Examine the Impact of Multinational Corporations Setting up in Developing Countries
There has been a very controversial debate over years now about the impact of multinational corporations setting up in developing countries, which have many supporters as well as opponents. Surely there is not only one way to look at this more and more common phenomenon that affects the host countries in many both positive and negative ways that are discussed in this paper. The term multinational corporations (MNCs) is used “to identify firms that have extensive involvement in international business and engage in foreign direct investment (FDI). MNCs own and control value-adding activities in more than one country that are usually coordinated from central headquarters” (Griffin and Pustay, 2005).
The investment of MNCs in the developing countries has greatly increased since the mid-1980s, because of globalization as they looked for new resources and larger markets (Greer and Singh, 2000). Presently, there are over 35,000 multinational corporations with more than 15,000 foreign subsidiaries, which is around one-third of the whole world production. Their value is estimated to be more than $1.5 trillion, one-third of which in the developing countries (GhanaWeb, 2012). The developing countries with most multinational investment are those with highest growth potential like Asian countries: China, Malaysia, Thailand, Singapore, and Latin American ones: Mexico, Argentina and Brazil. The African countries get less than 4% while the poorest 50 countries worldwide receive less than 2%. Over a half of business activities of MNCs deal with manufacturing and services and one-third with oil and gas (GhanaWeb, 2012). According to the report by the Institute for Policy Studies out of 100 largest world economies, based on corporate sales and country GDPs, 49 of those economies are countries while the other 51 are multinational corporations. Also, it is stated that the sales of the Top 200 corporations are equal to the 27.5 percent of world economic activity (Institute for Policy Studies, 2012).
These numbers show how powerful MNCs are and how important they are to the world economy, but what is their impact on the developing countries? On the one hand, multinational corporations setting up in developing countries have a very positive effect on their host countries. First of all they provide direct employment to local people and transfer of skills through education and experience. They also affect the indirect employment through paying rent for land or buildings and cooperating with local suppliers, who now have more demand and must deliver higher quality products. As residents have more chances for income they can purchase more and improve their standards of living, while there is generally greater selection and availability of goods and services. The standard of living of local people in some developing countries like Bermuda, the Bahamas, South Korea, Singapore, Hong Kong, and Taiwan has improved largely after the investment of multinational corporations there (Action Institute, 2012). In addition, attracting foreign investment in the developing countries results in economic growth and higher national income. Such countries are usually better off with higher development rates, higher exports, lower imports and additional tax revenues coming from the multinational corporations.
For instance, when Toyota started working in Georgetown, Kentucky it paid $1.5mln in property taxes, which was around one-fourth of the town’s municipal budget. By attracting foreign direct investment developing countries will also make substantial tax revenues that can be later on spent on health care, education and other domestic needs (Griffin and Pustay, 2005). In order to attract foreign direct investment local governments many times compete with each other to offer better conditions to multinational investors and lower the income taxes for their corporations. Yet they still get great amounts of money from the corporations that they would not get otherwise. Moreover, when moving into developing countries multinational corporations transfer technology and skill with them. There are also great improvements made to the local infrastructure to allow the effective operation of the corporations (Action Institute, 2012). That is a very important aspect for the developing countries as it improves their development and brings them at least a bit closer to the developed countries. Developing countries get an update on technology that people get used to and learn to work on, while the whole local society benefits from improved infrastructure like better roads, telecommunications etc.
On the other hand, multinational corporations can have a very negative effect on the developing countries. They are a very strong direct competition to local firms that are forced to shut down and due to their political and economic power they have advantages given by the local governments over small, national or start-up businesses. An example of such additional advantages to multinational corporations over local firms include lower taxation, less strict laws and less bureaucracy in setting up and later on operating the business activities. This results in unfair competition, while shutting up local firms leads to unemployment and in some cases monopoly (Global Issues, 2012). Furthermore, due to their great size and wealth multinational corporations usually gain great economic and political power that can be misused.
They usually have big influence on the local governments and are quite often associated with corporate corruption, bribery, lobbying or sponsoring politics campaigns during elections. As the corporations grow bigger they have a greater concentration of wealth, power and influence in the local area. The local authorities often face the threat of multinational corporations withdrawing the local market in case of stricter laws, higher taxation or other problems. In cases when multinational corporations really withdrew such markets, the whole process had a devastating effect on local economy strongly dependant on the foreign investment rates of unemployment went up and rates of economic growth went down at once (Adeyeye, 2012). Additionally, since multinational corporations can afford the best lawyers and accountants they are recognized for their large scale tax avoidance especially through mispricing transfers and false invoicing. In 2008 it was estimated that the developing world loses $160bn a year in tax revenue from only those two forms of tax avoidance (Global Issues, 2012). Not to mention the fact that local governments usually give corporations the privilege of lower taxation in order to attract the foreign investment. Unfortunately, the developing countries usually do not have the expertise, knowledge, wealth and power to address such issues. The multinational corporations are also known for their way of doing business: profit over people and their human rights. The reason why they decide to invest in host countries is to cut costs and maximise profits. If the cost of doing business was the same in home and host countries no company would decide to take such a great risk to expand overseas without any additional benefits.
A great opportunity for corporations is cutting costs in one of the most expensive factors of production: labour. Everyone has heard of cases of labour abuse, extremely low wages, child labour, poor working conditions and no health care in plants owned by multinational corporations in developing countries. In cases when local governments want to intervene and impose stricter laws on work safety, wages or even pollution controls they often have to deal with threats of market withdrawal and loss of foreign investment (Global Issues, 2012). Nevertheless, the wages paid to local workers seem low by western standards, but in local standards are acceptable and are much better than not having a job at all. Many multinational corporations like Nike have taken important steps to improve the working conditions of their employees in developing countries. Few years ago Nike was criticized for the poor working conditions and hard women and child labour in its plants in China, but the company was not aware of these problems as it was subcontracting with Asian manufacturers.
Nowadays the company works more closely with subcontractors on issues concerning employee rights and working conditions in its overseas plants (The World Bank Group, 2012). Last but not least, many opponents to the phenomenon of multinational corporations setting up in developing countries claim that the only reason they decide to invest in host countries is to gain access to their precious natural resources. These corporations exploit the non-renewable natural resources of developing countries like oil or gas for much less than their actual value. In exchange they negatively affect the local environment by polluting air, land and water through mining, auto, oil and chemical corporations. Then residents are left with no drinking water and diseases caused by heavily polluted environment like in China or India. However, small local firms also pollute the environment (on a smaller scale) and the issue needs stricter government regulations (The World Bank Group, 2012). Since these corporations do everything to keep their costs down and maximise their profits, they use non-environmentally friendly methods of production and non-renewable resources and get rid of production waste in a dangerous way. It is the government’s responsibility to make sure these corporations protect the environment through imposing regulations, controlling and making sure they are put in practice. To sum up, multinational corporations have both positive and negative impact on developing countries they are setting up in.
They give employment to local people and improve their standards of living, bring economic growth, higher national income and tax revenues, not to mention the transfer of technology and skills. However, they are serious competition to local businesses, often violate human rights, practice tax avoidance, misuse their economic and political power, exploit the local natural resources and harm the environment. The developing countries have the most need for foreign direct investment from the multinational corporations in order to catch up with the developed countries in their economic development, but they are the most at risk of exploitation and have the least power to resist it. Multinational corporations can bring many benefits to local societies as a result of their business activities, but this is surely not their initial aim. The purpose of these giant firms is to make the biggest possible profits at the smallest cost. They do not invest in host countries for humanitarian reasons and they will not bother to put additional effort or spend additional money to improve certain issues on their own without having a gain in doing so. This is the role local governments and societies should take and strongly insist on. Especially the local authorities should keep power and control strongly, not let the corporations be excessively large and powerful or affect the local communities in a negative way. Multinational corporations can be engines of positive change in the developing countries, but the local authorities should always keep in mind the overall good of their people and land, not only in the short but also in the long run and set favourable agreements and strict regulations that will benefit and protect the residents and the environment. That is because if following all the demands of corporations, local communities have much more to lose than the investment; precious natural resources, residents’ health and welfare and clean environment once gone cannot be returned.
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