Globalization: Ways where Multinational Enterprises Generate Economic Benefits - Essay Example

Globalization: Ways where Multinational Enterprises Generate Economic Benefits and Costs for a Host Economy The evolution of business organizations have transcended barriers due to the rapid technological advancement that occurred within the last century. The classifications and categories of enterprises continue to increase due to factors encompassing developments in time, space and culture. Multinational corporations must be aware that the nature of the business relationship with diverse governments is of primary importance to manage factors influencing its performance. One of the elements that multinational organizations closely and continuously evaluate is the benefits that they could generate in host economies. As the components and diverse perspectives of multinational enterprises pervade global organizations, the research aims to proffer significant advantages and disadvantages that multinational companies derive from the host economy they currently operate in. Definition of Terms The concept of globalization encompasses theories beyond the traditional view that global corporations merely do business abroad. Doing so would restrict and limit the nature and attributes of global organizations. In this regard, it is pertinent at this point to define and distinguish relevant terms concerning business organizations that would be used throughout the essay. Business organizations exist for a particular purpose. The distinguishing characteristic that differentiates one from the other is the market where each operates. Domestic business organizations seek license to operate in their national environment. When businesses begin to operate across their national borders, then they begin to be classified as international businesses. Lee Iwan, a professional with extensive cultural and international experiences international business proffered a clear distinction between global, transnational, international, multinational organizations. He averred that international organizations are considered either importers or exporters of products and services with absolutely no financial investment across borders. Multinational companies, on the other hand, have investments across borders. However, the products and services offered in foreign markets are adapted to local situations. Global organizations have predominantly more investments in various foreign markets. Their strategy employs a coordination of one brand and image in each and every market. There is a centralized corporate office which oversees the implementation of a global strategy emphasizing on the management of costs, volume, and increased efficiency. In global organizations, culture plays an important part in influencing and affecting the host organizations’ operations in terms of interacting with a collective group of people, whose values, beliefs and traditions are diversely variant from theirs. In an article written by Cobb & Barker (1999) the authors emphasized that the changing nature of culture affect both ethical and cultural norms pervading each society. Finally, transnational organizations are more complex in nature. Accordingly, “they have invested in foreign operations, have a central corporate facility but give decision-making, R&D and marketing powers to each individual foreign market” (Iwan 2007, 1). Apart from operating across borders, the amount of investment and coordination of business strategy in terms of products and services differentiate domestic from international enterprises. Ranking of MNCs Diverse organizations rank the performance of multinational enterprises based on different criteria. From among the more commonly used ranking approaches are: (1) based on revenues, (2) an overall market potential index (weighing 8 dimensions such as market size, growth rate, intensity and consumption capacity, commercial infrastructure, economic freedom, market receptivity and country risk) (Michigan State University (MSU) 2010, 1), (3) risk, (4) globalization index (considers social, economic, political and technological global assimilation), (5) market value, (6) market capitalization, (7) foreign assets and through (8) transnationality index, among others (MSU: Rankings 2010). The transnationality index, for instance, indicates the relationship between the domestic and foreign transactions of a particular organization. According to Gillies & Hett (1997), an organization is considered very internationalized “if the ratio of its foreign to domestic activities is very high” (3). Interestingly, another index, the network spread index attempts to measure the scope of geographical operations depending on the number of “countries/nations/states” where multinational companies operate (Gillies & Hett 1997, 3). Benefits Accorded by MNCs to a Host Economy Several business organizations which initially operated only on a domestic scale opt to expand its operations across foreign lands for diverse rationales. The more plausible reasons to go international are: aiming to increase revenues through tapping more markets, to minimize costs through economies of scale and lower labor costs, and to reduce risks (either political, economic or exchange risks) (Wagner 2007, 2). Aside from benefitting the host organizations, MNCs benefit the economies of foreign markets where they target to operate. In sum, the following are the advantages of MNCs operating in foreign economies: (1) growth in terms of employment and economic indicators, (2) development of human skills and advanced technological processes in production, (3) access to high quality products and services produced by the MNCs in the economies they operate, (4) generation of increased revenues in terms of taxes paid by the MNCs, and (5) developments in terms of infrastructure, among others. The most obvious benefit that MNCs give the host economy is a growth in economic indicators through the investment that they brought in. The amount of funds channeled to start a new enterprise entails building a structure, employing people, and bringing in capital. Building a new structure alone gives the economy enormous investment in the use of local resources, to wit: land, cement, machineries and equipment, etc. The employment of people would ensure additional income which would likewise be spent for personal commodities. In the process, the economy grows and prospers from increased foreign investment. For example, Khan (2009), “the MNCs slowly but reluctantly began to pour capital investment, technology and other valuable resources in the country causing a surge in GDP and upliftment of the economy as a whole. This was the post 1991 era where the government began to invite and welcome giant MNCs into the country” (1). From among the more prominent MNCs that immediately entered the Indian market after the liberalization were PepsiCo. and Coke’s re-entry. Hiring of local human resources would aid in the development of skills. People would be trained for responsibilities which should comply with the standards expected from MNCs. The skills acquired through training would subsequently be shared to others down the line. These advancement increases efficiency and production which fuels profits in the economy. In a study made by Gerschenberg (1987) on training accorded by MNCs in Kenya, he averred that more training were actually given by foreign firms than local private companies. The products and services that MNCs eventually generate would be available and accessible to the local market. Doing so would drive down prices and make competitive forces more active in the host economy. As a result, local business organizations would strive to improve product quality and services to make them at par with the MNCs. An example of this is indicated in a study made by Brash (1966) when General Motor’s entry into the Australian market necessitated the stricter quality control and influenced the local suppliers’ other operations. The operation of MNCs would generate tax revenues to the economy. Not only will the organization pay corporate taxes, as required; but the employment of personnel accords the governments with personal taxes duly paid by working individuals. In a presentation published by Economics and Business (2009, 18), it indicated that “James Hardie (building materials) announced… it would shift to Ireland to receive more tax benefits than it currently does with its domicile in the Netherlands”. Finally, developments in infrastructure come as a necessity when MNCs establish new corporate offices in host economies. They likewise invest in roads, ports, communication facilities, as required. Costs Associated with MNC’s Operations As there are advantages that MNCs accord to host economies, there are likewise costs associated with operating in foreign markets, to wit: (1) employment from local sources is not significant, (2) the amount of investment determines economic growth, (3) risks to the environment due to MNC’s operations are more eminent, (4) production of substandard goods which endanger local resources, and (5) profits being channeled back to the home country. For the economy of host countries to benefit from MNCs, the amount of investment must be substantial to spur economic activities including generating employment for local human resources. Frequently, MNCs require the expertise of personnel with previous training and skills required to undertake responsibilities also come from the home country. An example was indicated by Navarette & Venables (2005) when they averred that when US MNCs invested in Ireland, they hired Irish engineers based abroad rather than opting to recruit and train nationals. As mentioned, investments must be significant to ensure growth in the economy in terms of building the structure and making use of local resources. Otherwise, the amount of employment, or production in this regard would only be marginalized. In addition, the size in terms of resources and affiliations of MNCs are magnanimous that it makes them powerful and potentially imposing in countries they operate it. According to Economics Notes (2010), “their size means they often have considerable power and influence and as a result have come in for some criticism of their actions. One of the most famous of such cases was the problem faced by Nestlé in marketing its baby milk in Africa. Critics pointed out that Nestlé was pushing the product on people when it was likely to cause harm to babies. A code of conduct on marketing the product to countries in Africa was being ignored according to a study in the British Medical Journal in 2003. In addition, events like the Bhopal chemical explosion in 1984 have attracted much criticism and, sometimes, an assumption that MNCs are of necessity a bad thing.” (par. 3) There are potential risks that operations of MNCs could give to the host economy’s environment. The production facilities could emit pollutants and poison the air, water, or land, in this regard. The Economics and Business (2009, 31) presented environmental damages of $27 billion brought about by Chevron in the Amazon basin. Concurrently, some MNCs opt to produce substandard goods in foreign countries which have no means to monitor high standards of quality in the components used for production. According to Shanker (2007), Pepsi & Coke were reported “have used contaminated water as well as pesticides in their soft drinks 100 to 200% over and above the prescribed limits as per US/ European/international standards. Similarly, another US food giant KFC (specialized in fried chicken) was banned in India 4-5 years ago, when found that the oil being used by them was adulterated and was harmful to the people”. Finally, profits which are generated by the MNCs could be channeled back to the home country defeating any economic growth, if any. Navaretti & Venables indicated that foreign direct investment “causes profits to be channeled abroad and local industry to be damaged” (2005, 7). Risks faced by MNCs The nature of global markets has seen the inherent risks brought about by diverse political structures and governing bodies. A global enterprise must be aware that political risk can be managed with the proper techniques and strategies. The Eurasia Group and Pricewaterhouse Coopers (2009) define political risk as a change or transformation in political factors which cause the outcomes and values to be different from expected and thereby affects the attainment of originally defined corporate goals. Multinational corporations must be aware that the nature of the business relationship with the host government is of primary importance to manage political risk. Aside from political risk, MNCs face economic risks in deciding to operate in foreign countries. Harvey (2009) defines a country’s economic risk as a nation’s developmental status in terms of factors affecting its economy and impacts transactions with international organizations. For example, global organizations must be aware that doing business in the Philippines exposes them to both economic and political risks. The Philippines is considered as the most corrupt economical system in the Political and Economic Risk Council Asian Continent. The information is derived from contemporary research conducted by the Hong Kong based centre Political and Economic Risk Council (Perc), as published in the report date March 13, 2003. The Council indicated that the rationale for the finding is that the promises of politicians in the country continue to be implemented and therefore exasperated foreign investors planning to transact business in the country. Conclusion The benefits that multinational corporations give to host economies are enormous depending on the amount of funds they are willing to invest. Multinational organizations cannot merely exist and survive by imposing its products and services to foreign markets. There is a need to closely examine, not only theoretical frameworks on economic growth, human development, risks associated with operating in the foreign land and even the cultural dimensions that affect global organizations. The effect of globalization is the creation of a globalized culture – recognizing cultural diversity and acknowledging that the uniqueness of traditional values must continue to exist. Global and multinational strategies therefore are designed to incorporate the uniqueness inherent in every national culture and use these traits not only to their organizational and competitive advantage, but more so, to the benefit of the host economy it partnered to succeed. Reference List Brash, DT 1966. American Investment in Australian Industry. Cambridge, Mass., Harvard University Press. Cobb, SL & Barker, TS 1999. A Survey of Ethics and Cultural Dimensions of MNCs. Competitiveness Review: An International Business Journal incorporating Journal of Global Competitiveness, 9(2): 11-18. Economics and Business, 2009. Multinational Corporations: A Powerpoint Presentation. Retrieved 05 April 2010. Economic Notes, 2010. Multi-national Corporations. Retrieved 12 April 2010. < http://www.bized.co.uk/learn/economics/notes/multi.htm> Gerschenberg, I. 1987. “The Training and Spread of Managerial Know-How. A Comparative Analysis of Multinational and Other Firms in Kenya”. World Development. Vol. 15, 931 – 939. Gillies, GI & Hett, TS 1997. What do Internationalization Indices Measure? Center for International Business Studies. Viewed 02 April 2010. Iwan, L 2007. Difference between a global, transnational, international and national company. Viewed 01 April 2010. Harvey, C. R. 2009. Definition of Country Economic Risk. Hypertextual Finance Glossary. Viewed 30 March 2010. Khan, S. 2009. Impact of MNCs on Indian Economy. Retrieved 05 April 2010. Lechner, F 2001. Globalization Theories. Retrieved 15 March 2010. < http://www.sociology.emory.edu/globalization/theories01.html> Lewis, RD 2005. When Culture Collides. Nicholas Beasley Publishing. Mazrui, AA 2001. Globalization: Origins and Scope. The University of Georgia Series on Globalization and Global Understanding, 1-8. Michigan State University 2010. Market Potential Index for Emerging Markets – 2009. Viewed 01 April 2010. < http://globaledge.msu.edu/resourcedesk/mpi/> ------------------------------ 2010. Rankings. Viewed 01 April 2010. < http://globaledge.msu.edu/resourcedesk/rankings/> Navarette, GB & Venables, AJ 2005. Multinational Firms in the World Economy. Princeton University Press. PricewaterhouseCoopers. 2009. How managing political risk helps improve business performance. Viewed 30 March 2010. < http://www.pwc.com/gx/en/political-risk-consulting-services/index.jhtml> Shanker, V. 2009. What do you think about…? Retrieved 05April 2010. Read More