Are multinationals a force for good or should they be controlled?

Multinational corporations are businesses which are active in more than one
country.
They might have distribution outlets or factories abroad, or they may offer
services which are brought by organizations or people located in other
countries Multinational Corporations (MNCs)
MNCs are businesses that operate or have assets in more than one
country. they are sometimes described as transnational corporations (TNCs)
or multinationals enterprises (MNEs)
MNCs have offices or factories in different countries and usually have a
centralised head office where they co-ordinate global management- this is
where they are based. the other countries where they operate are described
as host countries
MNCs can be very large organisations with turnover exceeding the GDP of
many countries. But not all MNCs are large, powerful corporations; many are
small scale by comparison
Most of the largest MNCs are American, Japanese or European but
countries such as India & china now have large MNCs which are growing
rapidly

For and against:

The case against MNCs :
they use their size & power to exploit employees and host economies
they damage the environment
they harm the economic prospects of developing countries
they may leave the host country if they can find cheaper, suitable labour
elsewhere

The case for MNCs:

they create employment & wealth for their own & host economies
they raise incomes
they help poor countries to develop
they reap economies of scale & cater for mass markets

 employees acquire scarce skills Both viewpoints have some foundation in

reality.
All the points made above apply to some businesses in some places. But not
all of them are true for all MNCs. And there could be many valid arguments
as to the extent to which these positive & negative trends affect host
countries.

MNC objectives:
To access new markets:
For many MNCs, domestic markets are saturated. future growth & rising
profits must come from expansion overseas where rising incomes can be
tempting
entering new markets can form an extension strategy for the product life
cycle. products which are in maturity or even decline can take off again and
continue to yield profit in new markets

To reduce costs:
there may be economies of scale leading to lower unit costs & enhanced
competitive advantage
moving overseas to produce can reduce input costs. unskilled & semiskilled labour may be cheaper, more available and less regulated
proximity to markets can also be significant in reducing transportation
costs

To control resources:
many busiesses have to follow the resources to extract & process them
companies that rely on a secure, and preferably cheap, source of raw
materials are likely
to expand where they are found. examples include minerals,
petrochemicals & many other commodities ,e.g. palm oil, which is vital input
for food and cleaning products. del mote has its own pineapple plantations
in Indonesia

To take advantage of government incentives:

many governments offer substantial incentives to attract MNCs to their

countries
these can take the form of grants, cheap loans, tax breaks & subsidies
these effectively cut production costs
To get round trade barriers businesses that which to penetrate markets to
avoid tariffs/ quotas will often move
production into that area

Benefits that multinationals bring to overseas countries:

Employment:
MNCs create employment in a number of ways:
The initial investment for location in a host country creates employment.
buildings & equipment may be needed, creating work for local people
- once operations commence (production) a workforce will be needed
- local businesses may be involved in supplying or servicing e.g. raw
materials, cleaning, transport the MNC which therefore see an increase in
business, taking on more workers.
- all of the local people who have found new employment will spend some of
their income with local businesses. This increases local demand & in turn
creates more jobs
- there is a positive local multiplier effect

Wages:
Take care here. do not confuse low wages with exploitation of the workers.
wage levels must be considered in comparison with wages elsewhere in the
host countries (in own country, say Indonesia, Vietnam)
cheap labour is often important but some MNCs pay higher than average
wages in the host country
there are several reasons for this: increased motivation, increased
productivity, lower staff turnover, wider choice of workers

Skills and technology transfer:

- MNCs may require skilled workers & train up the local workforce
they may acquire useful skills that will benefit them if they move on
locals trained as managers may learn new business techniques
MNCs often bring new technologies, techniques & methods which can be
learnt & adopted in the host country
- new work practices & technology help the host country to become more
competitive & grow - this is called technology transfer.

Effect on the wider economy:

increased employment & wages should enlarge the tax base & increase
government revenue
if benefits were paid to the unemployed, this bill may decrease
profits of the MNC can be taxed
increased government expenditure can benefit the wider population & the
economy is general
exports may increase, improving the balance of payments

Corporate Social Responsibility (CSR):

all companies will claim to have some kind of CSR policy in place
this may be centered on the workforce, the local community or the local
environment
it may include better pay & conditions, improvements to infrastructure,
use of sustainable resources & environmental protection
those companies that take CSR seriously can greatly benefit the
communities they operate in

Drawbacks that multinationals bring to host

countries:
Employment:
wages can be low & working conditions poor. Sweatshops and child labour
are sometimes found

 health & safety conditions are often poor & regulations may be ignored
child labour may be used & exploited

Skills & technology transfer:

MNCs may not train local workers to a high level
skills may be brought in by hiring expat workers; locals may only get the
unskilled jobs
managers are often not recruited locally
R&D facilities may be kept in the home country, reducing opportunities to
develop skills/ tech transfer
many MNCs enter another country simply to access a new market, so only
sales & marketing facilities are established

Effects on the local community:

-local businesses suffer at the hands of the MNCs that reduce their market
share
they mass-produce standarised products, threatening national product
variety
they act as agents for cultural imperialism, which replaces & even
destroys the native culture with unwanted products & values
- MNCs cause great damage to the environment by their processes & the
transportation of their products. this damage can be short/ long term & the
resulting situation may be unsustainable

Cultural imperialism: the fact of the culture of a large

and powerful country, organization, etc. having a great
influence on another less powerful country.

Race to the bottom: a phrase used to describe the way

MNCs move to the country that offers the lowest tax rates
or the weakest environmental controls. In order to hold
onto their MNCs each country will offer them successively
more advantageous terms at the expense of their own
economy or environment, until the potential benefits of
having an MNC are outweighed by the costs.

Transfer pricing:
- One of the claimed benefits of MNCs is that they will increase a host
countrys tax revenues. MNCs should in theory pay tax on profits
earned in that country.
-One way round is transfer pricing.

Transfer pricing: occurs when one part of an MNC in one country

transfers (sells) goods or services to another part in another country.
The price charged is the transfer price. This may be unrelated to
costs incurred and can be set a level which reduces or cancels out the
total tax paid by the MNC.
- Each country has a different tax system, with detailed rules as to
how tax is paid. With the use of some clever tax accountants MNCs
can minimise if not avoid, their tax liabilities.

Negative impact on local businesses:

If MNCs receive favourable treatment from the host

governments, such as tax breaks or other forms of financial
assistance, they are effectively being subsidised.
Local firms may become less competitive, lose market share
and fall in profitability.

Exploiting the workforce:

- often accused of sweatshops, child labour, anti trade union
practices, poor health and safety records and the general exploitation
of labour

Examples include:
Nike
Gap
Primark

- MNCs arent as strict or as careful about their source of supplies as they

could be.

Examples include: Unilever

They have been accused of exploiting child

labour on Indian cotton farms, where they
work long hours and are exposed to
pesticides.

According to UNICEF, globally nearly one in six children aged 514 are engaged
in child labour.

- By far the worst accident happened in 2013 when 1,129 workers were
killed after the collapse of a factory building at Rana Plaza in Dhaka. Primark
was supplied by that factory.
- Phillips-Van-Huesen, owner of brands such as Tommy Hilfiger, Timberland
and Ted Baker, has been criticized for closing a factory in Guatemala
because the workers tried to form a union to protect their basic rights.

Environmental impacts:

Biodiversity loss (e.g. Orangutans in Borneo

due to palm oil plantations) or wildlife in the
Gulf of Mexico due to the BP oil spill in 2010.
Increased global warming, leading to melting of
poles
Ecosystem destruction (coral reefs in The Great
Barrier Reef)
Pollution linked to respiratory diseases (e.g. in
Beijing) or 70% of Chinese rivers being
polluted.
Water scarcity
Reduce in carbon sink, deforestation
Destruction of rainforests

In the BP oil spill in the Gulf of Mexico in 2010, more than 200
million gallons
of crude oil were pumped into the Gulf of Mexico for a total of
87 days,
making it the biggest oil spill in US history.

In 2013 the UN published a study that industries cost the world

economy 7.3 t
trillion dollars a year in damage to the environment, health and
other vital
benefits for the humankind.

Conclusion:
Evaluative points: - Without MNCs we would have to rely on our own
resources, choice would be limited, prices would be higher and innovation
would be well below the level we take for granted.
In a way, MNCs have been a key factor in the large improvement in welfare
and reduction in poverty that has occurred in developing countries over the
last forty years. Countries with little involvement with MNCs such as subSaharan Africa have developed more slowly.
On the other hand all examples mentioned previously. E.g. child labour, low
wages, poor working conditions, too much competition for domestic
companies, environmental consequences, global warming

Are MNCs a force for good or bad?

GOOD

creates FDI
brings jobs
regional multiplier effect
skills and technology transfer
increased demand for local businesses/ suppliers
increased tax revenues- government has more revenue to spend
export earnings
other MNCs may follow
CSR policies bring benefits

BAD

illegal & unethical behavior

exploitation of labour - low wages, poor working conditions, lack of
health & safety, child labour
environmental degradation/ pollution
unsustainable practices
tax avoidance
'race to the bottom'
cultural imperialism
local businesses pushed out
profits repatriated & not put back into local economy

Can MNCs be controlled?

by their very nature MNCs are hard to control because they transcend
national boundaries
there is no such thing as a 'world government' or 'world court' that
can prevent MNCs from doing what they want or force them to modify
their behavior.
there is a range of factors which can influence MNCs to a certain
event

In practice, keeping MNCs under control often requires a combination of

factors. Public opinion can lead to the creation of pressure groups which
may mount media campaigns to persuade the MNC to modify its actions, or
persuade Governments to intervene, or bring about legal proceedings.
However the effectiveness of these factors in controlling MNCs varies
according to circumstances

Pressure groups are organisatons that attempt to influence public policy &
especially Government legislation, regarding their particular concerns &
priorities

Factor that affect the ability to control MNCs:

Size of MNC: larger companies can be less susceptible to outside
pressure. They can afford better publicists, PR agents & legal teams
Size and importance of the host government: China is likely to be
much more effective in controlling MNC behavior than say, Zambia or

Madagascar. Some governments are desperate for FDI and overlook low pay
& working conditions.
Importance of the MNC to the host country: smaller/ emerging
economies may be reluctant to confront a company that may be important
to it both economically and in terms of employment. National objectives
may override concern for local communities
Strength of public opinion: the level of public awareness, the number
of people who are concerned and the depth of their feelings all affect the
degree of influence that public opinion can have.
The degree to which public opinion matters to the MNC: consumers
for its sales is more likely to be influenced by tactics such as protests and
boycotts than one that supplies other businesses. can work both ways!
Businesses use it to promote their products
Social media/ internet: & to boost their own image some pressure
groups are more effective
The strength and vigor of a pressure group: than others in their
campaigns. Greenpeace is renowned for its direct actions & headline
grabbing stunts

More examples:
Public opinion:
the way people feel about a company can influence its actions. If the
public decide not to buy a certain product/ brand because they disapprove
of the company's actions it can persuade them to change policies.
Example. The boycott of Nestle is the world's longest running. It began in
1977 in response to aggressive marketing of Nestle baby milk formula in
poorer countries. Public concern over phone hacking by the media led to the
closure of the News of the world

Pressure groups:
An organised group that seeks to influence either the political & legal
process/ whole industries or individual companies. Pressure groups can
organize campaigns, protests or even direct action
Example. Greenpeace campaigns for environmental causes. Action on
smoking and health (ASH) is a campaigning public health charity that works

to eliminate the harm caused by tobacco. Tescopoly is concerned with the

negative impact of supermarkets' power & Tesco in particular.

Social Media and the Internet:

More and more campaigns aimed at affecting the behaviour of MNCs make
use of the internet & sites such as Facebook & Twitter. These speed up the
flow of information & can make the actions of groups & individuals much
more effective
Example. SOHO is an organisation which investigates multinational
corporations & the consquences of their activities for people & the
environment around the world. It uses twitter, facebook & youtube to spread
its information & campaigns

The media:
Newspapers & TV programmes can mount campaigns to mobilise public
opinion & affect MNC's behavior.
Example. BBC Panorama programme investigated working conditions in
Primark's supply chain

Self-regulation:
Many MNCs follow a code of conduct which sets their own standards of
behaviour. This may be because of altruism or to prevent adverse criticism
Example. Multinational seed companies, Emergent Genetics & Proagro,
have launched a scheme of incentives & disincentives to persuade their
suppliers to discontinue the use of child labour on their farms

Government Control & Regulation:

Governments can set up regulatory bodies to monitor the behaviour of
businesses or industries. They can have advisory/ legally enforceable
powers. Governments can insist that MNCs form joint ventures.
Example. In the UK the Competition Commission and the OFT (Office of Fair
trading) have far reaching powers to investigate a business or industry. For
a time, China insisted on joint ventures for FDI project.

Legal enforcement:
All countries have legal codes, i.e. laws, and MNCs that break them are
subject to prosecution
Example. National Minimum Wage Act, Health and Safety at Work acctm &
similar laws in other countries

Shareholder Groups:
Shareholders who are the owners of a business can try affect an MNC's
behaviour by protest or votes at the AGM
Example. BP shareholders mounted a rebellion & protest at BP's AGM over
its plans for Canada's oil sands.

R + D: RESEARCH AND DEVELOPMENT.