Multinational corporations (MNCs) are key players in international business; they are defined as “a business that has direct investments (in the form of marketing of manufacturing subsidiaries) abroad in multiple countries” (Wild, Wild, et al., 21). Transnational corporations are among the world’s biggest economic institutions. A rough estimate suggests that the 300 largest MNCs own or control at least one-quarter of the entire world’s productive assets, worth about US$5 trillion (The Economist, 7).
The vast numbers of MNCs are located all around the world; they vary widely in size and interest. Their intention is to “take a package of capital, technology, managerial know-how, and/or marketing skills to carry out production or business services abroad” (Lecture Notes). Their effects are far reaching, affecting the daily lifestyle of the average consumer. Partly because of their size, MNCs tend to dominate the sectors in which they specialize. As a result, their transnational business ventures offer much debate about their impact on developing countries; many arguments have been proposed on this subject alone.
This paper will be used to illustrate the opportunities created by MNCs for less developed countries. A historical account will be presented identifying the general impact of MNCs on developing countries up to the 21st century. Contemporary views will also be used for the purpose of evaluating the influence of MNCs in the areas of growth and efficiency, welfare, and values and institutions in the present and potential future consequences. Many of the ideas for the foundation of this paper are from the 13 November 2003 in-class lecture.
The earliest version of the modern MNC is visible in the imperialistic and colonizing ventures by Western Europe, dating back to the 16th century. The modern version of the MNC was apparent with the advent of industrialization in the 19th century. Companies searching for resources and larger markets found it profitable to look towards less developed countries for the materials they desired. For instance, the United Fruit Corporation, an American corporation, began its reign in the affairs of Latin America by acquiring seven independent companies in Honduras. From there United Fruit moved on to become the largest importer of bananas to the United States, controlling 90%. The lesson to be learned from this is that companies are always looking for a way to increase profits, so they are continually looking for cheaper, more efficient resources.
Since the mid 1980s, investment in developing countries has significantly increased, greatly due to globalization (Greer & Singh). These developing countries are structurally unstable and are burdened by debt and unemployment, the foreign investment distributed into these countries will lead to a more stable and prosperous economy for them. The Economist agrees citing that that MNCs are “the embodiment of modernity and the prospect of wealth: full of technology, rich in capital, replete with skilled jobs” (The Economist, 9). In hopes of attracting potential investors, governments of the less developed countries have been “queuing up to attract multinationals” by lowering trade restrictions and making their economic environment more hospitable for foreign investment (Ibid., 9). There are however, opponents of MNCs and one of the main arguments is the “race to the bottom” theory; which states that “[u]nfettered globalization triggers and unavoidable “race to the bottom” in labor and environmental standards around the world. The reduction of restrictions on trade and cross-border investment frees corporations to scour the globe for the country or region where they can earn the highest return” (Drezner, 44).
The first topic is the growth and efficiency of developing countries, which have opened their doors to MNCs. It is important to address the long-term effects because they suggest how a developing country will either improve or decline in their position on the world market. The five general areas to be focused on in this topic are capital, technology, skills, exports and level of integration.
Capital, the means of production, is the basic need of an underdeveloped society. It allows for improvement in the structure of the economic system. Through foreign direct investment (FDI), companies are able to diffuse the much needed resource into third world countries. Technology is also brought into the country with the MNC; the movement of technology to produce goods as well as for communication purposes. This is not only important for production and distribution by the foreign firm, but also for the development of similar, local companies. These local firms may not have the most efficient machinery and materials for production and a host country may state that a firm must make its building and equipment plans public knowledge. The introduction of technology to the developing world can lead to cleaner more efficient technologies. For example, “the privatization of the petrochemicals sector of Brazil in the early 1990s led to a greater acceptance of environmentally safe practices” (Drezner, 45).
The skill level of the workers within the host country would also increase because many foreign firms can and do educate them in the job skills needed to produce efficiently; benefiting both the firm and the host country. The number of exports of the host country will grow exceptionally well; their gross domestic product (GDP) and gross national product (GNP) will also reflect the growth of industry. These changes will potentially attract more investors in the same industry as well as in others; this is the multiplier or ripple effect. The multiplier effect is essentially described as all of the good things that could potentially happen as a result of the infusion of capital, technology, skilled labor and exports. One of the most important consequences is integration, specifically economic integration; the globalization of a less developed country through FDI.
The welfare of the citizens within a country can be greatly improved by the infiltration of MNCs. Foreign firms bring with them the promise of jobs. The host country will usually stipulate that the investing company use local labor, this will help to boost the national economy. These jobs will also most likely pay more than existing domestic companies; they are used to having to pay more to skilled workers in more advanced economies, as well as the fact that they will be using cheaper labor and increasing their profits just by moving to this country.
Investing in local labor also boosts the resident income, thus increasing the ability of citizens to purchase and consume. As the income levels rise, people are driven to buy more, even luxury items to show status. The tax base will rise with the income levels; the government will have more money to spend on domestic needs. Health care, education and other domestic programs can be funded. These programs lead to longer, healthier lives for citizens in addition to improved opportunities through education and aid from the state.
Developing a country through FDI improves both the country’s values and institutions. Once a country is past just making sure that its government stays in power it has the ability to concentrate on more important issues; envision Maslow’s “Hierarchy of Needs” but on a national scale. The investment in a society by MNCs is just plain good, and healthy, for the society in general; it promotes a strong work ethic within the community. It also makes the country more receptive to change because they are more active on the global market. This is important for the continued economic improvement of the country.
Political improvements can be facilitated more easily if a country is integrated into the international scene. Governments will be more agreeable to change if it means continued investment by foreign firms and the home countries of these MNCs. Changes can be made in the constitution of the state and/or on trade or environmental restrictions. It is easier for an integrated state to convert constitutionally to a more liberal, capitalist state when it has to continually interact with other liberal, capitalist states. The nationalistic views and values can potentially be altered to reflect international views and values; this is beneficial in places where there are severe cultural differences hindering political or social change. Economic strategy is the best answer for easing the pains of change; economics is a game in which everyone is fending for themselves and the stakes they play for are maximum gains.
They say that capitalism begets capitalism, and if this is true as it has shown to be in the past then with the continued FDI in less developed countries our world will one day consist only of capitalist societies. Because capitalist societies are intrinsically more stabile, especially in affairs between themselves, the global village will become less hostile and more welcoming. In the end one can find that there is no better alternative to allowing MNCs to operate within a country. FDI is far easier to attain than national development aid or multilateral bank lending because there are so many firms looking for opportunities for optimizing profits.
In conclusion, MNCs are beneficial to less developed countries. They improve the foundations of a “backwards” economic environment through the diffusion of capital, technology, skills, and exports. MNCs have a direct effect on the development of a more citizen welfare conscious government. Accordingly, the number of jobs increases, consumer spending increases, the tax base grows and health care is more widely accessible. They also have an apparent lasting effect on the values and institutions of the host country. The values of the country change to reflect a country committed to staying in pace with a rapidly changing global environment; extending to political norms and nationalistic tendencies. Once there is openness to capitalism, or a more developed capitalist society emerges then there will be a more stable global society. However, in the end there really is no other more reliable way to improve the social, economic, and political environment of a state than by allowing a MNC to invest.
Drezner, Daniel W. “Bottom Feeders.” Annual Editions: Developing World. 12th Ed. McGraw-Hill/Dushkin, Guilford, C.T.: 2002/2003. 44-49.
“Everybody’s Favourite Monsters: A Survey of Multinationals.” The Economist Vol. 326 #7804 (27 Mar 93): Survey Insert.
Greer, Jed and Kavaljit Singh. A Brief History of Transnational Corporations. Corpwatch. 2000. Global Policy Forum. 30 Nov 2003. .
Lecture Notes. IS 275: Problems of the Developing World. 13 Nov 2003.
Wild, John J., Kenneth L. Wild, et al. International Business. 2nd Ed. Prentice Hall, Upper Saddle River, N.J.: 2003.
