Business Investment In Poor Economies Essay, Research Paper
Introduction A multinational corporation is a very large firm with a head office in one country and several branches operating overseas. These branches can be to do with production, marketing or distribution it doesn t matter. However each branch has its own role and this is part of the trend of globalisation of businesses. There are many arguments both for and against the investment of Multinationals in lesser economically developed countries (LEDC s) and the aim of this coursework is to analyse the effects that such investment has had on the countries.Advantages of Multinational investment in LEDC s Investment by multinationals creates jobs for the host country, these are jobs which would not be there if the multinationals did not locate in these countries, surely this extra employment which is due to the investment is a good thing for an LEDC s economy and it s peoples quality of life. The added employment means that local people have a larger amount of disposable income, which in turn will encourage the growth of more local shops and services as there will be more demand.Employment is obviously in demand, for example in Thailand some multinationals located in and around Bangkok in the early 1960 s, and Bangkok has since swelled in population beyond all expectations. The population has more than tripled since 1960. The location of multinational companies has had a positive effect on Thailand because due to the multiplier effect, this is where other complementary and subsidiary businesses set up to localise the production chain. Thus meaning more investment in the city and a more modern westernised city is the result. Another advantage to multinationals investing in LEDC s is that the companies will introduce new production techniques and managerial skills, not to mention the possibility of training staff and improve the quality of the local workforce. This will help the more backward thinking LEDC s to develop there own industries. Also multinational investment has often been the opening for the industrialisation of a developing country, for example Taiwan. Some of the multinational companies, particularly the more reputable ones, such as Sony, do actually concentrate more on investment within the actual country this is known as global localisation where companies try to conduct as much of its business as possible from product design and engineering to product manufacture and marketing all at a local level by local people. This surely is good for the host country. Another advantage to multinational companies locating in LEDC s is that the host countries begin to have access to higher quality and newer products meaning that the host country s people could have a better standard of living. Dis-advantages of Multinational investment in LEDC sA commercial enterprise seeking profit optimisation pursues its own corporate objectives such as achieving an acceptable rate of return on invested capital, gaining market share, or ensuring its long term competitiveness, rather than supporting the host country’s economic and social development objectives. The result is that corporations and host country authorities have diverging opinions on very fundamental issues: o Repatriation of profits to the parent company is in most cases essential in order to contribute to overhead costs incurred at headquarters (e.g. for research and development) as well as to corporate profits as repayment for financial risks. Host countries often consider this a regrettable drain on limited foreign exchange and a burden on the balance of payments. o Patents which safeguard the results of a company’s research and the associated transfer of patent and licensing fees may lead to conflicts because developing countries prefer the lower priced product imitations (e.g. generics). o A corporation’s research policy and its strategic direction may also not coincide with the developing country’s interests and needs. o A company’s location policy, for example of production facilities, is largely determined by economic criteria (e.g. volume of production, price of labour, land prices, market size, availability of high quality raw materials and technical skills), and not by a government’s need to become self-sufficient through the local production of specific goods. The point is that companies however good they seem are out to do well and this is their number one objective and that helping to solve environmental and social problems in their host countries is not high up the agenda.
Critics of multinational companies use several arguments against them. Companies have been accused of political interference in the countries in which they operated; as well as anti-competitive behaviour and abusing the local environment. They were said to use transfer pricing (the under-pricing or over-pricing of goods sold by one subsidiary to a sister subsidiary) in order to evade tax. And they were often charged with operating low-wage sweatshops, and of exploiting their existing advantages in a host economy, rather than transferring technology and skills or upgrading local capabilities. There was some truth in these charges. Take one notorious case of political interference, for example: there is plenty of evidence that the US company then known as International Telegraph and Telephones conspired with the Chilean armed forces in 1973 to overthrow leftwing president Salvador Allende and install the dictator General Augusto Pinochet. This is an unusual example but companies do have input into the goings-on in government. Multinational companies often use the LEDC s for raw materials and employ local people at very low rates of pay to extract the required materials. This often scars the landscape particularly in the case of open mining and it robs the country of its own materials. Multinational companies have obviously been criticised for not investing enough money in their host countries, they are not doing this because it is too easy to exploit the countries and their workers. There is a decided lack of investment in training actual skills to workers and virtually all work done by local workers in many companies is very labour intensive or unskilled. Another concern of Multinationals is the fact that they generally don t encourage trade and the development of local industries seen under the Multiplier effect because it brings over many of its own subsidiary companies to make the parts needed or the company or may force its overseas branches to buy supplies from head office to keep money within the company. This clearly does not help the host country. There are further problems because the companies discourage host countries to process their raw materials themselves and go on to make their own foothold in the industry. For example coffee companies in Brazil pay local workers very little to cultivate and harvest the coffee and then send it to a factory abroad or one in Brazil owned by the company to be processed. This is done obviously to keep the money gained by adding value to the coffee beans inside the company, which you can understand from the business point of view. But this means that the host country is only really earning money for the cash crops, which will not bring in enough money to develop further. Another possible problem with multinational investment is if there are unexpected economic problems in the parent country of the multinational. For example recent economic problems in Japan that led to unemployment and a reduction in wages made it cheaper to produce the product at home which would obviously be preferable to some multinationals. Places like Korea suffered as Japanese companies recalled manufacturing to be based in Japan. Conclusion So in conclusion it would seem that there are some advantages for LEDC s in having a multinational company set up a plant there. There will be a larger number of people employed in the country and it will add value and skill to the locals who the company employs, further economic activity will be encouraged on a local scale due to more disposable income. However it is clear that the locating of multinational companies in LEDC s does have some profound effects on the host country. The country and the company wont have the same aims as each other, and therefore the host country is the one who will be the most likely to not achieve its aims. As we know from business studies, the companies will want to maximise their efficiency and minimise their costs, this will mean that they will do things that the host government and World Trade Organisations may find inappropriate; for example using transfer pricing to minimise tax costs. I feel it is therefore inevitable that there will be conflict between the host government and the companies.