'Multi national operations create poverty in many countries and wealth in only a few.' Discuss
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Multinational Operations Create Poverty in Many Countries and Wealth in Only a Few
Table of Contents
Title …………………………………………………………………………………………………….…… i
Table of Contents ……………………………………………………………………………………… 1
Introduction …………………………………………………………………………………………..… 2
What is a Multinational Corporation? …………………………………………… 3
Methodology ……………………………………………………………………………………………… 4
Analysis ……………………………………………………………………………………………………… 5
Motives for Establishing Multinational Corporations ……………………… 5
Concerns about Multinational Corporations …………………………………… 7
Effects of Multinational Operation to Host Countries ……………………. 8
Provides Wealth ………………………………………………………………..… 8
Causes of Poverty ………………………………………………………………… 12
Evaluation ……………………………………………………………………………………………….… 15
Conclusion ………………………………………………………………………………………….……… 19
References ………………………………………………………………………………………………… 20
Business operations across national borders are becoming the trend in the current era. And this trend continuously grows because of globalisation and multinational operation. In response to this globalisation issue, multinational corporations tend operate in other countries to have excellent advantage. According to (2001) globalisation and the eagerness of a certain business organisation to operate across borders involves two dimension i.e. change in economic operations of various countries, and change in the participants of global economic operations. Several people believe that the globalisation of economic activities of every country would hasten the fight against poverty (2003).
Basically, multinational corporations have existed since the beginning of overseas trade; thus it remained a part of the business scene throughout history and even with out the trend of globalisation. During the 17th and 18th centuries with the creation of large, monopolistic concerns, multinationals were viewed as agent of civilisation and played a vital role in the commercial and industrial development of Asia, South America and Africa
It retained its favourable image as agents of improved global relations through commercial ties by the end of the 19th century since advances in communications closely linked the world markets. However, the existence of close international trading relations did not prevent the occurrence of two world wars in the first half of twentieth century. But, after the period of conflict, an even more closely bound world economy emerged
Multinational corporations have grown in power and visibility in recent years up to the era of globalisation. Both governments and the consumers worldwide have come to viewed it more ambivalently. Indeed, multinationals today are viewed with more suspicion given its perceived lack of concern for the economic well-being of particular geographic regions and the public impression that multinationals are gaining power in relation to international trade federations and organisations, national government agencies and local, national and international labour organisations. However, as barriers to international trade continue to be removed; multinational corporations continue to expand its power and influence despite such concerns Indeed, multinational corporations that operate internationally offers wealth to some countries but no one can deny that it also offers poverty to others.
What is a Multinational Corporation?
Multinational corporations originated early in 20th century and proliferated after World War II. Typically, a multinational corporation develops new products in its native country and manufactures them abroad, often in Third World nations, thus gaining trade advantages and economies of labor and materials. Many smaller corporations became multinational, some of them in developing nations, during the last two decades of the 20th century ( 2008).
It is a business concern with operations in more than one country. The operations outside the company’s home country may be linked to the parent by merger, operated as subsidiaries or have considerable autonomy (
Furthermore, it has also manufacturing, sales and service subsidiaries in one or more foreign countries. MNCs are also known as transnational or international corporations ( 2008). All major multinational firms are either American or Japanese or Western European. Nike, Coca-Cola, Wal-Mart, AOL, Toshiba, Honda and BMW are examples of these multinational corporations (2008).
MNCs had worldwide influence over other business entities and even over governments. In addition to approximately 250,000 overseas affiliates running cross-continental businesses, over 40,000 multinational corporations are currently operating in the global economy. The top 200 multinational corporations had combined sales of $7.1 trillion, which is equivalent to 28.3 percent of the world's gross domestic product in 1995. These MNCs having the capacity to shape global trade, production, and financial transactions are headquartered in the United States, Western Europe and Japan
According to Berry (1983), the collection of information and the rules for confirmation is not only the part of research, it is more about the way of explanation and the resources by which explanations are produced. With this consideration, the research design for this paper was influenced by the following factors: (1) The need to meet the learning objectives of the multinational corporations; (2) The requirement for credibility of this research and; (3) The extent of the effects of multinational corporations to the host countries in accordance to poverty and wealth issues they provide.
Basically, qualitative method of research will be considered as the approach of this study ( 1994). The qualitative method is chosen because there are only limited measurable data available on the subject of poverty and wealth per se. As every research project is built on a methodological approach, this study will deal on the philosophical position of interpretivism (1994), which relies on the underlying assumption that the general condition needs to be taken into consideration in order to fully understand a phenomena, in this case, the phenomena is the impact of multinational operations to different countries.
Motives for Establishing Multinational Corporations
There are motives why a business operates globally or a multinational corporation bring businesses and invest in other countries particularly in the Third World.
Desire for growth- A corporation may have reached a level of meeting domestic demands and anticipate little additional growth; thus, a new foreign market might provide opportunities for new growth ( 1998).
To escape the protectionist policies of an importing country- Through direct foreign investment, a corporation can bypass high tariffs that prevent its goods from being competitively priced. For example, when the European Common Market () placed tariffs on goods produced by outsiders, U.S. corporations responded by setting up European subsidiaries (1998).
Preventing competition-The most certain method of preventing actual or potential competition from foreign businesses is to acquire those businesses (1998).
To reduce cost- Another motive for establishing subsidiaries in other nations is to reduce costs, mainly through the use of cheap foreign labour in developing countries. A multinational corporation can hold down costs by shifting some or all of its production facilities abroad ( 1998).
MNC holds that they create employment, create wealth, and improve technology in countries that are in dire need of such development. Critics, however, point to their inordinate political influence, their exploitation of developing nations, and the loss of jobs that result in the corporations' home countries.
Concerns about Multinational Corporations
There is no doubt that MNC can bring economic success to the host country and provide wealth. However, labour organisations and government agencies worldwide as well as social welfare and environmental protection groups questions its motives and actions of establishing businesses to other nations which is also the primary reason that causes poverty
As argued by , the national and international labour unions have expressed concern that multinational corporations in economically developed countries can avoid labour negotiations by simply moving their jobs to especially in developing countries where labour costs are markedly less. The labour organisations in developing countries also face the converse of the same problem since they are usually obliged to negotiate with the national subsidiary of the multinational corporation in their country, which is usually willing to negotiate contract terms only on the basis of domestic wage standards, which may be well below those in the parent company's country.
Social welfare organisations are similarly concerned about the actions of multinationals, which are presumably less interested in social matters in countries in which they maintain subsidiary operations. Environmental protection agencies on the other hand are concerns on the hazardous operations of MNC in countries with minimal environmental protection statutes
Finally, government agencies fear the growing power of multinationals, which once again can use the threat of removing their operations from a country to secure favourable regulation and legislation. All of these concerns are valid, and abuses have undoubtedly occurred, but many forces are also at work to keep multinational corporations from wielding unlimited power over even their own operations.
Effects of Multinational Operation to Host Countries
Even if MNCs use financial power to impose unfavourable conditions or unfair terms on host nations particularly in the Third World, is not surprising that nations still compete to attract MNC investment because of such benefits. Governments offer MNCs attractive terms including tax holidays, low cost land for factories, concessions, advantageous depreciation and other incentives just for its investments ( 2001).
Actually, MNCs operations in host country can give some benefits such as ( 2001):
- Access to Foreign Capital
- Development of Resources
- Technology and Productivity Improvement
- Management and Marketing Skills
- Revenue and Taxation
- Diplomatic and Economic Alliances
Acceleration in national development is the prise won by governments in granting these short-term advantages. Basically, (1998) pointed out that such multinational investment will not only provide benefits to the economy of the host nation but also to its political leadership.
Moreover, access to capital, both equity and debt which not available to the host nation is bring by these multinational corporations. Thus, (2001) argued that multinational investment in natural resources permits the realisation of income and value from hidden national assets such as oil, hydroelectric potential and other minerals. Technologies which are not normally available to the host nation are often utilised by these investments; thus national productivity is improved by access to the specialised machinery, modern tools and labour-saving equipment that MNCs use in its operations.
(2001) in his paper justified that the techniques of modern management to supervise and safeguard the investment such as planning and management system, personnel policies, safety training and other proven techniques to enhance efficiency and train local staff are also brought by these multinational investors. The investment of intellectual capital becomes part of the host nation’s business culture as employees move into and through the MNC organisation.
Attracting MNC investment increases concrete benefits of political value to the nation’s leadership. The increased revenue and tax income in the long term even if deferred by tax holidays and temporary abatements are the most obvious in these benefits. Furthermore, MNC investments increase the host country’s diplomatic and economic stature since it provide the project materials, markets and capital to them (2001).
For some countries, the benefits and wealth that MNC brings to the individual citizens of the host nation are visible. Basically, for individual, MNCs operation creates:
- Employment and Jobs
- Skills and Education
- Entrepreneurial Opportunities
- Consumer Products and Services
Modern Commercial Institutions It creates work that did not previously exist. Workers are technically trained freely provided by MNCs. There are also supervisory and leadership content and potential for other positions; thus permitting local employees to achieve increased responsibility and compensation at rates more attractive than the local market provided previously.
A new job created in local companies which provide goods and services to the MNC investor brings a very significant employment effect. Support enterprises develop around the new investment which provides construction, local transportation, food service, supplies, and other necessities create an important employment and income multiplier in the local economy (2001). Inevitably, since the national and individual wealth increase, sellers of products seeking new markets are attracted. Demands for basic products that improve individual nutrition, health, communication and mobility are also created. Moreover, multinational investors bring new or improve products into the local markets, either directly through new factory investments or indirectly by import.
Since multinational investors required sophisticated banking, transportation and commercial services to support its operations, local firms are organised to provide these services. Sometimes other MNC also invest to support this valuable existing relationship. (2001) argued that all other local companies and individuals also had the access to these improved useful services since it is offered at lower cost.
Multinational investment supplements domestic investment and leads to increased economic activity. The past investment strongly influenced a country’s economic growth rate. Therefore, future output will be higher if the level of investment in a country is increased (1998). On, the other hand, multinational investment provides host countries with much-needed foreign currency.
The initial flow of capital into the host country and the (presumed) increase in exports caused by the presence of multinationals have beneficial effects on the host country's balance of payments. The inflow of foreign exchange also helps to reduce balance of payments deficits and allows host countries to import more goods and services from abroad (1998). Multinational companies and their subsidiaries frequently have very high profit margins, so they generate large amounts of tax revenue for host governments ( 1998). They also bring with them a host of managerial skills, business knowledge and (most importantly) technological information which are of immense benefit to host countries (1998).
Causes of Poverty
The world today is becoming relatively small. National borders are opened to facilitate the unrestricted transfer of goods, services, technology and information. Lifestyles in one nation are somehow dictated by lifestyles and trends in another. Today, the world is a global community as multinational operation sets in and continuous to penetrate every aspect of society. Advocates of globalisation e.g. Multinational Corporations (MNCs) refer to it as “a structured process that allows flows of capital and goods between individuals and states in all parts of the world and results to economic convergence, elevated standards of living in developing countries, and massive evolutionary changes in the economic, political, cultural, and biological aspects of human evolution” (2003).
Multinational investments and operations may not raise the aggregate level of output in the host country since its main aim is to maximise its profit. Considering predatory pricing, combined with large grants and subsidies from the host governments, MNCs also often displace existing companies or prevent the emergence of new competitors because they can offer lower prices and higher wages than the indigenous competitors. MNC may also prevent the natural emergence or expansion of indigenous suppliers by buying intermediate products from overseas affiliates; thus profits that would otherwise have accrued to local entrepreneurs, and probably been reinvested locally, are instead repatriated abroad. Moreover, the host country becomes more dependent on multinational companies for employment and output (1998). Because MNC desire to buy inputs from affiliates in other countries, it imports both inputs and capital equipment. Furthermore, it also sends back to its home countries the profit and royalties as well as the management fees and interest payments. Thus, it suggests a negative net effect on the host country’s balance of payment (1998). Apparently, transfer pricing can be used by MNCs to switch their profits to countries with very low rates of corporation tax. Also, the corporation tax it paid is actually outweighed by the subsidies and grants it receives from the host governments aside from the generous tax succession and allowances. MNCs further reduce the host government’s revenues by displacing indigenous competitors ( 1998).
Basically, it is cheaper and easier to allow MNCs to "transfer" its technology by establishing subsidiaries, employing and training local people and forming linkages with the domestic economy. On the other hand, technological advancement would require vast amounts of research and development expenditure on the part of indigenous companies (1998). Moreover, the multinational company's technical knowledge is often of little (external) benefit to the host economy. When technology is transferred to the host country, it is often inappropriate and incompatible to the needs of the host economy. The introduction of the labour-shedding technology to developing economies, also, can lead to increases in unemployment and deprivation ( 1998). Thus, it is evident that Multinational operations to some countries especially in most third world countries do not provide or give wealth but instead poverty to them. Here are reasons:
Multinational companies change local consumption patterns- Luxury goods that are produce in developing countries are sold locally. MNCs advertise its products in order to create demands. However, it is argued that these changes in demand patterns of host countries are the result of economic development and increased prosperity not of MNC activity, since multinational companies merely respond to changing demand patterns (1998).
Multinational companies lead to increased inequality and contribute to the development of urban slums in developing countries- MNCs pay high wages relative to the host country average. Consequently, only small proportion of the population is on high income, while the rest struggle to earn a subsistence income. There is also an unbalanced compensation offering since the workers in the city are earning high wages compare to those in provinces and rural areas. Furthermore, since, multinational companies require host countries to finance part of its investments, it draw resources away from other areas, including agriculture, which can lead to increased unemployment (1998).
Multinational companies reduce the host country's sovereignty and economic independence- Multinational often make decisions which affect the long term welfare of citizens in host countries, particularly about environmental matters. It often has no incentive to consult host governments about the use of non-renewable resources. Furthermore, multinationals often influence the political processes of host countries by using economic and fiscal aspects.
Multinational operations have the potential to benefit the host countries since investments can lead to increased economic output and increased prosperity. Foreign investment, also, creates multipliers that will lead to the growth of domestic investment. However, since MNCs often prevent or displace indigenous enterprise, distort consumption patterns, and intensify inequality and other social problems in the host country, it is unclear in practice whether multinational corporations benefit the host economy (1998).
The global expansion of multinational corporations has generated more controversy in the international political economy and creates poverty. In addition, some consider these powerful corporations help to mankind, dominating the nation-state, diffusing technology and economic growth to developing countries and interlocking national economies into an expanding and beneficial interdependence. Others view MNCs as imperialistic predators, exploiting all for the sake of the corporate few while creating a web of political dependence and economic underdevelopments . The international operation of these corporations is consistent with liberalism. However, it is directly counter to the doctrine of economic nationalism and to the views of countries committed to socialism and state intervention in the economy
Both hopes and fears about MNCs are well founded since many multinational are extremely powerful institutions and possess resources far in excess of most of the member-states of the United Nations. These corporations have continued to grow in importance .
The scope of operations and extent of the territory over which some multinational corporations range are more expansive geographically than any empire that has ever created. They have integrated the world economy more extensively than ever in the past, and they have taken global economic interdependence beyond the realms of trade and money into the area of industrial production. This internationalisation of production impinges significantly on national economies .
With respect to this, it is evident that multinational operation in accordance to fundamental benefits of globalisation on nations participating in the integration of national economies are increasing in terms of economic growth, reductions in poverty and greater chances for democracy (2000). Globalisation with respect to the operation of multinational organisations is deemed a blessing to the poorest populations in the world since relative economic growth is typically associated with reduced suffering for the poor. A report by the in 2000 and 2001 that examined the mean incomes of eighty countries to measure the impact of globalisation to the poor, revealed the following findings: income of the poor increases with every 1 percent increase in per capita gross domestic product and growth in per capita gross domestic product widens the financial status of poor and wealthy countries alike (2001). (2006) added that international trade and investment mainly involves migration of workers to high wage areas. Migration of employment would reduce global poverty since the migrating workers would receive higher wages in the new area. Also, there would be abundance in labour and as corporations move towards high wage areas, more demands for workers would be imminent; thereby giving more chances for employment. Corollary to this, trade liberalisation paves the way for lower prices of products and necessities. Thus, people in poor and developing countries would be given a chance to increase their purchasing power. Furthermore, multinational operation facilitates the proliferation of modern medicine and clinical procedures which has aided in extension of life expectancy and reduction in infant mortality within rich and poor countries. The average life expectancy in developing countries increased from 55 years in 1970 to 65 years in 1997 while infant mortality rates in Asia and sub-Saharan Africa have diminished by 10 percent since 1990 (2003).
Critiques of multinational operation regard it as a blessing to higher groups in society, to the multinational corporations and to the affluent nations; and as an enduring force that promote inequalities between the poor and the rich (2003). According to (2001) despite the fact that the multinational operation process has been around for more than a decade and the poor countries have been forced to resort to structural and economic reforms to adapt to trade liberalisation, most of these countries are still at the bottom of the poverty hierarchy. Some thirty three out of the forty nine poorest countries in the world have undergone major economic structural reforms but their economic performance failed to deliver any significant improvement (p. 6). The early years of multinational operation focused on a growth strategy that was dependent on enormous import substitution of heavy industry rather than exports of light products. This strategy weakened the poor by lessening opportunities for growth and destroying the demand for low-grade labour that consist majority of the poor. If development efforts are geared towards extensive export of labour-intensive goods and light products, the poor could have benefited more. Thus, free trade and multinational operation hinder the demand for unskilled labour and empowerment of the poor in general. Moreover, multinational operation advances trade and not charity thereby restricting the capability of governments in poor and developing countries to resort to minimum levels of welfare endeavors for their constituents. Privatisation of welfare services is promoted but this privatisation reduces access of the poor to quality welfare services and lead to the growing gap between the affluent and the poor (2008).
Predicting the future of the poor and impoverished nations in light of multinational operation is risky. One assumption says that the benefit of multinational operation to a poor country is dependent on the country’s economic policy (2008). (2004) argued that applicable state policies will empower the nation to benefit from the economic growth brought about by multinational operation by moderating or preventing negative effects to the poor . The key is collective social responsibility between citizens and governments. Governments have to face the reality and should solicit the participation of communities and people in addressing the plight for poverty. The penetration of multinational operation, trade and capitalism cannot be stopped but collaboration between governments and citizens can make them survive through analysis and understanding of each nation’s unique social reality (2003).
Globalisation and multinational operations are phenomenon that alters the economic arrangements of nations to give way for unimpeded flow of products, technology, expertise and experiences between national boundaries aimed at giving the people equal access to resources and innovations. However, this purpose is hardly real. Globalisation and multinational operations is shown to speed up economic development for the participating nations through increased gross domestic product and income of people. This also paves the way for inequality as some nations and governments find it hard to integrate themselves to the rapid flow of international trade. Consequently, the gap between the rich and the poor, and between those who are able to go with the globalisation flow and those who are incapable, widens. The benefit of globalisation cannot have a general connotation. Every nation would have their distinct social situation which may or may not be parallel to the aims of globalisation. Therefore, poverty reduction and empowerment of the poor still rely on the ability of the government and citizens to work together inside their own national territories.
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