a country increases the direct flow of capital into the country. Since the companies establish themselves in the country and produce commodities for local consumption and exports, the investments help the investments contribute positively to the substitution of the imports and promotion of exports from the country. The implication of this is that the commodities that the country used to import from other countries will be produced locally, and the surplus exported to other countries. This saves on import cost and helps the country gain from exportation of commodities. The second positive aspect of the presence of multinational corporations in China is the provision of employment opportunities. The level of unemployment in most countries in the world especially the developing countries is high. This problem in china has been significantly solved by the international companies. These companies enter into the country with strategies and other forms of organizational resources but gather most of their human resources for technical, skilled and unskilled labor from the host country.4 This helps the country to increase the employment level of its citizens. This positive impact is closely tied to the improvement of the living standards of the communities in which the corporations exists. The Chinese government attempts to expand the infrastructure to ensure that new companies find a wider environment to explore. This ensures that the foreign companies reach more of the areas where unemployment level is high. In an extension, the country benefits from enhanced corporate social responsibility policies of these companies that improve the life of the people. In addition, a foreign investor provides a source of revenue. The taxations that are imposed on licensure and other aspects of operations earn the host country a considerable amount of wealth in terms of revenue. These revenues go a long way in improving the economic environment in a country like China. The improved environment encourages more foreign investors thus increasing the chances that more multinational corporations will be attracted to the country. Besides, the entry of the corporations and increased production of commodities increases choices of commodities, enhances healthy business competition which benefits the consumers. The primary beneficiaries of this competition are the local consumer who access goods and services at reduced prices. This contributes positively to the economic growth of the country. Another benefit of these corporations and their presence in China has been the consistent improvement of the country’s reputation. Currently, the presence and continued success of multinational companies in China has improved the overall image of the country and had, as a result, attracted more and more investors into the country5. The expanding economy improves the environment that further provide incentives to international corporations and hence further increasing the economic benefit, as well as the reputation of the country on a global scale. In addition, this presence does not only attract the companies and its resources but also provides a forum for the exchange of technologies and innovations. This benefits the local industries and companies uplifting them to reach the international standards. Besides the above benefits, the country suffers a variety of disadvantages associated with the presence of the multinational corporations in the country. These disadvantages are associated to the operations of the companies and the increased loss of control by the government due to the overwhelming growth of industries.5 Firstly, the presence of foreign companies and the rapid growth of the industrial sector does not go in tandem with the preparation of the environment. This means that a foreign company will not be keen enough to factor in environmental sustainability concepts in its operations before first exploiting the profit acquisition concepts. This exploits the environment with limited returns. The entry and establishment of the multinational corporations in China, therefore, risk negatively affecting the environment in the long run. Secondly, the environmental impact goes beyond emission of harmful compounds to the environment. Economically, the multinational corporations increase the exploitation of the natural resources.6 The competition that results in the exploitation of these resources reduces the overall access to countries resources and reduction in the local control of resources.7 As the resources get exhausted, some corporations leave the country worse than they found it. The departure leaves people who were employed in these corporations without a source of income. In addition, despite the corporations employing many nationals in their operations, most of the expatriate and senior positions in the companies are taken by foreigners.8 The nationals in a country like China only take the less-skilled and unskilled positions which are largely exploitative. This, together with the risk of departure of foreign companies creates an atmosphere of human resources uncertainty in the country even with the expected economic growth. The exploited human resource becomes demotivated and even in cases where local companies attempts to rise, and the uncertainty drags the local development. In addition, the entry of foreign companies has warranted in many environments the loosening of the grip that the people have on their culture and social customs. Most of the foreign businesses dilute local customs and traditional cultures7. The movement from the traditional ways of doing business dilute the culture in the name of globalization. Lastly, it has been realized that multinational corporations in many parts of the world are becoming a part of the political system in the countries where they operate. This political impact brings out disproportionate influences to the governance and the service delivery in the host country. In most cases, the entry of the company into a foreign country s associated with policies.9 Due to their economic importance, any government will often agree to changes that the corporations demand and implement changes that make the environment conducive for the foreigners. This has been observed in China over the years with some economists observing that it sometimes appear as if it is easier for a foreign company to get established in china than it is for a local enterprises. This significantly discourage new local businesses that are limited by their lack of resources and the increased competition that results from the entry of the multinational corporations. The basic motive of multinational corporations is to expand and prosper in a new environment. Seeking new markets is associated with increased revenue and adds profits to the organization. This being the immediate motive or the corporation, and any benefit that results from the activities of the company to the host nations are only secondary. It, therefore, follows that with increased entry of multinational corporations into the country, the economic benefits of the investments including the employment and the social obligations are secondary to the corporation’s profits.10 If then the environment does not exercise optimum control of the business operations, the host company is bound to lose in the long-term basis. Conclusion The developing countries presents a wide emerging market that most multinational corporations are attracted to. The attraction is fuelled by the need by these developing economies to encourage investments. To make this attraction a reality, most developing countries have exercised policies that make it easy and affordable for foreign companies to enter into the market and establish themselves.11 From a research, this entry provides the host country with economic benefits that first provides it with revenue and financial profits besides giving a large population of the host country a chance to earn a living through employment opportunities. The companies also engage the government in strategizing for the revenue generation and community development in the host countries through corporate social obligations. This becomes more relevant when the country infrastructure allows for deeper entry of these corporations. However, the exploitation of the material and human resources of these corporations risks to drag local development and the rising of local entrepreneurs12. Further, the overreliance on foreign investors has created a poor investment experience for the country’s able population. As the corporations exhaust the resources that brought them to the country, there is a risk that the reduced profitability of the business will results to calling off or the operations leaving the country poorer than before. The result of this is that people end up losing jobs and going back to the low economic status. Multinational corporations are, therefore, beneficial to the economy in the short-term. The long term benefits demand a closer control and monitoring to reduce the uncertainty and hence increase the benefits. The involvement of these corporations in politics of the host country should also be controlled to prevent their influence in policy making. Works cited 1Dunning, J.H.. Multinational Enterprises and the Growth of Services. The Service Industries Journal,9 (1989). 2Birkin, F. et al. “New Sustainable Business Models in China.” Business Strategy and the Environment 18 (2009): 64–77. 3Whitelock. J. Theories on internationalization and their impact on market entry. International marketing review,19 (2009) 4Gaff, Brian M., Kenneth Choy, and Jamie Chan. “Doing Business in China.” Computer 45 (2012): 11–13. 5Hofer, Markus B., and Bernhard Ebel. Business Success in China. N. p., 2007. 6Bartlett, C.A. et al. Transactional Management. United States: McGraw- Hill (2006). 7Ip, Po Keung. “The Challenge of Developing a Business Ethics in China.” Journal of Business Ethics 88 (2009): 211–224. 8Sheng, Shibin, Kevin Zheng Zhou, and Julie Juan Li. “The Effects of Business and Political Ties on Firm Performance: Evidence from China.” Journal of Marketing 2011 : 1–15. 9Rajan, Raghuram, and Luigi Zingales “What Do We Know About Capital structure? Some Evidence from International Data.” Journal of Finance 50 (December 1995) 1421 – 1460 10Rudman, Stephen T. The Multinational Corporation in China: Controlling Interests. Malden, MA: Blackwell, 2006. Accessed on October 09, 2014. Web. 11Luo, Yadong. Multinational Corporations in China: Benefiting from Structural Transformation. Copenhagen: Copenhagen Business School Press, 2000. Print. 12Sun, Haishun. Entry Modes of Multinational Corporations into Chinas Market: A Socioeconomic Analysis. Syney, N.S.W.: Dept. of Economics, University of Sydney, 1996. Print. Read More