The activities of Multinational Corporations (MNCs) affect both the host countries and international economy in several ways. It is obvious that MNCs are largely motivated by the desire to boost profitability when they engage in overseas direct investment (Kumar 700). However, the definite impacts brought to host countries by MNCs are not clearly known. In most instances, debates on MNCs usually revolve around the negative effects of foreign direct investment to the affected nations. Some critics are of the opinion that most host nations heavily benefit from foreign direct investments. On the other hand, those with opposing views feel that host nations especially in the developing and underdeveloped world are negatively impacted by such investment activities. This essay explores two major perspectives on the consequences of MNCs in international economy.
The economic development of any nation is significantly boosted by the activities of MNCs according to the benign model. The most effective way of transferring savings and other capital funds from the developed to poor nations is through foreign direct investment. Hence, physical investment in developing or underdeveloped nations can be boosted through foreign direct investments.
The cross-border capital flows that are facilitated by MNCs are often resistant to challenges experienced by the ordinary financial capital flows from advanced to poor countries. It is also vital to mention that the operations of MNCs often necessitate fixed investments. Besides, financial capital flows are more volatile than fixed investments. Hence, foreign direct investments that are carried out by MNCs do not yield frequent bust and boom fluctuations. The latter is usually common with financial capital flows across nations.
The external indebtedness of host countries are not raised by direct investment bearing in mind that domestic affiliates are readily created by MNCs. In spite of the fact that there are a number of ways through savings can be transferred to the underdeveloped or developing nations, the most stable way to achieve the latter is through foreign direct investment under MNCs. The recipient nations find it less burdensome and more stable to utilize the functions of MNCs in capital transfer. Technology can also be swiftly transferred to host nations through the activities of MNCs. The propriety assets are controlled by MNCs. The latter are tagged on specialized knowledge. As a result, indigenous firms that are located in host nations benefit heavily from this transfer of knowledge.
It might be cumbersome for indigenous firms to produce competitive products without such transfer in technology. Another potential benefit of technology transfer is that broader development implications can be derived owing to the positive externalities that are generated. There are a number of ways through externalities can arise. For instance, the host nation may be well endowed with active economic actors who can reap direct benefits from the same transfer of knowledge or transactions.
Managerial expertise is also transferred by MNCs to poor or weak economies. Most host country business managers usually handle the operations of minimal enterprises. They also coordinate few business activities compared to personnel that have been drawn from Multinational corporations. Hence, the massive amount of experience is gradually transferred to managers who run indigenous firms. Several host country affiliates can benefit from the same transfer of knowledge. In the long run, the host country managers can operate efficiently like the personnel working for MNCs.
A vast marketing network is created by the presence of MNCs in host nations. The developing country producers are in a position to readily access surplus markets both locally and overseas. It is possible to integrate both the domestic firms and affiliates of MNCs in a world marketing chain when foreign direct investment is executed by the international organizations (Vithessonthi 329). As a consequence, unlimited opportunities to export locally produced goods is created. To a large extent, indigenous producers benefit from the additional external markets. It is vital to emphasize that marketing for goods and services is the prime rationale behind production.
An opposite perspective is that host nations and the international economy at large (especially in poor nations) do not benefit at all from the activities of multinational corporations. According to the malign model, there are two main ways through which local savings are lowered by MNCs. To begin with, the capital market of the host country suffers a lot from heavy borrowing by the MNCs. This implies that these corporations do not transfer capital from their home nations in order to execute investment. Consequently, a crowding effect is created rather than adding value to local investment.
The net result is remarkable reduction in capital savings within host countries. Second, the rents earned by multinational corporations are usually beyond ordinary profits. Worse still, MNCs have a tendency of repatriating earnings back to their home countries thereby leaving the host countries economically weak. The consumer market also suffers in the sense that goods produced are sold at relatively higher prices than those manufactured by indigenous firms. Therefore, individual savings are also lowered due to expensive products. Local financing of projects also fall below the expected level owing to reduced capital funding.
As much as transfer of technology is one of the economic contributions of MNCs, it is also understood that the same MNCs often exercise a rather tight control in regards to both expertise and technology at their disposal. It is interesting to learn that most indigenous firms have to struggle to access the same level of knowledge and technology (Vithessonthi 328). In the long run, several international economies where the MNCs are located might b adversely affected. In addition, control against propriety assets is one of the reasons why MNCs invest overseas. The latter extends into the control of propriety technology thereby leaving local economies at a poor state. In most instances, host country residents are not readily hired by MNCs. These multinational corporations often prefer working with their own expatriates. The most affected segment of employment is the top level position. Hence, host county residents can only secure low level jobs that do not necessarily require professional knowledge (Egan 3).
From the above considerations, it can be seen that the impacts of MNCs to international economy are varied. To a large extent, it depends on the specific country agreement upon which an MNC is being established. In other words, MNCs are established in foreign countries only after formal agreements have been concluded with host nations. Such contracts are the ones that determine whether the respective MNCs will be of economic value to a country (Dai 124).
The characteristics of MNCs tell it all. For instance, they play the role of coordinating economic operations among their organizations. This type of coordination obviously facilitates the flow of both monetary and human capital across borders. The net effect is the growth of international economy. Nonetheless, it is crucial to mention that such growth might not be balanced at all. The negative impacts of MNCs as highlighted in the above section are mainly attributed to the fact most weak or developing economies hardly benefit in the presence of MNCs. However, growth factor is evident in resident countries where MNCs originate.
National borders experience a lot of significant transactions in terms of economic transactions as a result of MNCs. As much as other firms also transact business activities in large scale, they have not reached the level of MNCs because the latter undertake their operations across a number of national boundaries. We do not need to exaggerate the magnificent roles played by MNCs in the growth of international economy.
Needless to say, most global nations have found it necessary incorporate the activities of MNCs in their growth agenda. This has especially been witnessed during all major global recessions. When direct foreign investments are injected into a weak national economy, growth prospects are definitely evident (Tan 174).
Revenue generation by multinational corporations often runs into billions of dollars. As a result, the economy of states can be remarkably boosted by their operations. in any , there are several weak economies whose Gross National Products are below some MNCs. In other words, a single multinational corporation may be in a position to generate higher revenue than a single state. For example, the revenue generated by Wal-Mart alone is expected to be higher than the combined Gross Domestic Products of about 35 states in the US.
The liberal world order and global independence are also pushed by most well established multinational corporations. For instance, MNCs assist in breaking barriers associated with trading activities across borders. When MNCs make deals with respective governments, they play a major role in eliminating most trade barriers may have otherwise hindered even the operations of indigenous firms. There are scores of trade pacts that are entered into between multinational corporations and state authorities.
When these agreements are finally concluded, they result into major breakthroughs in terms of trade flow across nations. In regards to liberal order, multinational corporations are usually keen to operate in environments that are peaceful and productive (Counihan 26). The growth of the international economy also relies on a conducive working environment at any given time. Even though governments across the globe are supposed to maintain law and order for a peaceful working environment, there are also myriads of multinational corporations that often push for a peaceful environment so that their business operations can flourish.
In the process of eliminating trade barriers, multinational corporations also find themselves handy and able to call for international order and stability. MNCs require stable international rules that cannot be fluted with ease. International politics has played both a negative and positive role in enhancing peace and stability. Governments that are not politically stable may find it cumbersome to host multinational corporations. However, when MNCs are already operating in such nations, it is highly likely that they can intervene in restoring a peaceful working environment. This eventually leads to a positive growth in the economy of such a country.
Another area of concern in the growth of international economy is labor. Some critics argue that multinational corporations influence labor standards. For multinationals that adhere to a horizontal integration strategy, the influence on labor is evident. In the case of vertical multinationals, the main purpose of production is to transport back finished products to the home nation. For example, when a labor-intensive is produced by an MNC, the costs of the input might be significantly low. This implies that vertical multinationals usually take advantage of the low cost of labor in host nations in order to boost profitability. Besides, the latter does not attempt to improve the standard of labor bearing in mind that it is the main variable affecting profitability. In this case, multinationals that produce with the aim of minimizing the cost of labor might negatively affect the economy of the host nation (Tan 174).
Horizontal foreign direct investment among established multinational corporations is also aimed at avoiding trade costs. Such multinationals make use of blueprints from their home countries in the process of operating their overseas organizations. Highly educated laborers are not required to execute the copying process.
However, skill intensity is still of a major value in horizontal foreign direct investment. Although skills are still required among the hired laborers, MNCs have no mandate at all of reducing unemployment index within the host country. Therefore, the impacts of MNCs in regards to labor and the growth of international economy rely on the nature of operation of individual organizations. In any case, an uneducated population may hardly reap the benefits brought about by the operations of multinational corporations. Irrespective of the nature of an MNC, individuals who are educated and obtained professional certification have an increased chance of securing employment opportunities from the multinational corporations (Tan 173).
The current international economy is apparently more supported by the growth and expansion of MNCs than it used to be some decades ago. Multinational corporations that have been deeply rooted in the developed world are rapidly seeking other operation avenues both the first world countries and the less developed world. As it stands now, the growing attention of multinationals is mainly focused in the manufacturing field rather than mining and extracting industries. MNCs have made it increasingly possible for economic activities to be spread across different nations. Once various economic activities are on board, growth and development of individual host nations can be facilitated.
Perhaps, it is crucial to explore some of the factors that propel the growth and expansion of international economy and then make a consideration whether these factors are aligned to the operations of multinational corporations. To begin with, demand on imports and comparative advantages are affected by demographic change. For example, active integration and participation of the females in the labor force, education improvement, migration and an aging population are some of the key factors that may cause demographic change. What is the relationship between MNCs and demographic change? As can be seen from the above discussions, labor force is a crucial parameter in the development of any economy (Swamy 76).
As a matter of fact, there is no single multinational corporation that can operate in the absence of a rigorous workforce in place. Whenever there is a change in the demographic profile of any country, the nature of labor force is also affected either positively or negatively. MNCs have an immense potential to cause a change in demography. For example, a significant segment of both skilled and unskilled population can relocate closer to an MNC in search for employment. Consequently, the economy of that region is improved while the region left without a vibrant labor force suffers economically.
The international supply chains are major drivers of international economy. In most cases, new players are often integrated in trading environments where significant investments have already been made in the physical infrastructure. The most notable new players are usually MNCs. Knowledge build-up, technological advancement and accumulation of capital are some of the positive attributes of MNCs in an international economy. These factors are prudent in the expansion of both MNCs and the host nations. The host countries are also at a vantage position to change their comparative advantage by increasing their value chain (Calvano 795).
To recap it all, it is vital to reiterate that multinational corporations (MNCs) remarkably affect international economy through individual host nations. Whether the effects are positive or negative is another subject of discussion altogether. As already pointed out in this essay, MNCs have the potential to transfer requisite technology to host nations at the advantage of indigenous firms. In addition, multinationals are well endowed with superb expertise in the production of goods and services. If firms located within the host nations can utilize the same expertise and knowledge base, the can favorably compete with the well established international organizations.
On the other hand, multinational corporations may hamper economic growth of host nations bearing in mind that some of them repatriate accumulated capital back to their home countries. Worse still, MNCs may cause unfavorable business environment for local firms through unhealthy competition. If this effect is multiplied across several host nations, the international economy of some regions may be grossly destabilized.
Works Cited
Calvano, Lisa. “Multinational Corporations and Local Communities: A Critical Analysis of Conflict.” Journal of Business Ethics 82.4 (2008): 793-805. Print.
Counihan, Christopher. “”Going Global”: Why do Multinational Corporations Participate in Highly Skilled Migration?” Comparative Technology Transfer and Society 7.1 (2009): 19-42. Print.
Dai, Xiling. “Study on Transferring Price Problem of Multinational Corporations.” International Business Research 3.3 (2010): 122-125. Print.
Egan, Patrick. “Hard Bargains: The Impact of Multinational Corporations on Economic Reform in Latin America.” Latin American Politics and Society 52.1 (2010): 1-3. Print.
Kumar, Nishant. “Managing Reverse Knowledge Flow in Multinational Corporations.” Journal of Knowledge Management 17.5 (2013): 695-708. Print.
Swamy, Kumara. “Are Multinational Corporations Problem-Solvers Or Problem-Makers in Developing Countries? Focus on Technology Gap and Arbitrage.” International Journal of Business 16.1 (2011): 71-87. Print.
Tan, Justin. “Institutional Structure and Firm Social Performance in Transitional Economies: Evidence of Multinational Corporations in China.” Journal of Business Ethics 86 (2009): 171-189. Print.
Vithessonthi, Chaiporn. “Social Interaction and Knowledge Sharing Behaviors in Multinational Corporations.” The Business Review, Cambridge 10.2 (2008): 324- 331. Print.