The Effects That Multinational Companies Can Have on a Host Country - Essay Example

Multinational companies refer to those business organizations that set up branches in other countries. Their headquarters are usually located in their home countries and it is from these locations that the day to day coordination is carried out. While the global village has seen a proliferation of multinational companies the impacts they have on host countries can result in negative consequences as well as positive effects. The effects are based on a number of variables that play an important part in the direction and future of the investments of these companies in foreign territories. The many economic benefits to host countries have prompted many countries around the world, including developed and developing countries to focusing on attracting multinational companies or foreign direct investments as they are also called. Even countries that were otherwise hostile to these types of investments have been seeing them in a positive light. The targeting of these multinational companies has become an important development strategy as countries such as Ireland provide grants towards start up costs and research and development (Jensen 2006:38 ). One effect that multinational companies have on a host country is the economic and financial benefits that are gained by the host country. Especially in developing countries this is a welcome change for both the worker and the political directorate. High employment levels are a panacea for political and social stability. In many cases multinational companies pay higher wages than local companies. The high demand for workers also contributes to the higher wages. The workers also receive training in technology, management, and entrepreneurial expertise that can be transferred to other facilities and areas in the country. Some employees also receive training in the parent company overseas. Consequently, the host now will now have a more highly skilled workforce that will be better able to compete with other countries. The host country will also receive economic gain through revenues paid to the government. Generally the companies are subjected to the different tax guidelines of the countries. In many cases the bargaining power of the host country helps these countries in securing major financial benefits. These tax incentives will increase economic growth and progress and will also help in stabilizing local currencies. The host country will also benefit from improved and new infrastructure. These developments help not only as an immediate benefit but in the long run as well. These developments are usually in the areas of roads, communication and transportation. India has seen an influx of multinational companies in recent times. This has brought tremendous benefits to the Indian economy. Multinational firms from Europe as well as the United States have contributed to India’s economy. The corporations range from automobile companies such as Fiat and Ford Motors to electronic stakeholders such as Samsung. The presence of multinational corporations can also promote the growth and development of some local businesses. In many cases these foreign corporations obtain raw materials from local suppliers. These tend to spark an increase in these supporting industries. In some cases new industries have emerged as in the case of the information technology in India. One major European information technology company has planned to double its workforce in India. The current workforce number of 3,300 persons will increase to 6,000 in a year’s time. There are other software companies as well that are planning to increase their workforce in order to expand their software capabilities (Tribune Business, August 27 2009). Although the competition is great between domestic and foreign companies, domestic companies can use their initiative to appeal to the consumers of the local market. They can use the cultural and social backgrounds and habits to their advantage. One of China’s oldest cosmetic companies, for example, Shanghai Jahwa used their cultural habits to their advantage in creating products that were inherently domestic but at the same time had an international appeal. There are also linkages and spillovers into the local industries from these foreign owned companies. Spillovers can occur when local companies benefit from the expertise and knowledge of process, technology, or markets without incurring a cost (Blomstrom, Kokko 1997: 12). According to Lall (1980) local firms can benefit in a number of ways. Some of these ways are assistance in setting up production facilities; provision of technical assistance; provision of training in management (Blomstrom, Kokko). One of the greatest beneficiaries of multinational corporations is consumers. The consumers or the general population of the host country are able to enjoy high quality products at very reasonable prices. Consequently, their standard of living improves. They are better able to appreciate a variety of high end products as their taste and desires change to a new acquisition of more sophisticated good and services. In countries in Eastern Europe, for example, consumers now demand properly made authentic products rather than lower quality products that they were accustomed to before the arrival of multinational firms. Trade and export is also a direct impact from multinational companies. In some countries the multinational companies are better able at managing the export market. When compared with their local counterparts they may be more experienced, have superior marketing skills, higher quality products also have better access to other international business firms. According to Blomstrom 1990, many firms from developing countries are successful in world markets because foreign firms help them by providing links to the final buyers. Apart from the direct economic and financial benefits gained by host countries from multinational corporations there is a human side that balances the business and economic ventures. Many multinational corporations come to the aid of countries in times of natural disasters and catastrophes and in some cases they participate in social development programs. After the 2008 earthquake in China, for example, MacDonald, Kentucky Fried Chicken and Wal-Mart have made significant contributions to the recovery and rebuilding efforts. There is substantial amount of evidence that multinational corporations impact the host countries in a significant way. The matter is very debatable, however, as many persons including interest groups within the host countries themselves argue that multinational corporations are forces of exploitation and deceit. The positive effects may be seen most in developing countries because one is better able to measure and note the differences that occurred after the arrival of multinationals. While on the one hand there is evidence of increase of economic achievement host countries such as developing countries are more vulnerable to be exploited. In many cases the annual profits from these giant companies are significantly higher than the gross domestic product of these countries. In his book Multinational Corporations and Foreign and Foreign Direct Investments Stephen Cohen summarized that multinationals have no incentive to place the needs of the host countries before their own and they are relentless in their pursuits of financial gains. There is evidence to support this claim as many host countries haven’t been placed in a better financial position after the investments done by these foreign companies. The disadvantages are closely linked with then disadvantages and many critics believe that the consequences are determined by the location and status of the host country. Many persons believe that the lees developed the country the les effective will be the results. In terms of employment many of the multinationals are located in certain host countries where the wages are lower and there is a higher supply of labour than in their home countries. The available workers, however, are in many cases unskilled and untrained so the companies resort to their countries for skilled workers. Usually persons who hold managerial and highly skilled positions are from the home country and it is not uncommon for labour to be imported from other countries as well. Depending on the size of the investments in the host country the financial profits of the multinational may not be sizeable enough so as to positively affect the economy of the host country. The profit is concentrated and rechanneled into the investments and ant the surplus directed to the parent company or to banks and other institutions outside of the host country. The types and number of new jobs generated by these companies is also dependent on the type of investments. Those facilities that are capital intensive production will provide fewer jobs this lessening the benefits that could otherwise come from larger and more diversified production facilities. Some host countries do not benefit from tax revenues from multinationals. In their anxiety to attract multinational companies many host countries offer certain incentives to these companies. China has offered incentives and Mexico too had followed suit. Many multinationals are quick to take up the offer especially in China because of the cheap, large labour force and also the large potential market. As countries try to woo multinational corporations many of these companies are always seeking host countries where they are better able to maximize their profits. Since many of these countries have no binding rules and regulations towards these companies, in many cases, corporations will relocate leaving the host countries in worst economic situations than how they met them. Their intention was to get gain tax and incentive benefits in the first place. The host country will only have short term benefits if any but if they were concentrating on future long term plans these will collapse and can result in social and political unrests. One of the disadvantages of multinational companies to host countries comes in the way of pollution and environmental abuse. In 2007 China decided to impose fines on any multinational company as well as domestic firms that contribute to the growing pollution problem in the country. One of the first multinational companies that was fined was Unilever which produce popular household brands such as Dove and Kellogg’s. Many local companies have ceased operations due to the location of the large foreign companies. They do not have the facilities that will allow them to compete with those large international companies. For one, they lack the necessary technology, the expertise and competitive edge that these companies possess. This usually results in loss of wages for many of their workers. In Mexico, many of the companies that set up operations under the treaties of the North American Free Trade Association (NAFTA) drove domestic companies out of business. In many cases many local farmers were unable to cope with large multinational companies that bought large parcels of agricultural lands. This can cause social unrest as was experienced in Mexico. Host countries can also suffer from the lack of rules and regulations allowed on certain production operations. The home countries of these multinational companies usually enforce strict laws and regulations that can in the long run reduce the rate of profit and production. Sweat shops and child labour are two issues that have been blamed on many multinational companies. The harsh working conditions and the low wages are only permitted in developing countries where unemployment rates are so high that workers ignore the substandard conditions in some cases because of the unavailability of jobs. Child labour which is unconstitutional in many developed countries still exists in other countries. For the host country it prevents proper education to a large percentage of the future generation thus condemning the country to a cycle of persistent poverty. Ironically, India that is host to a number of multinational corporations for reasons of having highly skilled and educated workforce is also guilty of allowing child labour in companies that are multinationals. Many children work under harsh conditions in cotton field in many states in India. Host countries may benefits from multinational organizations but they also need to be more vigilant of the ill effects that these organizations can produce. Jensen, N. Nation-states and the multinational corporation New Jersey: Princeton University Press, 2006   Thimmaya P. Tribune Business News. Washington: Jan 28, 2009. http://www2.unitar.org/hiroshima/programmes/ief04/Executive.pdf wds.worldbank.org/ Harvard Business Review Competing with Giants March-April 1999 Read More