The Disadvantages

The Disadvantages

A popular, if well worn, argument against multinationals setting up
offices in host nations is that they act to siphon off profits back to
their parent. Over time, MNCs therefore act as a conduit for capital
to move out of developing countries, not into them.
Evidence for this particular argument needs to be convincing
nowadays. If the market is developing then MNC profits are
frequently ploughed back into further investment in the host
country. In those countries where local stock markets are up and
running, the MNC will raise share capital and thus distribute
profits to local owners. In total, MNCs generate a lot of trade, in
goods, services and some of it in financial instruments, and it would
be premature to conclude that the net balance for host countries
must always be negative. Nonetheless, the historical experience of
oil companies and other extractive industries has been one where
great profits have been made and contracts signed with developing
country governments have left the hosts with only a small slice of
the overall cake. There should be little surprise then if newcomers
are now greeted overseas with more cynical, distrustful attitudes.
Employment effects of MNCs may not always be beneficial. The
incoming, modern-equipped factory may out-compete domestic
rivals and lead to the closing down of many jobs. This is all the
more likely if the technology employed by the MNC is capitalintensive.
Relatively few employment opportunities in high-tech
skills for foreigners will therefore be created whereas thousands of
unskilled domestic workers may be forced out of their jobs in local
firms that now go bust.
By the same token, technology transfer may be minimal. MNCs
may jealously guard access to research and development benefits —
perhaps keeping the important value-added functions of design and
technology in the parent country and releasing only assembly operations
to locations abroad where they are disparagingly known
as Ôscrewdriver plantsÕ. The first MAQUILADORES in Mexico were
originally of this type — US owned factories built just south of the
© 2004 Tony Cleaver
border in tax free zones set up to serve the markets further north.
Spin-off benefits to local industry, which might be expected to win
contracts to supply the MNC with a variety of inputs were also
disappointingly low where the said assembly plant just put together
mostly imported components.
Lastly, multinational corporations bring a way of life to developing
countries that threatens local cultures. Western capitalist
culture promotes materialism and rewards individualism, not the
communalism of the extended family or village. It brings an obsession
with the pursuit of profit and economic growth and it
inevitably results in widening income differentials as some seize
opportunities to enrich themselves while others do not; where some
skills and attributes are valued by the market and others are not.
MNCs are enormously powerful engines of modernism. If this is
progress, not all communities are prepared for it.
CONCLUSION
We live in an international marketplace nowadays. In fact it has
always been so: national sovereignty is a thing of the past, and the
long distant past at that. The chance to make fortunes in trade has
driven the expansion of empires from before Roman times, through
the race to establish European colonies, to the emphasis on globalisation
today.World economic fortunes are inextricably intertwined.
There yet remain some corners of the world where the global
reach of trade has not made significant inroads — such places may
retain prized traditional cultures but they also support very low
material standards of living. Given the choice, people in such
communities usually want the increasing incomes that access to
world markets gives them.
Multinational corporations have played an increasingly dominant
role in world trade since the early twentieth century and we have
seen that their operations can bring advantages and disadvantages
to countries that host their operations. National governments,
however, are responsible for setting the rules for commerce within
their borders and MNCs can only do business within the terms
of contracts agreed. It is for host nations therefore to monitor
the balance of interests served. Economics argues that the more
the competition that obtains, the more the efficiency and less the
© 2004 Tony Cleaver
corruption that is likely to result. Note that efficient markets require
the free exchange of information — open access to the media can thus
help safeguard against closet deals being signed that enrich only a
minority. Lastly, growing multinationalism in business is, in the end,
the best defence against certain countries being exploited for the
alleged benefit of others. ECONOMIC IMPERIALISM, as it is called, was
the result of companies of one distinct nationality trying to
maximise their returns at the expense of a foreign nation. But the
more a MNC raises long-term capital from stock holders in host
countries and the more it employs local managers in senior positions —
that is, the more truly multinational it becomes — then no country
becomes ÔforeignÕ and thus the more likely the ethos within the firm
will seek to promote equitable outcomes for all parties.