The Significance of Multinational Companies to the Economies of Less Developed Countries - Case Study Example

Today, the impact of multinational companies is widespread. Whether in the production of television sets, computers, software, cars, or even chocolate, some of the major players have found need to operate beyond their own borders, often in such of cheap labour. But the activities of multinationals go much farther back than the recent technological breakthroughs that have allowed almost every business to maintain some form of international presence if only by having a web presence. Some multinational companies such as Dunlop and Cadbury have a long-standing history with Third World countries because they had to source their raw materials from these countries. But to what extent did the Third World countries benefit or suffer from their involvement with these multinationals. In order to fully understand the impact it is important to appreciate that multinational companies are not charities and that self-interest drives their activities first and foremost. Multinationals often possess what many Third World countries lack, and that is knowledge and expertise. This is not to say that there are no smart people in Third World countries. Far from it. Many Third World leaders are highly educated and may surround themselves with an equally well educated elite but they may simply not have the technology and knowledge necessary to fully exploit their domestic resources. As such, the entry of multinationals, either by invitation or by business exploration on the part of the multinationals is predicated on the belief that there could be mutual benefit for both parties. In effect, the multinationals would help the Third World countries in question by buying their resources or extracting them as the case may be and give the countries an opportunity to earn much needed foreign exchange and other resources so that they can take care of the needs of the local population. In the early part of the 20th century, for example, when information spread that the Amazon jungle was a source of rubber, many companies from the more advanced economies made their way there and did what they could to take advantage of those resources. As Bradford L. Barham and Oliver T. Coomes write in the article, “Reinterpreting the Amazon rubber boom,” “For fifty years, the extraction of wild rubber from the jungles of the Amazon fueled unprecedented economic expansion in the region: per capita incomes in the Brazilian Amazon climbed by 800 percent: the regional population increased by more than 400 percent; urban centers and secondary towns blossomed along the river banks; and the vast Amazonian forest lands were integrated into national political spheres and the international market economy. But when low-cost rubber from British plantations in Asia flooded world markets in the 1910s, rubber prices plummeted, sharply curtailing financial returns from wild rubber extraction” (Barham & Coomes 73). As noted above, the primary interest of the multinationals is to make money, not to develop the Third World, so when opportunities for cheaper resources became available elsewhere they were quick to jump ship. In the case of the Amazon basin, some commentators believe that the failure of the area to develop a sustainable economy was due in part to the flight of capital from the area, in other words, the taking away of profits by the multinationals operating in the area rather than reinvesting the funds in the domestic Third World country. As Barham and Coomes note with regards to some interpretations, “exceptional profits that accrued from the rubber trade were transferred out of the region and thus made unavailable for local development. Surplus was extracted within the region through unequal exchange maintained by debt-peonage and coercion. Foreign firms, perceived as operating as a monopoly or monopsony (Bonilla 1977; Flores Marin 1987 and domestic elites (Santos 1980; Haring 1986) extracted the surplus and chose not to invest in the region” (Barham and Coomes 3). If the multinationals did not take as their priority the development of what was a foreign field to them the Third World countries have at times been betrayed by their own elite who prefer to skim off profits generated by their country for their own personal benefit rather than that of the nation as a whole. In Africa, the islands of Sao Tome e Principe (STP) have been one of the sources for agricultural produce such as sugar since as far back as the sixteenth century. Besides sugar, cocoa was one of the top money earners for the country in the 1920s, after which production has steadily declined. In STP cocoa production was based on the plantation system which made use of slave labour or other forms of coerced labour. Even after the abolition of the slave trade in 1836 by the Portuguese, some slaves continued to work for their former masters. Later, “a harsh system of indentured labour was developed, importing workers from the African mainland…The Santomean plantation economy thus centered on forced labour, periodic reconfigurations – from slavery to indentured labour to failed experiments with contract work – notwithstanding. The exposure of the worst excesses of the system in the early twentieth century led to the Portuguese abolishing the re-contracting of labour in 1921” (Frynas et al. 53-54. When the free labour system emerged, and with multinational companies paying very little for the cocoa, the production of cocoa became unsustainable for those involved in it. In fact, “In addition to problems in recruiting new labourers, the production system was highly inefficient. Despite the use of forced labour, production was very costly as white supervisory and administrative staff accounted for a high proportion of labour costs” (Frynas et al. 54). The pattern of multinationals was to extract as much as they could without any consideration for long term sustainability of the domestic economy; as in Brazil, the success of the cocoa industry and any benefits to the local economy was limited. In the article, “The Growth and Performance of British Multinational Firms before 1939,” Geoffrey Jones highlights the growth of Dunlop from a small firm set up in Dublin in 1889 to a multinational firm that invested in a number of countries around the world. It must be noted that the first international forays by Dunlop were not into Third World countries but into France, Germany, and the United States (Jones 36). According to some commentators, Dunlop and other companies that ventured abroad such as Lever Brothers were motivated by the opportunity to make monopolistic profits in outside markets. The company expanded on the strength of patented technologies related to the manufacture of bicycles. For the three foreign markets mentioned above, it seems that Dunlop was eager to take advantage of the opportunities in the market rather than the exploiting of resources. The company eventually moved into manufacturing activities in other countries such as South Africa and Eire in 1935. In 1936, the country established itself in India (Jones 44). The company had been motivated to do so because of increasing competition. Nationalistic sentiments were also making it more and more advantageous to produce goods for local markets rather than importing them from elsewhere. As Jones explains, “In India, the growth of nationalist feeling from the early 1920s led to a consideration of ways to strengthen the firm’s local identity. The swadeshi movement prompted the company to consider establishing a local rupee capital company instead of selling its products through an agency. The logic of taking this step was reinforced by the Government of India’s preference for giving business to Indian-registered companies. A large proportion of Dunlop’s business was done with the government or other public bodies” (Jones 50). In the case of South Africa, Dunlop set up a factory in part because of the expanding economy in the country around 1935. The establishment of a Firestone factory in South Africa, however, hastened Dunlop’s own plans to establish a company there. As noted in the introduction, multinationals are businesses and are concerned first and foremost with profit. When it seemed more profitable to extract raw materials from one place and manufacture in another, the companies would do just that. When it seemed more reasonable to set up a factory closer to the market in order to reduce costs of shipment or the overall price of the product in response to pressures from competitors they would do that. The relationship between multinationals and Third World countries could have been mutually beneficial if the Third World countries had good leaders and stewards of the national interest. For the multinational companies, gaining access to raw materials or the opportunity to sell in a market gave them what they wanted, as these opportunities translated into profits. For example, in the case of Dunlop, “In 1936 the company calculated its rate of return on capital invested in some of its foreign subsidiaries. The United States and Canada yielded negative rates of return. Dunlop’s French and German companies yielded small returns of 3.9 per cent and 4.6 per cent respectively, although it was impossible to repatriate any profits from Germany. The Japanese company earned 9.2 per cent, but it became increasingly difficult to repatriate those profits. The new South African company delivered a handsome 12.6 per cent during its first year of operation” (Jones 52). The uncertainty of being able to repatriate profits was a risk that multinationals had to bear and still continue to deal with in some countries around the world. The Third World companies also benefited by gaining access to the end products whether these were bicycle tires or cocoa; there was also the benefit of foreign exchange flowing into the coffers of the Third World nations, some of which fell into the hands of corrupt officials, and thus would not have benefited the population at large. Bibliography Barham, Bradford L. & Coomes, Oliver T. “Reinterpreting the Amazon rubber room: Investment, the State, and Dutch disease.” Latin American Research Review, Vol. 29 Issue 2 (1994):73-95. Geoffrey Jones, 'The Growth and Performance of British Multinational Firms Before 1939: The Case of Dunlop', Economic History Review, 2nd ser. 37 (Feb. 1984), 35 - 53. Khor, Martin. “Global Economy and the Third World.” International Journal of Rural Studies (IJRS) (Oct 1999):1-7. http://www.aede.org/intaf/intaf8.html (2006/04/23). Jedrzej, George Fryanas & Wood, Geoffrey, & de Oliviera, M S Soares. “Business and politics in Sao Tome e Principe: From cocoa monoculture to petro-state.” African Affairs, Vol. 102 (Jan 2003):51-80. Pang, Eul-Soo. “Prosperity’s Promise: The Amazon Rubber Boom and Distorted Economic Development.” The Hispanic American Historical Review, Vol. 77 Issue 4 (Nov 1997):749-752. Landes, David S. “Why Are We So Rich and They So Poor?” The American Economic Review, Vol. 80 Issue 2 (May 1990):1-13. Read More