Multinational cooperation

MultinationalCorporations-summary xImpactofMultinationalCorporationsonDevelopingCountries

Multinational Corporations (MNC)

derive at least a quarter

 of their revenues outside their home country. Many multinationals are based in developed nations. Advocates of multinationals say they create high-paying jobs and technologically advanced 

goods

 in countries that otherwise would not have access to such opportunities or goods. On the other hand, critics say multinationals have undue political influence over governments, exploit 

developing nations

, and create job losses in their own home countries.

The history of the multinational is linked with the history of colonialism. Many of the first multinationals were commissioned at the behest of European monarchs in order to conduct expeditions. Many of the colonies not held by Spain or Portugal were under the administration of some of the world’s earliest multinationals. One of the first arose in 1660: The East India Company, founded by the British. It was headquartered in London, and took part in international trade and exploration, with trading posts in India. Other examples include the Swedish Africa Company, founded in 1649, and the Hudson’s Bay Company, which was incorporated in the 17th century. 

There are four categories of multinationals that exist. They include:

1.

A decentralized corporation with a strong presence in its home country

2. A global, centralized corporation that acquires cost advantage where cheap resources are available

3. A global company that builds on the parent corporation’s 

R&D

4. A transnational enterprise that uses all three categories

There are subtle differences between the different kinds of multinational corporations. For instance, a transnational — which is one type of multinational — may have its home in at least two nations and spread out its operations in many countries for a high level of local response. Nestlé S.A. is an example of a transnational corporation that executes business and operational decisions in and outside of its 

headquarters

. 

A multinational enterprise controls and manages plants in at least two countries. This type of multinational will take part in 

foreign investment,

 as the company invests directly in host country plants in order to stake an ownership claim, thereby avoiding transaction costs. Apple Inc. is a great example of a multinational enterprise, as it tries to maximize cost advantages through foreign investments in international plants. 

· Initially, the firm might license patents, trademarks or technology to a foreign company in exchange for a fee or royalty.

· The firm sees a potential for extra sales by exporting and uses a local agent or distributor to enter a foreign market.

· The firm may use exporting as a “vent” for its surplus production and might have no long-term commitment to the international market.

· As exports become more important, the MNE will set up an office for its sales representative or a sales subsidiary.

· The firm might set up local packaging and/or assembly operations.

Finally, the firm will set up a wholly owned subsidiary (FDI).

Why do firms become MNEs?

· To diversify themselves against the risks and uncertainties of the domestic business cycle;

· To tap the growing world market for goods and services;

· In response to foreign competition;

· To reduce costs;

· To overcome barriers to entry into foreign markets;

· To take advantage of technological expertise by manufacturing goods directly.

While a business can technically be considered a multinational corporation if it has offices in two countries, most multinational corporations have relatively large operations. These operations typically require a large staff of workers and managers, as well as contracts with service providers such as attorneys and accountants.

MNC Imports and Exports :because multinational corporations typically run large operations, they may need lots of supplies, products and materials. Consequently, these businesses tend to import products to serve their businesses as well as export products to other businesses. Multinational corporations also may import products from their own factories stationed in other countries or export products from a factory to a retailer in another country. While even an individual can import or export a product or two, a common characteristic of multinational corporations is the large volume of importing or exporting done by the company. Some small businesses become multinational corporations by expanding their businesses to include imports and exports.

Trading as a Public Corporation: Companies don’t have to be traded publicly to become multinational corporations, but many of these corporations do go public. Publicly traded corporations make shares in their businesses available to investors. The investment money helps fund the company, and if the value of shares goes up, investors can share in the profits. This role in the stock exchange gives multinational corporations the ability to affect the economy of an entire nation. Some multinational corporations are traded in several nation’s stock markets. Small businesses interested in becoming public corporations don’t necessarily need to become huge. Public trading only requires that the company open its shares to a public audience, and many startups greatly expand when they choose to go public.

Partnerships and Affiliates :Since they’re doing business across borders, many multinational corporations develop partnerships and affiliations with other businesses, non-governmental organizations and governments. Such affiliations might include the licensing of products or chains to individuals or businesses, partnerships with governments to fulfill local initiatives and affiliations with non-governmental organizations to help raise money for charitable causes.

Competing as a Small Business :Small businesses hoping to become multinational corporations generally need clear business plans as well as the capacity to expand operations, staff and business reach. That said, the internet has opened the world of multinational operations to all businesses. Some small businesses can compete in a global marketplace by selling on websites or connecting remotely to foreign locations. Internet businesses often have lower overhead, particularly if they don’t have brick-and-mortar stores.

There are a number of advantages to establishing international operations. Having a presence in a foreign country such as India allows a corporation to meet Indian demand for its product without the transaction costs associated with long-distance shipping. Corporations tend to establish operations in markets where their 

capital

 is most efficient or wages are lowest. By producing the same quality of goods at lower costs, multinationals reduce prices and increase the 

purchasing power

 of consumers worldwide. Establishing operations in many different countries, a multinational is able to take advantage of tax variations by putting in its business officially in a 

nation where the tax rate is low

 — even if its operations are conducted elsewhere. The other benefits include spurring job growth in the local economies, potential increases in the company’s tax revenues, and increased variety of goods.

A trade-off of 

globalization

 – the price of lower prices, as it were – is that domestic jobs are susceptible to moving overseas. Studies indicate that for each year between 2003 and 2015, imports were responsible for job displacements of 136,000 workers. This data underscores how important it is for an economy to have a mobile or flexible labor force, so that fluctuations in economic temperament aren’t the cause of long-term unemployment. In this respect, education and the cultivation of new skills that correspond to emerging technologies are integral to maintaining a flexible, adaptable workforce. According to 

Bureau of Labor Statistics projections

, a few of the fastest-growing industries in the United States are home health care services, outpatient care centers, medical and diagnostic laboratories, and information services; together, these industries are replacing many of the American jobs that were displaced by overseas manufacturing. Those opposed to multinationals say they are a way for the corporations to develop a 

monopoly

 (for certain products), driving up prices for consumers, stifling competition, and inhibiting innovation. They are also said to have a detrimental effect on the environment because their operations may encourage land development and the depletion of local (natural) resources. The introduction of multinationals into a host country’s economy may also lead to the downfall of smaller, local businesses. Activists have also claimed that multinationals breach ethical standards, accusing them of evading ethical laws and leveraging their business agenda with capital.

Framework for global strategies:
the FSA/CSA matrix : There are two basic building blocks in an international business course.

· Firm-specific advantages (FSAs): a unique capability proprietary to the organization

· It may be built upon product or process technology, marketing or distributional skills.

· Country-specific advantages (CSAs): country factors

· Natural resource endowments (minerals, energy and forests), the labor force and associated cultural factors, etc.

Dunning’s “eclectic” theory of MNEs: OLI framework

· Ownership factors (O): FSAs

· Location factors (L): CSAs

· Internalization factors (I): FSAs

· As we know Ownership factors (O): FSA (O)and Location factors (I), in practice, are integrated features of FSA management within the MNE that cannot be decoupled in strategic decision making

Benefits of Multinational Corporations

· Create wealth and jobs around the world. Inward investment by multinationals creates much needed foreign currency for developing economies. They also create jobs and help raise expectations of what is possible.

· Their size and scale of operation enables them to benefit from 

economies of scale

 enabling lower average costs and prices for consumers. This is particularly important in industries with very high fixed costs, such as car manufacture and airlines.

· Large profits can be used for research & development. For example, oil exploration is costly and risky; this could only be undertaken by a large firm with significant profit and resources. It is similar for drug manufacturers who need to take risks in developing new drugs.

· Ensure minimum standards. The success of multinationals is often because consumers like to buy goods and services where they can rely on minimum standards. i.e. if you visit any country you know that the Starbucks coffee shop will give something you are fairly familiar with. It may not be the best coffee in the district, but it won’t be the worst. People like the security of knowing what to expect.

· Products which attain global dominance have a universal appeal. McDonalds, Coca-Cola, Apple have attained their market share due to meeting consumer preferences.

· Foreign investments. Multinationals engage in Foreign direct investment. This helps create capital flows to poorer/developing economies. It also creates jobs. Although wages may be low by the standards of the developed world – they are better jobs than alternatives and gradually help to raise wages in the developing world.

· Outsourcing of production by multinationals – enables lower prices; this increases disposable incomes of households in the developed world and enables them to buy more goods and services – creating new sources of employment to offset the lost jobs from outsourcing manufacturing jobs.

Criticisms of Multinational Corporations

Companies are often interested in profit at the expense of the consumer. Multinational companies often have monopoly power which enables them to make excess profit. For example, 

Shell made profits of £14bn last year.

Tax avoidance. Many multinationals set up companies in countries with the lowest tax rate. They funnel profit through the countries with lowest corporation tax rates – e.g. Bermuda, Ireland, Luxemburg. For example: in 2011, Google had £2.5bn of UK sales, but only paid £3.4 million UK tax. A tax rate of 00.1% despite having a global-wide profit margin of 33%. (

tax avoiding companies

) This means the multinationals are ‘free-riding on smaller companies who cannot attain the same creative tax accounts.

Cash reserves 

– Apple has cash reserves of $216bn, 93% of which is overseas. This represents deadweight welfare loss. It is not being used for investment

Their market dominance makes it difficult for local small firms to thrive. For example, it is argued that big supermarkets are squeezing the margins of local corner shops leading to less diversity.

In developing economies, big multinationals can use their economies of scale to push local firms out of business.

In the pursuit of profit, multinational companies often contribute to pollution and use of non-renewable resources which is putting the environment under threat.

· ‘Sweat-shop labor’ MNCs have been criticized for using ‘slave labor’ – workers who are paid a pittance by Western standards.

· Outsourcing to cheaper labor-cost economies has caused loss of jobs in the developed world. This is an issue in the US where many multinationals have outsource production around the world.

Evaluation

· Some criticisms of MNCs may be due to other issues. For example, the fact MNCs pollute is perhaps a failure of government regulation. Also, small firms can pollute just as much.

· MNCs may pay low wages by western standards but, this is arguably better than the alternatives of not having a job at all. Also, some multinationals have responded to concerns over standards of working conditions and have sought to improve them.

TheChittagong University Journal of Business Administration, Vol

.

24, 2009, pp. 111-137

Impact of Multinational Corporations on Developing Countries

Shameema Ferdausy

Md. Sahidur Rahman

ABSTARCT

Multinational corporations (MNCs) are enterprises which have operations in more than one country. They manage production establishments or deliver services in at least two countries. MNCs conduct a significant proportion of their operation in other countries. Therefore, they can have influence on other countries economic entire environment. The controversies whether MNCs help or harm development especially of

developing countries

have been examined in this paper. To attain this purpose, a brief definition of MNCs has been given. Thereafter, some of the positive impacts as well as negative impacts of MNCs’ operation particularly in developing countries have been examined. Accordingly, three case studies are presented that make evident the positive, negative, and mixed impacts of multinational corporations on developing countries.

Keywords: Multinational corporations, developing countries, foreign direct investment, positive impact, negative impact.

1. INTRODUCTION

In this twenty-first century, MNC has become the central institution of developing nations. A significant number of MNCs started their operations in developing countries by the 1990s. The effects of their operations in developing countries are now assessed quite differently from that was done in the past. MNCs benefit from the lower labor costs and grants given by the government of developing countries in order to attract these MNCs. Moreover, lower tax rates or tax exemptions are also given to MNCs for a period in the developing countries. On the other hand, these developing countries can also gain from the investment made by these MNCs. MNCs can help reducing poverty, driving economic growth, creating jobs that utilize local people, raise employment standards by paying better wages than local firms pay. In addition, they can boost economic development by transferring technology and knowledge, improve or build up infrastructure, raise people’s standard of living. Overall, it might seem that the developing countries gain from investments of MNCs. Is that really true? Although MNCs have become omnipresent in the developing world, there has always been an uncertainty about them, in both positive and negative ways. Most of the MNCs take advantage of developing countries. They can be guilty of making pollution or doing human rights abuse. Nevertheless, laborers are paid low wages, as there are few or no trade unions to protect their rights or negotiate with the MNCs. Thus, the theoretical dispute over the effects of MNCs in developing countries is mirrored in the conflict. Apparently, two broad positions can be derived from these differences of opinion- the positive and negative. Some proponents have developed arguments that emphasize the positive results of foreign direct investment (FDI) by MNCs. They are willing to admit some gains from FDI. On the contrary, others are unwilling to accept a positive role for multinational capital under any circumstances.

In this perspective, this paper takes an attempt to address the gap by examining the contentious argument whether MNCs nurture development and, for the present purposes, discussion is limited to development in those countries known as “Developing Countries”. Accordingly, a literature review has been done on the MNCs activities in developing countries. Also, some definitions of MNCs have been given. Thereafter, some of the benefits accruing to developing countries through investments by MNCs and some of the possible undesirable consequences that may blight development in developing countries have been examined. In support of the proposed study, three case studies are presented in the last section that shows the positive, negative, and mixed effects of MNCs on developing countries.

2. LITERATURE REVEIW

Recent advances in information technology, coupled with deregulation and market liberalization worldwide, have fuelled an unprecedented surge in the growth of MNCs. While some regard them as ruthless exploiters, others view them as benevolent engines of prosperity. But today’s multinationals bear little resemblance to their ancestors. They are reinventing themselves in diverse ways that confound the assumptions of critics and advocates alike (Stopford, 1998).

Theory and research concerning the process of multinational firms have been given significant attention by many scholars and researchers after the Second World War due to the increased cost of production, and the imbalance of resources (e.g. Buckley & Casson, 1985; Dunning, 1993; Ghoshal, 1987; Hamel & Prahalad, 1990; Ohmae, 1990; Prahalad & Doz, 1987; Rugman, 1981; Vernon, 1979). Most of these studies were conducted in the well-developed established countries namely North America, the

Western European Community

, and Japan. There has been little empirical study found on developing countries. In spite of this little attention, the study on developing countries commenced in the end of the 1970s and early 1980s (Lall, 1983a; Wells, 1983). In the 1990s, renewed attention has been given to the topic of

MNC growth

with the effort of scholars and researchers in considering their studies on multinationals from developing countries (Cantwell & Tolentino, 2000; Dunning, 1997; Hoesel, 1999; Nagesh, 1995; Tolentino, 2000; UNCTAD, 2006; Yeung, 1994).

According to Dunning (1995) in his eclectic paradigm theory, the main difference between MNCs from developing countries and those from developed countries lies in the nature of ownership-specific advantages of developing country MNCs. Ownership advantages of MNCs from developing countries are argued to lie in their lower production costs, lower wages and lower prices, which can only be exploited in other developing countries with a similar or poorer economic status (Lall, 1983b; Wells, 1983a). Available evidence (e.g. Ahmad & Kitchen, 2007; Cantwell & Tolentino, 2000; Hoesel, 1999; Tolentino, 1993; Yeung, 1998) has emphasised that capabilities of developing countries MNCs to catch up with their developed-countries counterparts through the process of technology accumulation.

In describing his school of thought, Wells (1983b) claimed that there are two pertinent market features in developing countries that force local firms to generate and adapt various innovations to achieve growth. These two features are small market size and the easy availability of low cost labour. Lall (1983a, 1983b) believed that localization of technological change is the key to the development of developing country MNCs. He further asserted that the wealth, assets, and knowledge of the local environment enabled developing country MNCs to develop sustainable proprietary assets that could be effectively utilized in overseas operations. Moreover, he emphasised that the lack of high-end technologies among multinationals from developing countries allows them to derive their advantages from widely diffused technologies, and from special knowledge of developing country markets.

Tatum (2010) proposes that multinationals operate in different structural models. The first common model is for the MNC positioning its executive headquarters in one country, while production facilities are located in more other countries. This model often allows the company to take advantage of benefits of incorporating in a given locality, while also being able to produce goods and services in areas where the cost of production is lower. The second structural model is for an MNC to base the parent company in one nation and operate subsidiaries in other countries around the world. With this model, just about all the functions of the parent are based in the country of origin. The subsidiaries more or less function independently, outside of a few basic ties to the parent. A third approach to the setup of an MNC involves the establishment of headquarters in one country that oversees a diverse conglomeration that stretches many different countries and industries (Robinson, 1979; Tatum, 2010).

MNCs in service industries have given this sector’s large and growing impact on the global economy (Goerzen & Makino, 2007). The Marxists view the emergence of an MNC as an aspect of capitalism in the process of developing, at international level (Gilpin, 1987; Stopford, 1988). While institutions are important for economic development, particularly in resource rich countries, the interaction between MNCs and host country institutions is not well understood (Wiig & Kolstad, (2010). There is a risk that MNCs facilitate patronage problems in resource of rich countries, exacerbating the resource of curse.

Chandler (1962) showed in his study, Strategy and Structure, the process by which a corporation develops from an initial small workshop through progression to a large factory, and then to a series of factories nationwide in scale. During this evolution and development, the importance of central office as well as the number of its department increases. The greater the size of the firm, the larger and more subdivided the operations of this central office become. Moreover, the power and responsibilities of this central office will rise according to their new structure.

With globalization and market liberalization, the outward FDI flows from developing countries have notably not been restricted to other developing countries from the same region. Moreover, developing country corporations have likewise embarked on a new sectoral scope, shifting away from massively labor intensive industries to knowledge-based industries such as automobiles, electronics and telecommunications. Thus, developing country MNCs have turned away from searching to satisfy basic utilitarian needs: that is, needs for natural resources and markets. At their globalising stage, they have gone abroad, no longer looking for basic resources; instead they have focused their efforts on more ambitious endeavours such as the search for new markets, developed new strategic assets and obtained higher efficiencies and economies of scale. All these are to be found in the ever-expansive literature.

3. OBJECTIVES

To address the gap, the current study aims to examine the impact of MNCs on developing countries. To achieve the main objective, the study covers the following specific purposes:

1. To identify the overall positive impact of MNCs on developing countries.

2. To explore the overall negative impact of MNCs on developing countries.

3. To put several case studies in order to show the evidence of positive, negative, and mixed impact of MNCs on developing countries.

4. To suggest some recommendations for developing countries to attract MNCs within their boundaries.

4. METHODS

In preparing the paper, the authors depend on desk research. The desk research method has been followed to review the existing literature of the subject. The study is analytical in nature which is solely based on secondary data. Secondary data has been collected from several sources including relevant books, journals, government reports, newspapers, and websites. Upon availability of data, a logical explanation and description of the issue has been provided. An effort has been made by providing three case studies in order to make study more informative and relevant.

5. DISCUSSIONS

5.1. What are MNCs?

MNCs are firms those own and control production facilities in two or more countries. They produce and distribute goods and services across national boundaries; they spread ideas, tastes, and technology throughout the world; and they plan their operations on a global scale. Such companies have offices and/or factories in different countries and usually have a centralized head office where they coordinate global management. Nearly all major multinational corporations are American, Japanese or Western European, such as Nike, Coca-Cola, Wal-Mart, AOL, Toshiba, Honda, and BMW.

Since the study is of MNCs in a developing country, it is appropriate to first define the term to dwell on the possible source of confusion. The imperative to control resources and know-how as well as to secure access to overseas markets has driven some firms to engage in FDI and gradually or potentially to become MNCs. Widespread use of this term MNCs commenced in the early 1960s (Hymer, 1979; Jones, 1996). Since then, a variety of definitions have been offered and are widely known and used in the literature.

In fact, Lilienthal (1960), who was a Director of the Tennessee Valley Authority and Director of the Atomic Energy Commission at that time, was first to introduce the term ‘Multinational Corporation’ in 1960. At a symposium held on the Occasion of the Tenth Anniversary of the Graduate School of Industrial Administration, Carnegie Institute of Technology, Lilienthal (1960), distinguished between portfolio and direct investment and then defined “multinational corporations – which have their home in one country but which operate and live under the laws of other countries as well…”(p. 119).

The MNC is commonly defined as an enterprise which controls and manages assets in at least two countries. MNCs can be divided into three types. One turns out essentially the same lines of goods or services from each facility in several locations, and is called the horizontally integrated MNC. Another, the vertically integrated MNC, produces outputs in some facilities which serve as inputs into other facilities located across national boundaries. The third is the internationally diversified MNC, whose plants’ outputs are neither vertically nor horizontally related (Caves, 1996; Teece, 1986).

Most scholars and researchers in international business (e.g. Buckley & Casson, 1976; Caves, 1996; Dicken, 1998; Dunning, 1993a; 1993b; UNCTAD, 1997; Vernon, 1971) have provided various definitions of the term ‘multinational corporation’. The adoption of different definitions is clearly understood that there are different objectives/functions by individual researchers. Among those who took up the challenge of analyzing MNC operations, Vernon (1971) eventually emerged as the most influential. He stated that MNCs represent a cluster of affiliated firms located in different countries that are linked through common ownership, draw upon a common pool of resources, and respond to a common strategy. All this means a high degree of integration among different units of the firm.

Bucklay and Casson (1976) define the multinational as a firm in which the coordination of production without using market exchange takes the firm across national boundaries through FDI. The focus here is on legal ownership of operations in at least two countries as the defining features of what constitutes a multinational. Dunning (1993b) describes MNC as an enterprise that engages in FDI and that owns or controls value-added activities more than one country. MNCs have many dimensions and can be viewed from several perspectives such as ownership, management, business strategy, structural, and so on. On the perspective of business strategy, Perlmutter (1969) states that MNCs may pursue policies that are home country-oriented or host country-oriented or world-oriented.

Similarly, Dicken (1998) defines MNC as “a firm, which has the power to co-ordinate and control operations in more than one country, even if it does not own them” (p. 8). Generally, MNCs do own assets in foreign countries. This definition on the other hand, implies that multinationals do not have to own productive assets abroad in order to be able to control. They however, can have control by getting involved in legally collaborative relationships across national boundaries.

The United Nations prefer the term “multinational” that signifies the activities of the corporation or enterprise involve more than one nation. They assert that certain minimum qualifying criteria are often used in respect of the type of activity or the importance of the foreign component in the total activity of an MNC. The activity in question may refer to assets, sales, production, employment, or profits of foreign branches and affiliates (UNCTAD, 1997).

The term ‘Multinational Corporation’ is distinct from ‘International Corporation.’ The latter term was used to designate a company with a strong national identification. A MNC consists of the parent company, (normally the head office based in their home country) and its affiliates (either subsidiaries or associates in other countries abroad). The parent company owns some percentage of the share capital in order to be able to exercise control; that is, its overseas activities were an extension of its domestic functions and its decision-making centre remains at home (Wilczynski, 1976). Rugman and Collinson (2009), who prefer to use the name multinational enterprises, say that the concept of the MNE is that “the difference between Domestic Corporation and the MNE is that the latter operates across national boundaries” (p. 7).

5.2. Do MNCs help or harm developing countries?

The presence and activities of MNCs in developing countries have been a subject of controversy in discussions on development. According to Borensztein, Gregorio, and Lee (1998) “Governments are liberalizing MNC regimes as they have come to associate MNCs with positive effects for economic development and poverty reduction in their countries” (p. 115). Of course, in practice, objectives to attract MNCs differ from country to country and the impact of MNCs is not always desirable. However, economic growth and industrialization trigger globalized world that enables MNCs to become a useful tool for economic growth.

5.2.1. Positive impact of MNCs:

The role of MNCs varies from country to country. In some countries, it is relatively insignificant, whereas in others it plays a key role. The positive case stresses the net positive benefits of FDI. The negative case coming out of radical and dependency analyses places the focus on the negative impact of foreign firms. This paper focuses on both the impacts of MNCs operation, especially in developing countries. The descriptions of the positive impact are presented as follows:

5.2.1.1. Economic Growth: MNCs can be considered as a major stimulus to economic growth in developing countries. According to orthodox liberals, inward FDI provides external financing to compensate for inadequate amounts of local savings and foreign aid. In general, FDI inflows are more stable and easier to service than commercial debt or portfolio investment. In the 1990s, FDI in developing countries accounted for average $150 billion a year. However, in 2005, net flows of FDI to developing countries averaged around $334 billion annually, which shows a dramatic increase of FDI in developing countries. According to UNCTAD World Investment Report, FDI in developing countries increased in 2010 and stands as nearly $574 billion annually (UNCTAD. 2010). FDI is thought to bring certain benefits to national economies. It can contribute to gross domestic product (GDP), gross fixed capital formation and balance of payments. There have been empirical studies indicating a positive link between higher GDP and FDI inflows. For example, in Bangladesh the inward FDI inflow as a percent of gross fixed capital was 3.5%, which was attributed to lead higher GDP growth as 6.27% in 2004 (BBS 2006). However, according to BBS (2011) the GDP growth rate slightly decreased in 2010 and stands as 5.83% in Bangladesh (p. 387).

5.2.1.2. Export-based Industrialization: Building export capacity is very important for developing countries if they want to benefit fully from international trade and investment opportunities. Therefore, the government must seek to develop a regulatory framework that could assist local and regional areas in designing and implementing active policies for building export competitiveness. The countries in East and Southeast Asia, who had attracted MNCs as part of their export-oriented strategies, provided clear evidence that MNCs could vitally assist in export-based industrialization in developing countries. MNCs helped such successful integrators, for example, Malaysia and Thailand become a part of “global commodity chains” linking developing country producers to advanced-country consumers. Thus, during the 1980s and into the 1990s, many developing-country governments liberalized their policies on foreign direct investment (Grieco & Ikenberry, 2003). Singapore effectively tailored industrial policies to attract multinationals and successfully managed MNCs productively to complement indigenous industry. Singapore benefited from neither rich natural resources nor proximity to large economic markets. Strong leadership, pro-active industrial strategy, and a consistent and favourable policy towards MNCs, enabled it to capitalise on MNCs investment (Velde, 2001).

5.2.1.3. Capital Formation: Capital represents an essential economic asset in developing countries. A significant benefit of MNCs is their injection of capital into a developing country, bringing financial resources otherwise unavailable through their own capital and access to international capital markets. An important share of the total capital flow to developing countries comes from MNCs’ investments; estimations vary from 14.9% to 51.5% of the total flows to developing countries (UNCTAD, 1994; p. 409). Studies show that foreign multinationals are indeed more productive, pay higher wages and are more export intensive than local firms (Markusen, 1995). MNCs contribute important foreign exchange earnings through their trade effect of generating exports. By producing goods for export, the balance of payments of the developing countries enhance the economic growth, becoming a more attractive prospect for further investment as well as contributing to the growing role of developing countries in world trade. MNCs provide immediate access to foreign markets and customers which would take domestic firms years of investment and effort to acquire for themselves (Strange, 1995).

5.2.1.4. Technology/R&D: Technology development and work processes improvement differ greatly in developing countries, and even in some cases between regions. For example, Bangkok or the South of Thailand is more developed than some Northern areas. MNCs contribute greatly in providing the foundation for technological development. A vital resource gap filled by the MNCs, as proponents say, is technology. The desire to obtain modern technology is perhaps the most important attraction of foreign investment for developing countries. MNCs allow developing states to profit from the sophisticated research and development carried out by the multinationals. They make available technology that would otherwise be out of the reach of developing countries (Spero & Hart, 2010). MNCs train local staff, stimulate local technological activities, and transfer technology throughout the local economy. Accordingly, technology improves the quality of production and encourages development (Page, 1994).

5.2.1.5. Cleaner Environment: FDI through MNCs may help increase the level of overall domestic environment. MNCs are more likely to produce a cleaner rather than a more despoiled natural environment. MNCs from developed countries, preferring to have a single set of rules for all competitors, may consequently prefer that developing countries have environmental standards similar to those in the developed countries (Garcia, 2000). In addition, MNCs tend to bring their higher pollution control and energy-efficiency standards with other countries when setting up operations overseas. It can be evident from a study on 300 Indonesian enterprises which conducted in 1996. In this study, comparison of the pollution levels in waste streams confirmed that the enterprises that had foreign ownership had superior performance compared to the private and state owned firms (GEMI, 2006).

5.2.1.6. Poverty Alleviation: MNCs are the key to poverty reduction. The multinational corporations encourage people to produce a certain product, and these products make the workers’ life improved. For example, the DaimlerChrysler project in Brazil. DaimlerBenz, in 1991, looked for ways to use renewable natural fibbers in its automobiles. For the Brazilians, life changed dramatically for the better; children were able to attend school, health facilities have improved and people are more active in local politics. The liberals believe that industrialisation through MNCs combined with a free market economy has allowed many previously agrarian based economies to grow out of poverty. “The international operation of these corporations is consistent with liberalism but is directly counter to the doctrine of economic nationalism and to the views of countries committed to socialism and state intervention in the economy” (Gilpin, 1987; p. 248). Liberals show that for those that have chosen to become integrated into the world economy, the rewards have been significant. In fifty years, Taiwan has transformed from an agrarian economy which was poorer than much of Sub-Sahara Africa to a country now as rich and prosperous as Spain. From 30 million people entrapped in absolute poverty in the 1950s, it now has virtually none absolute poverty and real wages are now ten times higher than they were fifty years ago (Norberg, 2003).

5.2.1.7. Employment Generation: MNCs play a role in creating new kind of jobs and therefore can contribute to employment generation and the increase of quality of life of the employees in developing countries. Those who argue for MNCs, state that MNCs generate employment worldwide. Of the 73 million jobs created through MNCs, only 12 million are located in developing countries amounting to 2% or 3% of the world’s workforce. MNCs account for one-fifth of all paid employment in non-agricultural sectors and creates a large number of jobs in the manufacturing industries, especially where technology is concerned (UNRISD, 2010). In addition, MNCs have a positive impact on welfare of the employees. Supporters say that the creation of jobs, the provision of new and better products, and programs to improve health, housing and education for employees and local communities improve the standard of living in the developing countries. Moreover, having a closer look at empirical data it gets clear that foreign-owned and subcontracting manufacturing companies in developing countries tend to pay higher wages than the local firms. Furthermore export oriented companies pay higher wages the non exporting ones. In Mexico, for example, exporting firms (i.e. 80% of all sales are for export) paid wages at least 58% higher than non export oriented firms. In 2001, a study found that foreign-owned plants paid 33% more for blue-collar workers and 70% more for white-collar workers than locally owned firms in Indonesia (Lozaday, 2001).

5.2.1.8. Building Competence and Skill: Building skills of local workers has proved to be essential to the successful transfer and diffusion of technologies and knowledge. Foreign investment provides managerial skills and competence that improve production. Whenever it is possible, MNC’s prefer to hire local people than the use of expatriate employees. However, the lack of an adequately skilled workforce in the developing countries presents a challenge to overcome. Low education levels of potential employees are a particular impediment to maximizing a local employee base. Therefore, MNCs are often engaged in capacity building efforts and sometimes deliver education and training to groups in order to help them increase production levels and to perform work routines more efficiently. There is a recognized need to adjust approaches to education and training based on local conditions and local knowledge and skill levels. It has clear benefits to engaging local based trainers, and thus local Universities are seen by MNCs as a good pool of competencies that will help ensure the sustainability of the technology transferred. Universities and R&D institutions understand the local context and possess the knowledge that is valuable to MNCs. Thus they are considered as the right partners for conducting joint research projects for technology maintenance or improvement, leading in some cases to new and innovative products or services (Worasinchai & Bechina, 2010)

5.2.2. Negative impact of MNCs:

In reverse, this positive role of MNCs can be disputed by those who claim that the net effect of MNCs investment is negative for host countries. Critics of the multinationals have challenged this positive view of the role of MNCs. The discussions of negative impact of MNCs are presented as follows:

5.2.2.1. Prevent Autonomous Development: “Dependency is a situation in which a certain number of countries have their economy conditioned by the development and expansion of another…placing the dependent countries in a backward position exploited by the dominant countries” (Santos, 1970; p.180). Dependency theorists understand the current underdevelopment of developing countries to be a process within the framework of the global capitalist system. They understand global capitalism as a process that generates wealth and development in the industrialised world at the expense of creating poverty as an intentional by-product of the West and perpetuating underdevelopment in developing countries. According to dependency theorists, MNCs prevent the developing countries from achieving genuine autonomous development. For example, MNCs prevent local firms and entrepreneurs from participating in the most dynamic sectors of the economy; they use local capital rather than bringing in new capital from the outside; they increase income inequalities in the host country; and they use inappropriate capital-intensive technologies that contribute to unemployment (Moran, 1978).

5.2.2.2. Outflow of Capital: Some critics believe that FDI in developing countries actually leads to an outflow of capital. Capital flows from South to North through profits, debt service, royalties, and fees, and through manipulation of import and export prices. Such reverse flows are, in themselves, not unusual or improper. Indeed, the reason for investments is to make money for the firm. What certain critics argue, however, is that such return flows are unjustifiably high. Critics point out that the average return on book value of U.S. FDI in the developed market economies between 1975 and 1978 was 12.1%, whereas the average return in developing countries was much higher as 25.8% (Moran, 1978).

5.2.2.3. Exploit Worker: Critics charge that many MNCs enter developing countries in order to exploit their cheap labor and abundant natural resources. Companies such as Reebok, Nike, and Levi Strauss have exploited the human labor in Indonesia. Workers live in deteriorating, leaky, mosquito – infested apartments and only earn a mere $39 a month for producing thousands of products worth well over $100 each. Indonesia’s economy is booming because of massive direct foreign investment while the cheap labour is suffering from inhumane living conditions and illegal wages (UNCTAD, 2006). MNCs adversely affect their workers, provide incentives to worsen working conditions, pay lower wages than in alternative employment, or repress worker rights (Drusilla, Alan, & Robert, 2002). Critics also argue that MNCs do not benefit developing countries labor. MNCs make only a small contribution to employment, and they discourage local entrepreneurs by competing successfully with them in local capital markets by acquiring existing firms, by using expatriate managers instead of training local citizens, and by hiring away local skilled workers.

5.2.2.4. Environment Pollution: With regard to the environment, international big business is both the creator of pollution and the only resource available for its cleanup. The MNCs’ record on pollution pales in comparison with those of many local businesses and state-owned enterprises: Critics allege that MNCs have – in part due to their sheer size – caused significant environmental damage in developing countries. Because MNCs have operated for a long time and in so many countries, there undoubtedly have been cases where these criticisms are accurate (Stopford, 1998). In all parts of the world, mining operations have generated severe environmental degradation and pollution, including the discharge of toxic substances into river systems, large volume waste disposal, the inadequate disposal of hazardous wastes, and the long run impacts of poorly planned mine closure. Multinational oil companies have been the target of protest and criticism for widespread pollution and human rights violations in the developing countries, for example, Nigeria, Indonesia, and, increasingly, the Caspian region.

5.2.2.5. Tax Evaders: The issue of tax evasion by MNCs continues to generate acrimonious debate, despite guidelines produced by the Organisation for Economic Cooperation and Development (OECD). Multinational corporations protest that they pay their taxes responsibly. For example, the U.S. Chamber of Commerce in Bangkok claimed a few years ago that MNCs paid 70% of Thailand’s corporate taxes, implying considerable tax evasion by the locals. But even this seemingly simple claim was clouded by the intricate workings of the local tax code. The debate will most likely continue as a hidden technical subject, leaving public opinion unaltered in its negative perception (Stopford, 1998).

5.2.2.6. Organized Crime: The introduction of famous brands into developing countries by MNCs has provided an irresistible lure to criminal organizations to branch out into this lucrative area of crime. In East Asia – the hotbed of counterfeiting – criminal organizations involved in gambling, prostitution, smuggling, narcotics, and human trafficking have now migrated to counterfeiting because of its highly lucrative rewards and the low-risk nature of the crime. Penalties for trafficking in narcotics are notoriously severe in Asia. Long prison sentences and capital punishment are common for narcotics violations (Chow, 2011). Organized crime is a serious global problem. It existed long before counterfeiting at its current levels emerged. But the emergence of the global trade in counterfeit goods has provided organized crime in developing countries a new and highly lucrative means to earn profits.

5.2.2.7. Health and Safety Risks: Another type of secondary consequences suffered by developing countries is health and safety hazards caused by the proliferation of substandard counterfeit medicines. According to some recent media accounts, 10% of the world’s drugs are counterfeit; fake baby infant formula, cough syrup, and other medicines have led to serious illness or death. However, almost all of these harms to human health and safety occur in developing countries, which have weak border control systems that allow counterfeits that are mostly manufactured in China to pass through undetected (Chow, 2011). Almost no serious health or safety incidents have occurred in advanced industrialized countries, such as the United States and many European countries. Consumers in these countries are too savvy and distribution networks are too professional to allow low-quality medicines to penetrate distribution channels to reach consumers. As with the other harms associated with counterfeiting, developing countries tend to suffer the most harm.

5.3. Case Studies of MNCs

This part discusses three case studies that reflect the positive, negative, and mixed impact of MNCs on developing countries.

Case 1: Phillips Petroleum Company: Environmental Excellence in China-A concern of GEMI

Phillips Petroleum Company has a long standing tradition of protecting the environment in areas where it has business operations. In 1997, Phillips decided to share its environmental commitment with the people of China by developing a multi-year environmental initiative entitled “Search for Solutions,” in conjunction with the State Environmental Protection Agency (SEPA) and non-governmental agencies from the United States. Over the course of five years, students from five major cities in China will take part in activities designed not only to raise their awareness but to stimulate new ideas on ways to protect natural resources. To support the environmental initiative, Phillips has committed $500,000 to be distributed in five communities where Phillips operates: Beijing, Lanzhou, Shanghai, Shenzhen, and Tianjin. Although the overall program will be coordinated by Phillips, the environmental protection bureaus (EPB) from each of the five cities will help administer the activities. The funding provided:

i. Environmental awareness handbooks for high school students,

ii. Earth Vision posters,

iii. Phillips Environmental Partnership (PEP) Grants in which students actively participate in such things as water quality testing, air sampling, and other hands-on activities, and

iv. Children’s work/coloring books.

Additional activities will likely include field trips, environmental awareness videos, exchange programs with U.S. educators, and additional PEP grants. Phillips kicked off the environmental initiative in China on Earth Day 1998 with a water quality testing program. Students from schools in Beijing performed water quality testing of estuaries with test kits purchased by Phillips. Also, SEPA distributed Phillips-funded Earth Vision posters as part of a national environmental awareness tour on World Environment Day. The “Life Engineer” program is another Search for Solutions activity supported with Phillips funding and employee volunteers. Life Engineers is a special, experiential, out-of-class- room program that provides Chinese high schools students opportunities to learn about local environmental conditions and contribute to community environmental projects. In one 1998 activity in Lanzhou, more than a thousand students toured the Lanzhou Chemical Industry Company, and participated in monitoring activities. Under Phillips’ leadership, Search for Solutions has established itself as a national initiative that helps Chinese youth become good environmental citizens through education and community service. During the past year, strong working relationships were established with local EPBs in the five major municipalities where Phillips has business operations. The Search for Solutions initiative was featured as a model program in the June 30, 1998, China Daily editorial. Search for Solutions continued to build on the successes of 1998 by continuing three core programs in 1999, PEP grants, environmental handbooks on local environmental conditions, and Earth Vision posters. Members of Phillips’ Health, Environment, and Safety team join Beijing school children as they celebrate Earth Day ‘98.

Case 2: The Abidjan Tragedy and Trafigura

In August 2006, disaster struck the Ivory Coast having been devastated by years of civil war, which has been trying to recover under a fragile government established under the supervision of ONUCI, the United Nations peace process for the Ivory Coast. A Panamanian flagged ship unloaded a toxic waste shipment in Abidjan, having been unable to unload the shipment in the Netherlands, reputedly because of cost implications. There have been reports of deaths and thousands requiring treatment following the dumping on open-air sites (Greenpeace, 2006; An African dumping ground, 2006). Missions from the World Health Organisation and the United Nations Disaster Assessment and Coordination have been dispatched to Abidjan. This ship was reported to have been leased to a MNC, Trafigura Ltd. It specialises in the energy and base metals markets. Trafigura maintains 4 data centres in addition to the 55 trading offices in 36 countries in Europe, North, Central and South America, Africa, Asia and Australia. Trafigura had a joint venture agreement with Emirates General Petroleum Corporation and BP Singapore PTE Limited to construct a new gasoline storage and blending facility at Jebel Ali Free Zone in UAE at a total investment of US$ 33 million (Energyme, 2004). By entering a tripartite agreement, the state controlled corporation, with its 60% interest, was able to retain an element of control over the project and also the employment opportunities. It has been stated by the Chairman of Trafigura that once the project has been completed, UAE will be benefited from the international trading opportunities created by Trafigura. However, these real benefits that accrue to UAE, i.e., a developing country must be weighed against the disadvantages. The environmental disaster at Abidjan gives a clear example of a developing country suffering from the dumping of dangerous waste in an ill-equipped and unregulated economy, which led to death, suffering and the dismissal of a fragile government.

Trafigura case study shows that, while it has brought substantial benefits to host countries, it will attempt to circumvent regional, national or international regulations in order to realise greater profit for its shareholders, even at the expense of the host countries.

Case 3: Mixed Record: The Mexican Experience

For Mexico, FDI was the prize of the NAFTA integration process. The hope was that FDI inflows would increase economic growth and bringing social and environmental benefits by absorbing rural migrants – displaced from by agricultural liberalization – into new, higher paying urban-based jobs, and by transferring cleaner technologies and better environmental management practices.

In the event, the results have been mixed. U.S. FDI into Mexico has increased by a factor of ten since 1985, reaching $24 billion in 2001, contributing to a massive influx of internal migrants to urban areas. Between 1980 and 2000, population more than doubled in FDI-laden areas, while the population of Mexico as a whole grew by less than forty percent.

What is less clear is whether the lives of Mexico’s working and poor people have substantially improved. According to the OECD, the swollen urban population far exceeds the infrastructure capacity of host communities to manage sewage and waste, provide sufficient water, and protect air quality. Wages in foreign firms are lower than the mean wage in Mexican manufacturing as a whole–and have fallen in real terms by more than 10% since 1987. Moreover, the large FDI inflows of the last decade may not be sustainable. From the middle of 2001 through the end of 2002, foreign-owned firms dismissed 287,000 workers or one in five of all such workers. The environmental benefits of FDI have also been elusive. A World Bank study found no correlation between foreign-ownership and firm-level environmental performance in Mexican industry. Rather, the key variable was the strength of state regulation (Dasgupta, Hettige, & Wheeler, 2000).

These trends mask some “best practices” that can serve as models for a more comprehensive sustainable investment strategy. Some foreign firms, including Dutch steel companies and U.S. chemical firms, have offered higher wages, better working conditions and/or better environmental standards. Some have also negotiated relationships with host communities for public infrastructure and social services (Gentry, 1998).

Unfortunately, these sustainable development success stories are an exception rather than the rule. Between 1985 and 1999, rural soil erosion grew by 89%, municipal solid waste by 108%, and urban air pollution by 97% (Gallagher, 2003). The Mexican government estimates that the economic costs of environmental degradation have amounted to a staggering 10% of annual GDP, or $36 billion per year. These costs dwarf economic growth, which amounted to only 2.6% on an annual basis.

Unless economic integration is coupled with strong environmental regulation and enforcement, pollution is likely to worsen. Since NAFTA took effect, however, real spending on the environment has declined 45%, and plant-level environmental inspections have shown a similar drop.

6. CONCLUSIONS AND POLICY IMPLICATIONS

Studies over a period of years indicate that the impact of MNCs on host States is neither as positive nor as negative. It is true that MNCs play an important role in the developing countries. They can create more employment opportunities for huge labour force, train them and promote the development of high level skills. Moreover, MNCs help increase GDP growth and capital formation, reduce poverty. However, MNCs can be guilty of pollution or human rights abuse. Critics of MNCs alleged that MNCs want to reduce their production costs, seek out developing countries with flexible environmental regulations and undertake in those countries productive activities that exacerbate both local and global environmental problems. Instead of adhering to either, a positive or negative overview this perspective recognizes that the costs and benefits of FDI by MNCs will vary from country to country and also that what constitutes costs and benefits will vary depending on the values of the observer.

Available evidence suggests that the impacts of FDI in developing countries may be positive or negative, depending on a variety of variables, mostly having to do with host country policies. One study found that the impact of FDI is significantly positive in “open” economies, and significantly negative in “closed” economies. Others have found that positive impacts depend on the effectiveness of domestic industry policies; and on tax, financial or macroeconomic policies. A World Bank study found that the impacts of FDI depend on the industry, as well as host country policies.

Both economic theory and recent empirical evidence suggest that FDI has a beneficial impact on developing countries. But recent work also points to some potential risks. Therefore, a tentative conclusion of this essay is that MNCs may promote economic development by contributing to productivity growth and exports in developing countries. However, the exact nature of the relation between foreign MNCs and economies of developing countries seem to vary between industries and countries. It is reasonable to assume that the characteristics of the developing country’s industry and policy environment are important determinants of the net benefits of FDI. Policy recommendations for developing countries should focus on the following issues to improve the investment climate for all kinds of capital, domestic as well as foreign:

i) Reduction of Bureaucratic Complexity: Governments of the developing countries should reduce the restrictions in establishing the MNCs. They should simplify the industrial sanctioning procedure and keep free all the foreign investors from unnecessary harassment while registration of firms is going on.

ii) Development of Infrastructure: Governments of the developing countries should take all out efforts to develop infrastructure facilities. Problems of gas, water, electricity, warehouse, port, and transport should be removed.

iii) Continuation of Policies: For attracting MNCs, continuation of economic policies despite changes in governments must be maintained in the developing countries.

iv) Avoidance of Confrontational Politics: Political consensus among political parties is essential for establishing MNCs in the developing countries. Political stability is a critical consideration to foreign investors when they think about investment in any country.

v) Reduction of Corruption: In order to uphold their position in the world as the destination of MNCs, developing countries should take positive initiatives to reduce massive corruption. They should make judiciary services independent and encourage good governance as well.

vi) Improvement of Law and Order Situation: Improved law and order situation is one of the pre-conditions for MNCs sustainability.

vii) Development of Skilled Labor: Developing countries should ensure available skilled, experienced, trained, and educated labor force to attract foreign investors in establishing the MNCs.

viii) Stability of Macro Economic Situation: Over all macro economic stability and its continuity is also important for not only attracting MNCs but also ensures profitability from it.

ix) Political Stability: Stability means progress. Developing countries, therefore, should be sincere and committed to ensure their political stability to attract MNCs within their boundaries.

x) Foreign Exchange Reserve: Developing countries should increase the foreign exchange reserve and keep currency value more or less stable to keep the benefits from MNCs.

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� Associate Professor, Department of Management Studies, University of Chittagong.

� Professor, Department of Management Studies, University of Chittagong.

1. The Global Environmental Management Initiative (GEMI) is a nonprofit organization of leading companies dedicated to fostering environmental, health and safety excellence worldwide through the sharing of tools and information in order for business to help business achieve environmental excellence.

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