The Impact Of Economic Globalization And The Rise Of The MNCs On The Developing World - Essay Example

THE IMPACT OF ECONOMIC GLOBALIZATION AND THE RISE OF THE MNCs ON THE DEVELOPING WORLD by of the Name of the University City Date Introduction The latest phenomenon of economic globalization since the early 1990s has been marked by a rush in capital flows between developing and industrial nations. While these increasing capital flows have triggered high growth rates in some developing countries, like India and China, a number of states, like Thailand and Nigeria, have suffered from occasional collapse in growth rates and intense economic crises which have caused significant social and macroeconomic negative effects in such countries. Furthermore, the lowering transportation costs, advanced information and communication technologies, adoption of open trade policies and liberal regulation for Foreign Direct Investments (FDIs) by majority of states, have created flourishing environment for the growth of multinational companies (MNCs) in developing world. Economic globalization and the rise of the MNCs have provided greater opportunities to developing countries to improve productivity and living standards through greater access to developed states’ markets and technology. On the other hand, they have also brought new challenges, like volatility in economic market, growing wealth inequality and poverty across and within developing states, and environmental deteriorations. As a result, a widespread debate has emerged in both political and academic spheres on the impact of economic globalization and the rise of the MNCs on the developing countries. The purpose of this paper is to analyze the overall effects of economic globalization on developing world by means of various scholarly researches and reports. On the basis of collected data and proven facts, the paper evaluates the effectiveness of economic globalization and the MNCs in terms of promoting financial growth in developing states and investigates major factors that likely restrict the benefits of economic globalization and the MNCs for developing world. The Concept of Economic Globalization and Its Recent Trends The phenomenon of globalization emerged in its initial form when humans began to settle into different parts of the world; however, due to increased scale and speed of technological advances in recent years, it has shown a rapid progress and has developed as an international dynamic. According to Guy Brainbant, the phenomenon of globalization not only includes rise of global trade, internationalism of economic markets, development of advanced information and communication technologies, increased number of MNCs, increased mobility of people, capital, goods, ideas, and data but also pollution, infections, and diseases. On a precise note, the United Nations has defined economic globalization as the process that facilitates the increasing independence of global economies in consequence of the expanding scale of cross-border trade of services and commodities, rapid and wide spread of advanced technologies, and increased flow of international capital. The rapid advancement of science and technologies and the growing marketization are the two primary triggering forces for economic globalization. Over the years, developed states have played a dominant role in the course of economic globalization. In the early 2000s, the overall volume of exports of developed states was over US$ 4500 billion, constituting almost 82% of the overall value of global trade. Also, 10 major developed states including the G7, Netherlands, Sweden, and Switzerland took up 86% of the overall value of FDIs (foreign direct investments) in the whole world. The excessive domination of developed states in economic globalization is also associated with the fact that it is developed states who decide the regulations for international financial exchanges. Consequently, compare to developing and third world countries, developed states are the biggest beneficiaries of economic globalizations. According to the reports of the United Nations, mere 20 developing countries have been benefited from financial globalization. The global trade grew over $20 trillion in 2005 with the average annual increment rate of 10.7% between 1951 and 2006. However, the developing states’ percentage share in total global trade has remained unchanged at just around 30% which can even lower till 20% if china is excluded. Also, even though the developing countries constitute merely 0.5% of exports in global commercial services, the service sector makes up 42% of GDP and 19% of total trade of these countries. The current trends reflect the drastic inequality in share and benefit from economic globalization between developed countries and developing countries. Recent Trends about the MNCs in Developing Countries The rise of MNCs is more than just a cross border capital investment in pursuit of higher profits. Rather, multinational enterprise uniquely possesses an asset-package which consists of capital, management skills, advanced technology, and marketing techniques. This asset-package gives MNCs a competitive advantage over local firms. Basically, an MNC is a parent firm that involves in cross-border production through its associates situated in several states. It executes direct control over the policies and actions of its associates, and integrates business strategies in marketing, production, finance, and recruiting that surpass national boundaries. Currently, there are over 36,000 MNCs worldwide, controlling more than 15,500 foreign subsidiaries and constituting about 33% of the total world production. However, the share of FDIs in developing countries is remarkably uneven. The developing countries with greater population, large market, and the highest growth potential receive the most multinational investments. These countries are commonly known as the newly industrialized countries (NICs) which include Asian countries, like India, China, Malaysia, Indonesia, Philippines, Thailand, and Singapore, African countries, like South Africa, and Latin American countries like, Mexico, Argentina, and Brazil. Top 10 biggest NICs receive almost 95% of total FDIs, while all the African states collectively receive less than 4%. Also, the poorest or third world countries receive hardly 1% of total FDIs in the world. The annual turnover of many of the world’s largest MNCs, like IBM, General Motors, Coca Cola, Shell even exceed the national incomes of many poor African, Latin American, and Asian countries. Originally, the investment of MNCs was concentrated in plantation and mining. Today, the most of MNCs’ investment in developing countries is concentrated in specific sectors such as, petroleum, manufacturing and services, while mining and plantation constitute merely 7-8% of total investment. Critical Analysis of the Effects of Economic Globalization and the MNCs Positive Effects Financial globalization and substantial growth of the MNCs have created opportunities for both developed and developing countries. However, the biggest impact has been on developing states, which are now able to attract foreign capital and foreign investors. This has led to both negative and positive effects for developing countries. Economic globalization created new opportunities, new business ideas, and opened new markets that entrepreneurs from developing states couldn’t access previously. The access to new and bigger markets around the world allowed firms from less developed countries greater opportunities to expand and progress. The integration with global economy and financial globalization led to greater access to advanced technology, capital flows, cheaper imports, human capital, and bigger export markets. Economic globalization has allowed businesses in developing states to become part of global supply chains and production networks which are the crucial channels of trade. For instance, the economies of Asian countries, like Singapore, South Korea, China, and India have demonstrated the positive effects of financial globalization and liberal policies towards MNCs on economic growth and poverty rates in these countries. The remarkable economic growth in East Asian countries, which increased GDP per capita by almost 8 times and elevated millions of people out of poverty, was mainly based on financial globalization-related factors, like export-oriented growth and ability to close the technological gap with developed countries. The significant economic reformation in order to integrate domestic economy with the global economy, implementation of liberal policies towards FDIs and MNCs, and adoption of open trade policies helped India to elevate its GDP growth from 5.5% in 1990-91 to optimum level of 7.8% in 1996-97. Today, with the steady growth rate between 5-6%, India has emerged as the fastest growing economy followed by China. Numerous scholars, like Tarr and Matusz (1999), Ghose (2003) have presented positive relationship between liberalisation in trade policies and employment opportunities in developing states. The experts claimed that although increasing FDI through the rise of MNCs and trade have been significant only in few NICs, for these countries the growth of trade in manufacturing sector has led to positive effects on manufacturing employment. The studies of Rama (1995), Revenga (1998), Katz and Ciomoli (2003) found mixed employment effects of trade liberalization in Latin America, whereas they were quite positive in majority of Asian states. Also, outsourcing of low-skilled jobs and services from developed countries to less developed countries has created new employment opportunities in developing countries. For instance, it is common practice for corporate and firms in developed countries to outsource services such as customer service, reading x-rays, and data processing to India, Indonesia, Philippines, and Malaysia. Also, open economy and financial globalization have allowed low skilled workers to migrate in better places for seasonal work that would provide them comparably higher wages. In Europe, the number of migrant workers increased from 3% in 1961 to 9% in 2005. Similarly, the rate increased from 7% to 14% in Northern America, from 5% to 38% in the Gulf countries, and from 12% to 17% in Oceania. The increased number of migrants is fuelling economic and social burden on destination countries but it is providing a growing source of foreign exchange for the origin countries. The temporary migration of low-skilled workers has offered positive effects for less developed countries, especially in terms of brain circulation, skills upgrading, and remittances. Remittance plays a crucial role as a source of comparably stable foreign funding. It is reported that remittances to developing states went well above $166 billion in 2005. Many less industrialized countries, like Bangladesh, Lesotho, Cambodia, Nepal, Yemen, and Sudan have become heavily dependent on remittances as a major source of foreign exchange. Negative Effects Conclusion (Continue) Read More