Impact of multinational companies on the host country
Clearly, multinational multinational corporations can provide developing countries with critical financial infrastructure for economic and social development. However, However, these institutions may also bring with them relaxed codes of ethical conduct that serve to exploit the neediness of developing nations, rather than to provide the critical support necessary for countrywide economic and social development. When a multinational invests in a host country, the scale of the investment (given the size s ize of the firms) is liely to be significant. !ndeed governments will often offer incentives to firms in the form of grants, subsidies and tax breas to attract investment into their countries. "his foreign direct investment (#$!) will have advantages and disadvantages for the host country.
Advantages "he possible benefits of a multinational investing in a country may include% •
Improving the balance of payments &
inward investment will usually help a country's balance of payments situation. "he investment itself will be a direct flow of capital into the country and the investment is also liely to result in import substitution and export promotion. xport promotion comes due to the multinational
•
using their production facility as a basis for exporting, while import substitution means that products previously imported may now be bought domestically. Providing employment & #$! will usually result in employment benefits for the host country as most employees will be locally recruited. "hese benefits may be relatively greater given that governments will usually try to attract firms to areas where there is relatively high unemployment or a good labour supply. & profits of multinationals will be subect to local taxes in most cases, which will provide a valuable source of revenue for the domestic government.
•
Source of tax revenue
•
Technology transfer &
•
Increasing choice
•
National reputation &
multinationals will bring with them technology and production methods that are probably new to the host country and a lot can therefore be learnt from these techni*ues. Worers will be trained to use the new technology and production techni*ues and domestic firms will see the benefits of the new technology. "his process is nown as technology transfer. & if the multinational manufactures for domestic marets as well as for export, then the local population will gain form a wider choice of goods and services and at a price possibly lower than imported substitutes. the presence of one multinational may improve the reputation of the host country and other large corporations may follow suite and locate as well.
+ mbun-t-țirea balanței de pl-ți & investiții str-ine va auta, de obicei, situația balanței de pl-ți a unei ț-ri. !nvestitia se va fi o curgere direct- de capital n țar- și investiția este, de asemenea, de natur- s- conduc- la substituirea importurilor și promovarea exporturilor. /romovarea exportului vine ca urmare a multinaționale folosind facilitatile lor de producție ca baz- pentru exportator, n timp ce substituirea importurilor nseamn- c- produsele importate anterior pot fi cump-rate acum pe plan intern. + ocuparea forței de munc- #urnizarea & !0$ va duce, de obicei, la beneficii de muncpentru țara gazd-, așa cum cei mai multi angaati vor fi recrutați pe plan local. 1ceste beneficii pot fi relativ mai mare av2nd n vedere c- guvernele vor ncerca de obicei s- atragfirmele n zone n care exist- șoma relativ mare sau o bun- aprovizionare de munc-.
0ursa de venituri fiscale & profit de multinaționale vor fi supuse taxelor locale, n cele mai multe cazuri, ceea ce va oferi o surs- valoroas- de venituri pentru guvern intern. + "ransferul de tehnologie & companiile multinaționale vor aduce cu ei de tehnologie și de producție metode care sunt, probabil, nou pentru țara gazd- și, prin urmare, o mul țime poate fi nv-țate de la aceste tehnici. 3ucr-torii vor fi instruiți s- utilizeze noile tehnici de tehnologie și de producție și firmele autohtone vor vedea beneficiile noii tehnologii. 1cest proces este cunoscut sub numele de transfer tehnologic. + Creșterea alegere & dac- produce multinaționale pentru piața intern-, c2t și pentru export, atunci populația local- va c2știga forma o gam- mai larg- de bunuri și servicii și la un preț mai mic dec2t, eventual, nlocuitori importate. + reputație național- & prezența unei singure multina ționale poate mbun-t-ți reputația ț-rii gazd- și alte corporații mari pot urma privat- și localiza, de asemenea.
Disadvantages "he possible disadvantages of a multinational investing in a country may include% •
•
Environmental impact &
multinationals will want to produce in ways that are as efficient and as cheap as possible and this may not always be the best environmental practice. "hey will often lobby governments hard to try to ensure that they can benefit from regulations being as lax as possible and given their economic importance to the host country, this lobbying will often be *uite effective. Access to natural resources & multinationals will sometimes invest in countries ust to get access to a plentiful supply of raw materials and host nations are often more concerned about the short&term economic benefits than the long&term costs to their country in terms of the depletion of natural resources.
•
Uncertainty &
multinational firms are increasingly 'footloose'. "his means that they can move and change at very short notice and often will. "his creates uncertainty for the host country.
•
Increased competition
•
!ro"ding out if
the impact the local industries can be severe, because the presence of newly arrived multinationals increases the competition in the economy and because multinationals should be able to produce at a lower cost. overseas firms borrow in the domestic economy this may reduce access to funds and increase interest rates.
•
Influence and political pressure &
multinational investment can be very important to a country and this will often give them a disproportionate influence over government and other organisations in the host country. 4iven their economic importance, governments will often agree to changes that may not be beneficial for the long&term welfare of their people.
•
Transfer pricing &
•
#o"s$illed employment &
•
%ealth and safety
•
Export of Profits
•
!ultural and social impact
multinationals will always aim to reduce their tax liability to a minimum. 5ne way of doing this is through transfer pricing. "he aim of this is to reduce their tax liability in countries with high tax rates and increase them in the countries with low tax rates. "hey can do this by transferring components and part& finished goods between their operations in different countries at differing prices. Where the tax liability is high, they transfer the goods at a relatively high price to mae the costs appear higher. "his is then recouped in the lower tax country by transferring the goods at a relatively lower price. "his will reduce their overall tax bill. the obs created in the local environment may be low& silled with the multinational employing expatriate worers for the more senior and silled roles. multinationals have been accused of cutting corners on health and safety in countries where regulation and laws are not as rigorous. & large multinational are liely to repatriate profits bac to their 'home country', leaving little financial benefits for the host country. large numbers of foreign businesses can dilute local customs and traditional cultures. #or example, the sociologist 4eorge 6itzer coined the term McDonaldization to describe the process by which more and more sectors of 1merican society as well as of the rest of the world tae on the characteristics of a fast&food restaurant, such as i ncreasing standardisation and the movement away from traditional business approaches.
Lipsey's analysis suggests that, if anything, both home and host countries would be worse o in a world without globe trotting multinationals. For example, examining the critique that a company's foreign operations ineitably will hurt domestic !obs and wages, Lipsey notes that among those who hae studied the situation, such fears hae "mostly dissipated."
Lipsey does not deny that problems, such as !ob losses at home, can occur when a domestic company inests in foreign production facility. #ut he notes that critics of globali$ation often fail to consider the broader picture. For example, in the %nited &tates, while there has been considerable attention to !obs lost because of a domestic rm shifting production abroad, less attention has been paid to how this may be oset by foreign rms inesting in %.&. facilities. Lipsey notes that %.&.(based manufacturing employment and output proided by %.&.(owned companies indeed declined from )*++ to )**+, but "most of the reduction...was oset" by the increased output and employment resulting from an surge in foreign owned aliates moing into the %nited &tates. "%.&. and foreign rms were both internationali$ing," he writes. "-ach group was expanding in the other group's home region." Lipsey points to other instances in which a company's inestment abroad proides benets at home. For example, inesting in a particular country may gie a company access to marets that it would not be able to penetrate with a domestic operation alone. /his has the eect of increasing the company's exports oerall, the benets of which accrue to domestic operations. 0n addition, haing operations abroad can shield a company from the damaging eects of currency 1uctuations and trade(inhibiting tax policies in the home country. 0n both instances, the foreign inestment could end up protecting !obs at home by strengthening the parent company. 2erall, Lipsey argues it's not always or een often the case that an inestment in production abroad "substitutes" for or displaces what would otherwise be production capacity at home. Looing at exports alone, Lipsey notes that economists hae found more eidence associating foreign inestments with an increase in home country exports than a decrease. -en in -urope (( where rising unemployment in proximity to an increase in foreign inestment lead to suspicions that the two were related (( Lipsey notes that economists found foreign inestment was more liely to boost rather than to reduce the host country's exports. 3s for its eect on the foreign country, again, Lipsey nds little, if any, support for the anti( globali$ation gospel. For example, considering the charge that foreign inestment leads to depressed wages and thus exploits "host country" worers, Lipsey nds that the opposite is true. "4ithin host countries it has been abundantly shown that foreign(owned rms pay higher wages than domestically(owned rms," he writes. Lipsey notes that foreign rms tend to be in "higher wage sectors," generally hire "better educated and more qualied worers" than locally(owned rms, and "tend to be larger and more capital intensie." 5e nds only sparse eidence of those higher wages haing a "spilloer" eect on wages paid by local companies, but he claims that whateer eidence there was points to an increase in aerage wages. Lipsey obseres that the research oers a mixed iew of whether the presence of foreign rms has a positie eect on productiity in the host country, with some studies reporting a signicant eect and others iewing the eidence as inconclusie. 5oweer, Lipsey beliees that, with productiity in foreign rms generally superior, this "suggests that oerall production is improed by the presence of foreign(owned operations, although that question is rarely, if eer, examined."
6ore conclusie, according to Lipsey, is eidence that foreign inestment signicantly boosts exports and economic growth in the host country. #ut he acnowledges that such an association "would not necessarily please critics of multinationals." For example, he notes that the encumbrances of trading relationships can be iewed as restricting a goernment's freedom to act domestically while "fast growth inoles disruptions and the destruction of the alue of old techniques of production and old sills." "/hose who alue stability oer economic progress will not be coninced of the worth of the gifts brought by foreign inolement," Lipsey obseres. "/hat is especially true if the gains are captured by small elements of the population or if no eort is made to soften the impact of the ineitable losses." (( 6atthew 7ais
the maximizing benefits of FDI for the host country can be significant, including technology spillovers, human capital formation support, enhancement of competitive business environment, contribution to international trade integration and improvement of enterprise development. Moreover, further than economic benefits FDI can help the improvement of environment and social condition in the host country by relocating ‘cleaner’ technology and gu iding to more socially responsible corporate policies. ll of these benefits contribute to higher economic gro!th, !hich is the main instrument for alleviating poverty in those economies.
Foreign direct investment can ma"e a positive contribution to a host economy by supplying capital, technology and management resources that !ould other!ise not be available. #uch resource transfer can stimulate the economic gro!th of the host economy $%ill, &'''(. Capital s far as capital is concern, multinational enterprises $M)*s( invest in long+term proects, ta"ing ris"s and repatriating profits only !hen the proects yield returns. -he free flo! of capital across nations is li"ely to be favou red by many economists since it allo!s capital to see" out the highest rate of return. Many M)*s, by virtue of their large size and financial strength, have access to financial resources not available to hostcountry firms. -hese funds may be available from internal company sources, o r, because of their reputation, large M)*s may find it easier to borro! money from capital mar"ets than host+county firms !ould $%ill, &'''(. -he crucial role played by the technological progress in the economic gro!th is no! !idely accepted $omer, /001(. -echnology can stimulate economic development and industrialization. It can ta"e t!o forms, both of !hich are valuable. -echnology can be incorporated in a production process $e.g., the technology for discovering, extracting and refining oil( or it can be incorporated in a product $e.g., personal computers( $%ill, &'''(.
-echnologies that are transferred to developing countries in connection !ith foreign direct investment tend to be more modern, and environmentally ‘cleaner’, than !hat is locally available. Moreover, positive externalities have been observed !here local imitation, employment turnover and supply+chain re2uirements led to more general environmental improvements in the host economy. 3y transferring "no!ledge, FDI !ill increase the existing stoc" of "no!ledge in the host country through labour training, transfer of s"ills, and the transfer of ne! managerial and organizational practice. FDI can have a great contribution to economic gro!th in developing countries by supporting export gro!th of the countries.
