Consequences of Multinational Corporations - Term Paper Example

Multinational Corporations and Their Consequences For The International Economy Multinational Corporations and Their Consequences for the International Economy Introduction A multinational corporation is a corporation which has extended its operations in different countries globally and engages in direct foreign investment (Spero & Hart, 2010). Generally, a company is termed as multinational if more than one quarter of its total revenues is obtained from outside the home country. They are usually managed centrally from the parent country. Being companies that operate globally, they are governed by a set of laws and regulations that are put in place by international organizations as well as the host and home countries. The international economic system is political in nature because it is governed by rules that are borne from control of the system from a political view by individual countries to protect their sovereignty. It takes into account the domestic political economy, international economic policy and the strategic interaction between nations (Friedman & Lake, 1999). It is managed by international bodies which have been given that mandate by several countries by virtue of being members. It involves the interactions between individuals, businesses, companies and governments. The need for these systems was recognized during and after the Second World War where after the war ended, a conference was held in Hamsphire town Bretton Woods to discuss the formation of these bodies. Bodies formed during that meeting were the International Monetary Fund (IMF), The World Bank and The General Agreement on Tariffs and Trade (GATT) (Ravenhill, 2008). The aim of the meeting was the creation of a steady monetary system and appropriate governing bodies. Globalization of companies is a trend that is on the rise and has been fueled by advancement in travel and telecommunication technology and organizational sophistication which have enhanced the operation and management of such companies (Spero & Hart, 2010). However, with the increased presence of these companies the face of the global economy has experienced some changes. It has resulted in both negative and positive impacts. Positive Impacts of Multinational Corporations on the International Economy Efficiency in Production Multinational corporations specialize in the provision of certain goods or services. Specialization results in efficiency in production because the least possible amounts of resources are used in the production of a unit of a product due to the fact that they have a comparative advantage over other businesses especially those in developing countries. Existence of these companies in multiple countries eliminates the need to have other companies producing the products in question. Chances are high that these smaller companies do not employ the most efficient techniques in production and as such a lot of time, resources and labor hours are wasted. Efficiency in production is also achieved and continuously enhanced through extensive research and innovations. Multinational corporations have a large resource base and as thus are able to employ very qualified employees as well as finance the research that will be carried out by these employees (Mathhew, 2014). Small organizations do not have access to such finances and may be stuck to old outdated inefficient techniques. In general, leaving the production and distribution of these goods and services to the well established multinational companies saves a lot of funds which can then be used to finance other investments. Being big companies, multinationals enjoy economies of scale on production, management, distribution and advertisements. The unit costs of production are lower than those of companies which do not enjoy the same. This also enhances production efficiency and frees up money for capital investments. Increased Exports and Enhanced Economic Growth This mostly applies to developing countries where the nature and quantity of exports results in the collection of revenue that is below that which they need to import the required goods and services (Pettinger, 2008). The result is an unfavorable balance of payments. Presence of multinational companies in developing countries boosts exports because the goods they produce are of high quality and are thus fit to be exported. The balance of payments of developing countries is thus made more favorable which is a boost to the economy. Economic growth of individual countries as well the entire international economy is enhanced by virtue of increased profits and thus funds for further investments. Capital for further investments are also realized when the corporations save money on the costs of production due to specialization and efficiency in the production processes. Increased Foreign Direct Investments Direct foreign investment is said to have been made if the foreign company controls 10% or more of the tock of a company in a foreign land (Spero & Hart, 2010). Multinational corporations invest directly in the host country thus instantly pumping resources in to these economies. The biggest beneficiaries of direct foreign investments are developing countries. These countries do not have enough resources to put into capital investments. This can be attributed to the poor saving attitude of the people as they are characterized by an `earn and spend` attitude and also due to the fact that majority of the population live below the poverty level and hence do not have anything to save. Despite this inability, they still need the production of goods and services and this is where the multinational corporations come in to invest in these countries. The economies of these countries are boosted through creation of jobs for the citizens, increased flow of money in the economy and exports, if any, from the produced goods. Reduced Prices of Goods and Service Multinational companies have lower costs of production per a unit due to the economies of scale that they enjoy and also because of efficiency in production. They can thus sell goods at a cheaper price (Blomstrom & Kokko, 2002). Reduced prices of normal goods raise the purchasing power of the consumers who will then demand more of the good. Increased aggregate demand stimulates the economy as the velocity of money is increased. This means that the amount of times a unit of money is used after changing hands is increased. Effects on Jobs and Salaries Multinational corporations create job opportunities for citizens in the host country. These companies conform to the wage legislations in their countries and therefore they tend to offer more wages to employees in the same category as compared to domestic companies. Increased job opportunities increase employees` welfare and also directly increase their purchasing power. Increased purchasing power translates to increased aggregate demand for goods and services and hence the economy is stimulated. This factor also has a negative impact on the economy of the host country (Randy, 2009). Higher wages for similar employees is likely to put pressure on the local companies through the trade unions to increase the wages of their employees to the level of employees in multinational companies. This is detrimental because these local businesses are not able to finance such high wages. On the other hand, citizens in the home country miss out on job opportunities and as such the economy suffers from the lower than would have been aggregate demand Increased Competition Competition is fueled by protectionism where all parties focus on what is best for them without much consideration about the other players. Globalization of many businesses has increased the competition to a level where only the strongest players can not only survive in the market but also achieve a desired level of profits. Competition for a limited number of consumers causes these corporations to supply high quality goods at competitive to gain a competitive edge over the competitors. This stiff competition has created a more efficient market and as a result a more efficient economy. Access to Wider Markets Globalizing a corporation exposes it to a larger market one which it would not have been able to venture into if it were limited to the boundaries of the home country. A wider market directly translates to increased profits. These profits could be consumed which boosts the aggregate demand and as such the economy. The revenues could also be accumulated and re-invested into other business ventures which also aids in the growth of the economy Increased Taxes for Governments Expansion of companies into foreign land earns the host county revenue in the form of taxes. Profits of all eligible organizations are usually taxed at the rates prescribed in that particular country and this earns the host government extra revenue hat could be used to stimulate the economy through investments. The home country also earns extra revenue as the profits will also be taxed at home according to the set out principles. Effect on Exchange rates Initial capital outlay of setting up a branch of a multinational company in different countries as well as other operations and business activities like expansion, payment of dividends and remittance of profits involves transfers of large amounts of money from one country to another. In a free floating exchange rate system which is adopted by most countries, the rates are determined by the market forces of demand and supply and therefore these transfers have an effect on the rates for instance, when the corporation branch is being set up, increased demand for the currency of the host country shifts the exchange rates in their favor. On the other hand, when the companies are remitting monies abroad, the demand for the foreign currency is high as they desire to exchange the hosts` currency with that of their home country. The result of this is a change of the exchange rates in the favor o the home countries which is detrimental to the economy of the host county (Egger, Egger, & Rayn, 2005). The economy suffers because an unfavorable change if in the exchange rates means that the import s from the host country are more expensive while exports will not earn much because they are cheaper. Increased prices decrease the demand and as thus the economy underperforms. In addition to this, cheaper exports and more expensive imports could result into an unfavorable balance of payments especially in developing countries. Negative Effects of Multinational Corporations on the International Economy Evasion of Taxes and Tax Havens Tax evasion is a legal practice that involves taking advantage of loopholes in the governing laws and the system in general to reduce one`s tax liability. Multinational corporations have extensive funds and as thus are able to hire top notch lawyers who are able to find loopholes in the laws to enable the companies evade taxes. This is done with the aim of maximizing profits and in the long run the wealth of the shareholders. Tax havens are regions or countries where taxes are lower than the general level of taxes levied in similar states or regions. This is done to act as in incentive for investors to invest in that region. There has been a practice of corporations relocating some of their businesses to these regions in order to pay lower taxes. In addition to that, multinational companies that venture into the markets of developing countries are treated preferentially as compared to domestic or regional countries. They are given tax holidays and tax waivers to encourage them and also to act as an incentive to attract other corporations to set up business in the countries. As much as they serve their purpose of attracting investors, both of these practices result to loss in revenue for the international economy and more so for developing countries which are estimated to lose $160 billion in tax revenue every year (Shah, 2013). Technological Dependence by the Host Countries Presence of a multinational corporation facilitates h transfer of technology from the home country to the host country. This is a positive effect except for the fact that it creates a state of overdependence where the host country is unable to do its own research and come up with innovations because they depend on what is presented to them by the MNC`s (Spero & Hart, 2010). This importation of technology might prove to be expensive thus contracting the economy Inequitable Distribution of Resources One of the goals of most international bodies is to promote equitable redistribution of resources. They aim to create a channel that will allow for the flow of resources from the rich nations to the developing countries so as to create a balance, to boost the economies and to eradicate poverty (Ulf, Ulf, & Forsgren, 2002). Multinational corporations trace their home countries to wealthy nations and their operations in developing countries undermine this goal. Profits earned from trading activities are remitted back to their home countries as opposed to the situation where the company in operation is domestic and the profits made are retained in the country. The gap between the rich and poor nations keeps increasing as a result of this factor. The rich nations keep getting richer from resources collected from poor nations who then sink deeper into poverty. Market Dominance and Oligopolistic Powers Multinational companies enjoy the market dominance and control that is almost similar to that of a monopoly. For this reason they are able to charge prices that are higher than optimal and hence they earn super normal profits. This practice is not fair because consumers are forced to pay more for a product because there is no other supplier of the same. This results in market inefficiencies and on the larger part an economy that is not equitable because it further fuels the inequalities in the distribution of resources (Mathhew, 2014). Detrimental to Small Businesses and Infant industries The market dominance that they enjoy also makes competition unfair between multinational companies and small businesses because they are not on the same level on development and do not have equal access to resources, information and opportunities. Such corporations have been responsible for pushing out smaller corporations from the market. The multinationals achieve this by quoting the prices of their goods and services at a level lower than can be sustained by a small business which does not enjoy the economies of scale. These small businesses are then forced out of business due to massive losses that result from decreased sales which are as a result of loss of customers to the cheaper stores. Consumers are always trying to maximize utility and therefore the lower priced goods are more attractive to them. Elimination of small businesses from the economy is detrimental because resources are then concentrated in the hands of a few individuals and this is not equitable. The economies of the particular regions also suffer because profits from these organizations to remitted abroad while the smaller stores would have ensured that the resources stay within the economy to facilitate its growth. This can be combated by protective tariffs, barriers and quotas put in place by the various governments to increase the prices of products from multinational corporations so as to make those from local industries more attractive to customers. In conclusion, the debate on the benefits and the downsides of having multinational companies could go on forever because every idea is subject to individual analysis and judgment. What is a fact is that these corporations are here to stay and as a matter of fact keep increasing by the day because expansion into global markets is a very profitable and lucrative venture. These ventures have both desirable and undesirable effects on the home country, host country and the international economy. Despite the negative effects, their existence is supported because the benefits outweigh the costs. References Blomstrom, m., & Kokko, A. (2002). Multinational corporations and spillovers. Journal of economic surveys, 247-277. Egger, H., Egger, P., & Rayn, M. (2005). exchange rate effects on multinational activity: theory and evidence. Friedman, j. A., & Lake, D. A. (1999). international political economy. Bedford. Mathhew, D. (2014, September 6). Effects of multinational company investmemts. Retrieved December 6, 2014, from The National bureau of economic research: www.nber.org/digest/may03/w9293.html Pettinger, T. (2008, May 30). multinational corporations: good or bad. Retrieved December 6, 2014, from Economics help: www.economicshelp.org/blog/538/economics/multinational-corporations-good-or-bad/ Randy, C. E. (2009). Tweny-first century economy. Vintage books . Ravenhill, J. (2008). Globsl political economy. Californis: Oxford university press. Shah, A. (2013, January 07). Tax avoidance and tax havens: undermining democracy. Retrieved December 6, 2014, from Global issues: www.globalissues.org/article/54/tax-avoidance-and-havens-undermining-democracy Spero, J. E., & Hart, J. (2010). The politics of inernational economic relations. Boston: Cengage learning. Ulf, A., Ulf, H., & Forsgren, M. (2002). The strategic impact of external networks: subsidary peformance and competence development in the multinational corporation. Strategic managemnt journal, 979-996. Read More