Multinational Corporations’ Investment – Free Essay Examples

Multinational Corporations’ Investment

Introduction

Multinational corporations (MNCs) refer to businesses that operate across borders. These kinds of business entities typically have their headquarters in one country and other business locations spread across other countries. Multinationals are also called transnational corporations (TNC) or multinational enterprise (MNE). MNCs can take advantage of their global presence to locate their production units in countries that have cheap operating costs. They also broaden their operations to ensure that they keep growing and to reach wider markets.

The presence of MNCs in several countries is a reality in today’s business environment. However, the presence of MNCs is not always welcome in the host nations due to a conflict of interests as the MCN try to maximize their profits and the local governments protect their national sovereignty and security. The focus of this paper will be on why a country should welcome multinational investment into their country. Also, explain how a host country can maximize the beneficial impacts of multinational corporations’ investments.

Background

Many national governments did not welcome the MNCs and often resisted their entry into their countries. Nonetheless, the national governments that previously resisted the MNCs had to welcome them because of the phenomenon of economic globalization that started in the 1990s and lead to increased cooperation between many national governments and MNCs (Dunning, 1998; Luo, 2001& Wells, 1998). The national governments that had for a long time been hostile to the MNCs had to change their stance because they wanted to benefit from the relationship as they thought that free-market capitalism was going to benefit them and raise their standards of living (Greider, 1997).

Impacts of multinational corporations

Multinational corporations are in business to make a profit. Making money is their primary objective and they look for ways to maximize their profits. Therefore, the MNCs will look for locations where they can manufacture goods and services at low costs. Many MNCs look for bases other than in their parent countries where the production costs may be high and thus prefer to locate their production units in other countries where the production costs are low. Many argue that MNCs benefit the host countries by contributing to development. Those against the MNCs say that they only exploit the host countries, which get very few if any benefits from the cooperation.

The reason put forward for the host nations’ failure to benefit from the cooperation with the MNCs is due to the unique characteristics of the host nations, which are usually developing countries. The governments in such nations are weak. The developing countries have a major problem of poverty and thus escaping from poverty is their primary concern. It, therefore, follows that the host nation governments can overlook some conditions set by the MNCs as long as they agree to invest in their countries.

The countries usually do not grasp the negative impacts the MNCs have on their economy because they lack factors of production and have low per capita levels (Oswald, 1980). Also, the political environment in most of the host nations is not stable. The instability reduces the chances for foreign investments and hence those MNCs that come knocking are not scrutinized much. The MNCs have big financial muscles and are in a position to manipulate the host governments.

The current business environment has nations depending on one another. No single country can stand on its own and make it in international trade. Due to this phenomenon, interdependency among countries is not a matter of circumstance but a necessity (Oswald, 1980). The developing nations need the developed nations in terms of technology transfer and capital. On the other hand, developed nations need developing countries for resources. The interdependency leads to a symbiotic relationship between the MNCs and the host nations.

As a result of this interdependency, the host nations are very wary of the power of the MNCs and have big concerns for their sovereignty and security due to their dependency on the developed nations’ technology (Oswald, 1980). Despite these concerns, countries still have to welcome MNCs. Studies done show that the host nations generally benefit from the presence of MNCs and thus a country has reasons to make it possible for MNCs to enter their countries and operate (Dass, 2004).

Reason for welcoming MNCs

MNCs have some positive impacts on the host nations. They provide employment opportunities for the local community within which they set up their business. The locals are empowered economically and the effects of the employment will be felt with the increase of purchasing power for the locals. In return, the local economy grows with increased consumption of goods and services. However, they are often criticised for offering the locals low paying jobs and usual the manual work leaving the top managerial positions for the nationals of the MNCs parent countries that get high salaries. That notwithstanding, the MNCs provide the locals with a source for livelihood especially if the rates of unemployment are high in the host countries (Dass, 2004).

The MNCs serve as sources of tax and revenue for the host governments as well as foreign exchange income (Fernando, 2009). The MNCs pay taxes and acquire operating licences that generate income for the host government. For instance, some studies show that MNCs are more likely than the domestic firms are to comply with the government’s requirements in tax payment. Hence, a country that has many MNCs benefits more as the MNCs comply with the governments’ regulations (Dass, 2004). Moreover, MNCs are a good source of local resources. The MNCs are big hence and create a large market for local resources, for example, Ford MNC in India outsource spare parts to Indian companies (Fernando, 2009).

The countries that welcome the MNCs also benefit from technological know-how that the multinational corporations bring. Technological know-how is a major reason why many nations agree to welcome MNCs as they hope to benefit from the transfer of such knowledge. The technological knowledge gained can be utilized and adapted to meet the challenges unique to the host nations because using the technology unchanged may not benefit the host countries as the needs of the MNCs base countries and those of the host countries vary (Fernando, 2009).

The local personnel who are hired by the MNCs can benefit from the technical and organisational knowledge, which they can use in domestic organizations (Dass, 2004). MNCs will most likely offer training to the local recruitments, the local people will gain knowledge, and skills thus provide the host nations with highly skilled labourers. The host nations benefit by gaining a skilled human capital.

The MNCs also help in improving standards of living in the host nations through their policies on housing, wages and welfare, which are high in case the host society decides to emulate them (Fobete, 2008; Santoro, 2002; Dass, 2004). The MNCs also require services such as complex banking services, transportation and other commercial services. The host country provides this service to make the operation of the MNCs smooth. Sometimes the MNCs may also provide the services they require and in turn, the society benefits from the subsidiary operations that arise from the core businesses of the MNCs.

The MNCs can contribute to the development of the country via appropriate technological transfer. The MNCs can offer the host country an opportunity for rapid industrialization. This can be done through improving productivity in the host country and generation of both forward and backward linkages that stimulate technological multiplier effects (Dass, 2004). More importantly, the presence of MNCs can lead to an improved political and social environment because the MNCs need a politically stable environment to operate. The governments in such countries can work hard to ensure that the countries remain peaceful to attract and retain foreign investors. The MNCs may also speak out against human rights abuse in the host nations to the advantage of the citizens.

Maximizing benefits of MNCs

Governments of host nations need to take an active role in ensuring that their countries minimize or eliminate the negative impacts of MNCs. If the MNCs are left to operate in a country without, check the repercussions may be too expensive for the host countries such as losing their sovereignty. A country can lose its sovereignty if it allows MNCs to interfere and control the affairs of the country. MNCs may get such powers if the government systems are weak. The host governments need to have a bargaining power when dealing with MNCs to ensure that they do not interfere with the internal affairs of the country.

To reap maximum benefits from the MNCs the host governments must come up with policies to guide the operations of the MNCs and the policies must be reinforced to ensure that the MNCs comply. To achieve regulation of MNCs the governments must strengthen their systems, stem out corruption, and ensure that the local businesses are protected against the risk of monopolisation (Trebilcock & Howse, 2005). Corrupt government officials are easy to bribe and they may turn a blind eye to the misconduct of some corporations. If governments put their systems in order, they will make their environment attractive for investment from MNCs. The MNCs will then compete to invest in countries that have a favourable business environment in such cases the host governments can lay down their regulations, as they will have an upper hand (Frieden & Lake, 2000).

The host countries have been accused of weak environmental laws. Consequently, many MNCs pollute the environment in the societies they operate in just because they can, as the laws concerning pollution are not as stringent in their home countries. The host governments must come up with strict laws concerning the pollution of the environment because the benefits they get compared with the magnitude of the pollution that the MNCs contribute means the host nations lose, as the cost of pollution is expensive. The governments must come up with clear guidelines concerning environmental degradation by the MNCs even if the consequences will be a reduction in the number of MNCs interested in investing in such a country strict regulations by the host nation are necessary if the foreign investment is to be beneficial (McNally, 2000.; Zarksy & Gallagher, 2003). The MNCs that pollute the environment must be made to pay fines (Sornaraja, 2010).

The host governments must also ensure the MNCs are ethical in their operations because some use child labour in their operations. Children have been reported to work in seat shops and this is very unfortunate to the innocent children who are denied a chance to grow like other ordinary children. The government should close operations of MNCs that engage in such unethical behaviour. More importantly, the host nations must liberalise their policies on foreign investments (Sauvant, 2010).

Conclusion

MNCs are a reality in this era of globalisation. They have both positive and negative impacts on the host nations. A country stands to benefit from the presence of MNCs and due to the advantages that come with cooperation with MNCs countries should go ahead and allow them to operate. However, host countries must formulate policies that will ensure the presence of MNCs benefits them rather than hurt them through proper regulations. The host countries must create environments that are acceptable for a business to attract MNCs and participate in international trade. Moreover, the host countries must ensure that they do not push away the MNCs through too much interference because MNCs need host countries as much as the host countries need them.

References

Dass, S.K. 2004. Global Climate and Sustainable Development. New Delhi, India: Gyan Publishing House.

Dunning, J. H.: 1998. An Overview of Relations with National Governments. New Political Economy 3, pp. 280–284.

Fernando, A.C. 2009. Business Ethics: An Indian Perspective. India: Pearson Education India.

Fobete, N.G. 2008. Multinational Corporation and Third World Development. Norderstedt, Germany: GRIN Verlag.

Frieden, J.A. & Lake, D.A. 2000. International political economy: perspectives on global power and wealth. New York: Routledge.

Greider, W.: 1997, One World, Ready or Not: The Manic Logic of Global Capitalism New York: Touchstone.

Luo, Y.: 2001, ‘Toward a Cooperative View of MNCHost Government Relations: Building Blocks and Performance Implications’, Journal of International Business Studies 32(3), pp. 401–419.

McNally, R. 2000. Foreign Direct Investment and Sustainable Development: A discussion for CSD WWF-UK CSD Brief – February 2000. Web.

Oswald, A.J. 1980. Towards measuring the technological impact of multinational corporations in the less developed countries. United States: Ayer Publishing.

Santoro, M. (2002). Should LDCs love MNCs? Foreign Policy 128, pp. 94-96.

Wells, L. T.: 1998, ‘Multinationals and Developing Countries’, Journal of International Business Studies 29(1), pp. 101–114.

Sauvant, K. 2010. Investment Promotion Agencies and Sustainable FDI: Moving toward the fourth generation of investment promotion. Web.

Sornaraja, M. 2010. The International Law on Foreign Investment. New York: Cambridge University Press.

Trebilcock, M.J. & Howse, R. 2005. The regulation of international trade. New York: Routledge.

Zarksy, L & Gallagher, K. 2003. Searching for the Holy Grail? Making FDI work for Sustainable Development. Web.

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UniPapers. "Multinational Corporations’ Investment." October 28, 2021. https://unipapers.org/free-essay-examples/multinational-corporations-investment/.

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UniPapers. 2021. "Multinational Corporations’ Investment." October 28, 2021. https://unipapers.org/free-essay-examples/multinational-corporations-investment/.

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UniPapers. (2021, October 28). Multinational Corporations’ Investment. https://unipapers.org/free-essay-examples/multinational-corporations-investment/

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UniPapers. (2021) 'Multinational Corporations’ Investment'. 28 October.