The Role and Impact of Multinational Corporations in the world economy Free Essay Example

Before we will start our topic under consideration, let me draw generalized picture form our everyday lives. Imagine that you are coming back home from your lovely work. You are driving your Volvo car of 2002 model year, during this you are talking with your darling, by your new Nokia N97, and she promise to be at home after one hour and cook for you dinner. After 20 minutes you are at home, you need something to eat before your darling cook for you.

You are so hungry, and you open fridge and find there your favorite “Nutella”, you decide to make some sandwiches with it, after that you take “Dynamisan” vitamin, and then you go to the sofa to watch you Sony TV and wait for your darling… And now stop and become thoughtful, all four things, which I have mentioned here, are produced by the Multinational Corporations (MNCs): Ford Motors, Nokia, Nestle SA, Novartis and Sony Group. And from this point we can see to what extent MNCs are prominent in our daily life and whole world economy.

Of course this fragment is generalized, but nevertheless things we are using every day in majority of cases are produced by MNCs, but these in turn are creating working places, building factories and making investments in research and development. As we have already mentioned MNCs are playing significant role not only in our lives but also in a whole world economy and going with my discussion further I want more clearly consider this question, but first of all we need to have comprehensive definition about what is MNCs.

As we have already understood MNCs are not just ordinary firms and their activities range from the extraction of raw materials to the producing to high – technology productions. What is more, they are firms that control production in two and more countries, with multinational employment and cross – border investment, investment in manufacturing as well as in research and development. Moreover, multinational firm send abroad a package of capital, technology, managerial talent, and marketing production to carry out production in foreign countries, and firm cannot be counted as multinational if it only engages in overseas trade. Read why estle kills babies

Also majority of MNCs have their production in more than two or three countries and their production is authentically worldwide. All control concerning production and decision – making usually are centralized and made by parent company, however there are cases when some portion of decision – making is transferred to the local level – to the subsidiaries. Not like ordinary firms, quite often corporate giants acting in the oligopolistic markets. And through this definition we can see how important they are in the world economy.

Moreover, data about their performance can be empirical evidence of that. For instance, in 2003 there was 62. 000 MNCs with more than 820 000 of subsidiaries around the world, with world’s stock of FDI reached level of $8. 2 trillion, at the same time MNCs are producing 10 percent of the total world’s GDP, conducting 40% of world’s trade and employing 90 million people around the world. Now we can get the comprehensive picture about the role and scope of MNCs, and going further we will also discuss their impact in world economy and we will see how important they are.

Role and impact: FDI, Globalization, History, Regulation and Economic Bloc. Starting our considerations about the role and impact of the MNCs, first of all, I want to draw our attention to the FDI and MNCs. So, as we can see above MNCs have quite significant role on the FDI promotion and of course this policy has an impact in the world economy. Making FDI, multinational corporations stimulate growth within country, which receive such investments.

Moreover, as Oatley pointed out in his book, country can achieve faster growth with the FDI, because it will not be rely only on the domestic savings. And following this argument, we can make a supposition that developing countries can enjoy more rapid growth with the MNCs and their investment, getting financial resources that their lack and not only developing countries. Also investments by MNCs in future can increase the level of overall domestic investment, what again can give impetus for more rapid growth and development of developing countries.

Moreover, investments which are made by MNCs can be both capital – investments, which are not always safe, and fixed investments, i. e. factories or plants and these in turn cannot be easily removed from the country, ipso facto creating debts’ problems and it is also is quite crucial for developing countries, because later will not produce boom and bust cycles. What is more, establishing and investing in local affiliates, MNCs does not raise host countries external indebtedness. In addition, MNCs are also investing in physical as well as human capital.

What also can be quite important for development and growth in developing countries, because investing in technology and knowledge (for instance, managerial experience) MNCs developed it and in future it can be transferred to the indigenous firms. Moreover, when MNCs enter domestic market in order to implement its global production strategy and investments are made as the part of this strategy, the local affiliate and domestic firms that supply this local affiliate, are becoming integrated into one global chain, what is opening for them new export opportunities and as corollary new impetus for economic growth.

Plus according to the previous research FDI flows produce more growth and development in the countries, which invest more in human capital development, i. e. provide educational facilities and train their workers. And knowing this argument, developing countries can be compelled to invest more in the education and training. Following these arguments we can suppose to see positive effect on development and growth in developing countries cause by activities of MNCs within it. Unfortunately this is only one side of the coin. On the other hand, MNCs do not necessarily provide growth and development in the developing countries rather otherwise.

Notably because MNCs are also using the same logic, which is applying to the ordinary firms – maximize profit with the minimum losses. And following this logic MNCs build their plants and factories in the countries with the lowest wages, environment and social standards, ipso facto exploiting developing world and its inhabitants. Plus they will be probably use inhabitants in low – paid work and they will not hire inhabitatnts for the top positions. Moreover, majority of the MNCs are operating in oligopolistic or monopolistic markets, and entering new market they usually reproduce the oligopolistic character of home market.

Especially this issue may be crucial in developing world, where local firms are badly – established and do not have enough capital, new technologies and skilled human capital at their disposal to be competitive and as consequence they will become vulnerable to the large and powerful MNCs. Later as corollary, former will be just absorbed by the later and this will make prices of production artificially overrated, domestic production limited and threat of extraction of oligopoly rents as profit repatriation.

And this of course can hinder economic growth of vulnerable economies of developing countries and force domestic firms to reinvest oligopoly rents, that MNCs are not reinvested locally. In addition, facing better technological and managerial skills, domestic firms also can lose their ground. Moreover, there can be quite often situations when MNCs will supply them with imports from their subsidiaries in others countries and domestic firms will go to the background. And following these arguments we can see that MNCs can also have negative effects on developing nations and as consequence on the world economy.

Second important role of MNCs in the world economy is their leading role in globalization processes promotion and proof for that we also can find in Oatley book, where he is writing that “practically every aspect of globalization has been linked to the activities of the MNCs”. And indeed that is. Facing enormous international competition in the world, where 62. 000 MNCs are operating, firms are trying to internationalize their activities in order to get benefits from it. And looking for lower costs of factors of production many MNCs shift their production across the world.

And following this logic, MNCs shift their production, matching the factor intensity of a production stage to the factor abundance of particular country. For example, more capital – intensive part of laptop as processor chip, video adapter and random access memory should be produced in capital – abundant or advanced industrialized countries, for instance Japan, whereas such elements of laptop as keyboard or facing , which is not require high – technologies, should be produced in a labor – abundant countries, for example China or other developing countries.

And this of course cannot be dismissed, doing so MNCs are creating division of labor, what of course in many cases is not beneficial for developing countries. For example, establishing only or mainly labor – intensive processes of production in developing countries will hinder their economic development, because no research, special skills or advance technology are needed for this stage of production and as consequence MNCs will not import them.

Also there is a wide criticism concerning the MNCs, globalization processes and sweatshops. Sweatshop term is not new one in the world economy, and the first sweatshops have already emerged in 19th century, however this term become more prominent and more actual with the increased MNCs activities in developing countries. Critics of globalization claim that MNCs and their affiliates are engaged in the systematic worker exploitation, poor working conditions and understated wages.

On the one hand it can be seemed true, for instance, workers in the developing world are working more than normal working week standards (40 hours), moreover wage in MNCs employment in developing world is higher than average, for example, in Vietnam and Indonesia workers in Nike factories earn five and three times more respectively, in comparison with the average annual minimum. Moreover, these factories, which are established by MNCs, are the reason why global inequality decrease increased and 375 people overcome poverty line. There is also one more criticism concerning the MNCs and globalization.

Still many argue that MNCs by movement of their production gradually erode regulations to protect environment. On the one hand, it can be true, because majority of MNCs enter the developing countries, where environment regulations are poor and making their production de facto they are exploiting this poor environment regulation and this is beneficial for them, because environment – friendly technologies costs big money, so it will be quite attractive for MNCs not to invest a lot of money to the environment – friendly technologies of production, because they also is seeking for maximum profit, with minimum costs.

Moreover, governments of many developing countries specially hold such low environment standards in order to attract multinationals to their country. But on the other, hand we can claim that every economic activity generate waste and with the economies of scale this waste will only increase, moreover, consumption patterns can change as income rise, and for instance, as more people becoming richer they starting to buy cars and more cars of course harm the nature by the CO2 emission. So, form this argument we can claim that not only one MNCs are guilty of environment pollutions rather the whole process of development.

However, development in long – term perspective can make people more concerned with the environment issues and financial resources more available for tackling these issues. As we all know MNCs in fact are no such new invention. The first multinationals emerged in the 19th century and was dominated by the Greta Britain, however, this pattern was changed with the time and after the WWII American multinational corporations were dominating post – war world market, what of course have played it historical role.

Devastated and exhausted Europe after the WWII was required additional resources for development and growth. At that moment (1945 – 1960) 2/3 of all world affiliates were created by America, and the largest of this investments gone to the Europe’s manufacturing, moreover this gave additional impetus for creation of European Economic Community in the end of 1950s. This of course had a and still is having impact of world economy because with its assistance we can see West Europe, strong and important West Europe, which is appearing one of the largest source of FDI.

And nowadays, 41% of world’s FDI comes from the Western Europe and who knows, what it would like be without American MNCs and their investment. Also we should point out that with its important and sometimes controversial impact MNCs raise question of the regulation in the world economy. Because of its dominance and weak competition from the domestic firms in the developing countries and , later was most of all concerned with the question of regulation of MNCs.

However, from the 1990s developing countries become more diversified in terms of economics and attracting more investments in manufacturing, what is meaning more growth and development for them and less dominance. Moreover, there are new tendency for South to become home base for MNCs. And this all is meaning that pursuing liberal economic strategies developing countries will make participation of MNCs easier in their domestic economies and no comprehensive rules or regulations will be installed.

What is more, it seems impossible because of interest conflict between capital – importing and capital – exporting countries. For instance, capital – importing countries, mainly developing one want to install rules that will allow them to control firms operating within their border, whereas capital – exporting, in majority of cases developed countries want to see rules, which will limit ability of host countries to regulate the MNCs activities within their economies. But, nevertheless, there are some regulations about the governing the activities of MNCs in the global economy.

Namely, there are rules by World Trade Organization, Organization for Economic Development and Cooperation and North American Free Trade Agreement that apply to a few countries. One more interesting point can be made about the MNCs and their impact on the world economy. According to the Oatley the majority of activities of MNCs are concentrated in the advanced industrialized countries and evidence for that also can be fact, that form 500 MNCs that are responsible for 90% of world FDI and 40% of world trade – 440 of them are based in Japan, Europe and USA.

And this data can bring us toward interesting conclusion that in the world economy there is powerful bloc for economic development consisted of the later and this bloc would be impossible to create without MNCs and their activities. However, it would be better for developing countries, if trade and investment would be more evenly distributed, because in such terms as it is now, it seems that control of most resources and capitals by this economic bloc is not just and in terms as it now, it is promoting global inequality.

Conclusion: world without MNCs? Throughout my essay I was looking on the general impacts and role played by the Multinational Corporations. The one finding we can make at once is that, indeed, role played by the MNCs in the globe economies is really huge and important and it is impossible to However, their impact sometimes can be controversial. In the beginning of my essay I was discussing role of the MNCs in promotion of the FDI and what consequences it can have for the developing world. As we have discovered it can have two sides of one coin.

On the one hand, FDI which is done by the MNCs can be positive and promote development. For instance, it creates new working places for the poor societies in the developing world, introduce new technologies and manufacturing skills, import capital, which many developing nations lack and as result promote development and growth in the developing world. But on the other hand, it can hinder economic growth and development, notably forcing to close domestic factories by the competition pressure from the MNCs, also it can exploit inhabitants in low – paid work and not providing them with the top – ositions. Moreover, MNCs can be reluctant to import new technologies and manufacturing skills. However, acting as promoters and sources of FDI, MNCs increase dependency of developing nations (mainly South) on wealthier one (Japan, the USA, Europe – North), ipso facto again establishing correlation North – South, creating threat for the conflict in future. But sometimes this dependency can have positive effects on the developing world. Second role, which is played by the MNCs in the world economy, is promotion of globalization. And it was surprisingly to find some positive points about that.

Mainly it is concerning conclusion that factories and plants which are established in the developing countries are helping to reduce poverty and average wages paid on this factories are higher in comparison with the domestic work opportunities. Moreover, in some sense it is silly to blame MNCs for low wages in developing world in comparison with the West, because it has already entered market with such low wages and moreover, productivity is lower in developing world. However, MNCs and their role as promoters of globalization can have some negative consequences for the developing world.

And first of all it is labor division, which is promoted by the MNCs, which in some sense can hinder economic development. Also there is strong criticism that MNCs violate environment in developing countries and force governments of developing nations to do so, however, there is strong point that all economic development and activity will create pollution and it is unavoidable. However, we can see that MNCs with their shift of production, promote globalization with both positive and negative effects. Also, in my discussion I was looking at the MNCs historical role and impact.

American MNCs were investing mainly in the Europe after the WWII what helped to reconstruct and develop it. And from my point of view, this was a great advantage for the whole world, because nobody knows, how world would like be looked without strong Europe. I also pointed out that, MNCs gave impetus for discussion of regulations and rules concerning MNCs activities in the world economy, and due to the conflict between capital – exporting countries and capital – importing countries such regulations was not installed, however they were heavily contested.

Moreover, we again can see conflict between North and South, where North mainly is representing interest of capital –exporting countries, but South is representing interests of capital – importing countries. And finally, I have made emphasis on leading role of Japanese, USA and European MNCs in the world economy and interconnectedness between them. And this alignment of forces, form my point of view, is promoting global inequality in world economy. Of course in some sense our world cannot develop it without MNCs and they are becoming increasingly important force and impetus for growth and development, especially in the developing world.

And as Carbon report claimed, MNCs have overall positive effect on world economic activity it has “favorable impacts on productivity, growth rates and overall level of employment, on the dissemination of new products and processes and also managerial know – how”, also MNCs improve balance and payment, research and development, the level of technology, and increased dynamism”. Majority of these claims are seemed to be true, but nevertheless, it can differ from case to case and some of countries, especially developing one.

And in order to gain more from the MNCs national governments should impose some restrictions and obligations on the later. However, in spite of their controversy, in overall terms, MNCs and their activities have a lot of positive effects in how world economy is running. And nowadays it is impossible to insulate MNCs from the world economy. And without them, development in the whole world will just fell into the stagnation, what in consequence will turn out in great economic costs.