Critically discuss the extent to which multinational corporations can be viewed as a positive source of employment and foreign direct investment for less economically developed countries. Word Count: 2516
Do multinational corporations really have a positive impact on less economically developed countries? I will be investigating this through analysing a range of sources which will enable me to come to a final conclusion on the question above. The key points throughout will be how multinational corporations provide a source of employment for locals along with other benefits such as infrastructure upgrading and employee training which offers vital skills and provides a lasting legacy. The benefits of multinational corporations will be balanced with the negatives associated with multinational corporations in less economically developed countries such as destroying local businesses and environmental pollution of the area. All these points will be discussed, analysed and concluded to create a comprehensive investigation. The key words within the question are critically, multinational corporations and foreign direct investment. Critically is defined as “a tendency to find and call attention to errors and flaws” [Encarta Dictionary]. In relation to this essay it will mean I will have to give a balanced discussion of both the positives and negatives of multinational corporations.
Multinational corporations are “A corporation that has its facilities and other assets in at least one country other than its home country” (Encarta Dictionary). Examples of multinational corporations include Nike, McDonalds and Ford cars who operate in several countries across the world. The final key word is foreign direct investment which means the following, “an investment made by a foreign person or organization in a particular country” (Encarta Dictionary). For example, if a multinational corporation such as Nike invested in improving the infrastructure in a less economically developed country such as Vietnam, that would be defined as foreign direct investment. Multinational corporations undoubtedly provide less economically developed countries with hundreds of jobs to the local community. The wage offered by the multinational corporation is often higher than those smaller local businesses so competition to gain a job is high. This enables the local people to gain a reliable source of income which can trigger the ‘multiplication effect’ which is when one factor leads to several other occurrences.
In this case when an employee receives a wage, they will subsequently spend that money on other products from local companies which means that those businesses benefit from increased revenues. This leads to the overall area gaining economically from the multinational corporation. However, with the introduction of the large multinational corporations it leads to smaller businesses in the area suffering. The smaller, local businesses can’t compete with the multinational corporation and often leads to them being forced to close. This is especially disastrous when the multinational corporation decides to move on, leaving the area with no jobs and no businesses. The benefits of the multinational corporation moving into an area and providing jobs are generally short lived and as soon as they move on, they leave the area worse off than before. With the introduction of multinational corporations to a less economically developed country, employees benefit massively from the training provided by the company. This training will not only help them in their current job but will also be useful in the future. For example, Nike have who have over 300 factories in less economically developed countries such as Vietnam, Thailand and South Korea among others have trained employees basic English and training on how to effectively use specific technology such as computers and machinery. This will provide a legacy as these employees will then benefit in future jobs through utilizing these skills. However, not all corporations offer training to their workers so choosing a suitable corporation is vital to gain maximum success. Through the training process and working experience at the multinational company, employees often lose their proud countries customs, values and traditions.
These traditions and substituted with the Western world Customs, values and traditions. This can disrupt a country, causing future problems as a country is divided. Therefore the training offered by the multinational corporations can often benefit themselves more than the actual employees. Multinational corporations often have to improve the infrastructure in the area to enable the large deliveries of materials and the exporting of the products to and from the factories. This ranges from new and improved roads being built in the area, new water services and electricity cables to enable the smooth running of the factory. This mainly benefits the business but will leave a lasting legacy in the country with the modernisation of the area. The improved infrastructure will encourage more businesses to the area with increased trade routes being developed which will only benefit the country due to the ‘multiplication effect’ occurring, where one corporation will increase the employees disposable income meaning fellow businesses will move into the country. This will subsequently lead to urbanisation and the development of the country into a newly industrilized country. Frequently there are many incidents involving multinational corporations and their impact upon the local environment in the less economically developed countries. Businesses cause noise and visual pollution with many waste products being spilled into rivers and the local landscape.
This disturbs local wildlife and causes long term problems for the country as well as costing the government money to clean up after the multinational corporation. “In 1998 a suit was brought against the Canadian mining company Cambior following a leak of 3.2 billion litres of cyanide-polluted water at the Omai mine in Guyana” (Anderson 2002, P 406). This is just one of many cases where environmental damage has been caused by multinational corporations. Although the host country gains from the improved infrastructure, the destruction of the environment counter balances the positives. When a company moves into a less economically developed country they will help to increase that country’s health standards. They often offer all employees a health package where they will be able to visit the company’s doctor when needed along with a health insurance package. This increases the employee’s standards of health due to regular check-ups but also reduces the stress upon that countries health service. This subsequently leads to the improvement of the health service due to a lower demand upon the service and often because of a financial package from the multinational corporation to help improve the health service within that specific area of the country. This benefits the business as a healthier workforce is more like to become more efficient in their work. Many companies with factories in Africa such as Nike, and Shell offer employers HIV drugs to help lower the risk of aids. This not only benefits the employers but also the area in which the company is located in.
Due to the large size of the multinational corporations they often have more power than the less economically developed country’s government, this inevitable leads to several problems such as exploitation and corruption. Company’s sometimes exploit workers in terms of underage workers, poor working conditions and low pay. Multinational corporations also have been known for bribing governments to benefit themselves, this leads to a negative impact upon the country such as environmental degradation or tax avoidance. In a recent report from Nike, they have acknowledged that issues do occur within over 25% of their factories in relation to working conditions and exploitation. They stated that “factories with which it contracts to produce goods have harassed workers and forced some to work overtime”.(Callimachi, 2005) There has also been allegations of sweatshop conditions, restricted access to toilets and water throughout the working day along with workers being forced to work in excess of 60hours a week. The growth rate of a country can quickly gain momentum through a large company introducing new investment into the country. This is called foreign direct investment and is normally invested by the multinational corporation as a condition for being allowed into the country. Foreign direct investment comes in several forms such as improved infrastructure, health care packages and technology introduction to the area. Through the introduction of new technology into the area it enables the country to build a platform for growth. Although this is seen as most appealing factor about foreign direct investment, it often fails to work out for the less economically developed country due to several factors such as a lack of capital to maintain growth and a lack of knowledge in the economic development sector. On Numerous occasions this has led to an accumulation of debt by the country which leads to a future crisis.
Therefore, foreign direct investment is only beneficial to a country if the less economically developed country uses it wisely to provide benefits to the country not only in the short term, but more importantly in the long term. The arrival of a large company to a country has great short term benefits as already stated; however the negatives begin to appear later on. Once the corporation begins to decrease production rates or decide to move to a different country which can occur due to a range of factors, it creates economic instability within that country. Economic instability will occur due to the fact that the multinational corporation will be the major employer at the time, a reduction in production rate or closure of a factory will lead to a cut in jobs. Due to a sudden rise in unemployment, the area can suffer from increased poverty, quickly slipping back into their old situation. This inevitable will occur at some point as the multinational corporation will continuously find better alternatives in other countries, such as cheaper wages, better trade routes and lower tax rates. This can be prevented by successful management to reduce the dependency on a multinational corporation. One of the key factors in determining if a multinational corporation will benefit a less economically developed country is whether they will source their materials from that country or from abroad. The multinational corporation will cause smaller rival businesses to close and then if they source their components from abroad it will drive local producers out of business due to no longer having the smaller business to supply to.
Through carefully selecting an appropriate corporation which will source its components locally will overcome this potential problem and create increased income for the country through selling its resources to the multinational corporation. A constant and reliable benefit of introducing a multinational corporation into a less economically developed country is the continuous tax payments from the company. This additional income can be extremely beneficial to countries in their quest to achieve economic development if used intelligently. However, tax evasion from the corporation and poor management of how that additional income is invested causes the benefits of additional tax revenue to diminish.
Multinational corporations can provide a platform for less economically developed countries to build upon. For example, Ford motor cars opened factories in Japan in the 90’s, the Japanese people and government learnt from the techniques used by the company and were soon utilising their newly learned knowledge to create cars themselves. This enabled the country to create their own product range to trade with the world, thus creating themselves their own economic market. This is a prime example of how countries can benefit from the arrival of multinational corporations. Less economically developed countries are extremely vulnerable to the corporation controlling large sectors of the countries industries. Due to the large size of the foreign companies in comparison to the country, they can dominate the market causing uncertainty especially if the corporation decides to relocate. This is an ever constant concern particularly when a country relies upon a multinational corporation, causing disastrous impacts when they relocate. Another benefit of a foreign corporation operating in a less economically developed country is the promotion of positive values, such as diversity and equality for women which often is lacked in countries. These values are required if a country is aiming to develop into a more economically developed country in the future. The final advantage for a less economically developed country in relation to allowing a multinational corporation into its country is the efficient production techniques and broader range of products introduced into their market.
A wider range of products on the market enables the growth of a countries economy through increased tax revenue and increased sales. The economy of the country can also benefit from adopting the efficient production techniques used by the corporation and initializing them into their own markets. Finally, recent studies has suggested that there is little evidence to suggest that the higher wages paid by the multinational corporation have any ‘spill over’ effect on wages paid by local companies. This often creates a divide between the locals and the employees of the company in turns of income. This is very difficult to overcome, meaning only a select few will benefit from the induction of a foreign company into a country. In conclusion to the original question, the research undertaken has led to me believe that the extent to which multinational corporations can be viewed as a positive source of employment and foreign direct investment for less economically developed countries varies upon the multinational corporation and the country itself. The key factors upon the success relies on the multinational corporation providing plenty of well-paid jobs with decent working conditions along with supporting the local community with investment in the form of infrastructure, health care, purchasing of local resources and tax payments. If the business fulfils these requirements then the less economically developed country will benefit massively from the foreign direct investment. Examples of companies which have helped countries develop include Coco Cola and McDonald’s in countries such as India. Less economically developed countries need to ensure that the multinational corporations they allow into their country are suitable and fulfil the requirements expected as stated above. Through carefully selecting businesses that will benefit the country it will minimize the risk of any of the disadvantages stated above from occurring such as environmental degradation, tax avoidance and exploitation of workers. However, if a countries government is corrupt then it increases the risk of multinational
corporations bribing the government to allow them into the country which is when problems occur. The key factors which are involved when a multinational corporation fails to benefit a less economically developed country is poor management, lack of support towards the country and exploitation of both the workers and the countries resources. If a less economically developed country ensures that none of the above factors occur through careful management then the success rate dramatically increases. Through the research I have conducted I have concluded that the failure of multinational corporations in less economically developed countries is more than often down to countries attempting to develop too quickly which leads to debts accumulating. My own interpretation upon the question is that the benefits of a multinational corporation, especially the improved infrastructure which provides a lasting legacy for a country to use as a platform for development outweighs the potential problems involved. The extent of the benefits associated with foreign direct investment and source of employment depend entirely upon how the foreign direct investment is managed. Through successful management the results can be outstanding, such as in Brazil who are now classed as a newly industrialized country.
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