Role of Multinational Corporations in Development by Cynthia Hove

This presentation focuses on MNC’s as they have greatly influenced the development path of many nations. It seeks to expose how they have positively and negatively impacted host countries as they are considered key agents of change when it comes to development. This change can be facilitated by various players, the government , NGO’s and non-profit organisations, Faith based Organisations and Multi National Corporations.   

Former UN Secretary General Kofi Annan emphasized in one of his speeches: “The UN once dealt with only governments. By now we know that peace and prosperity cannot be achieved without partnerships involving governments, international organizations, the business community and civil society. In today’s world we depend on each other.” (Gell-Redman, Micah and Kang, Caren, 2006)

What then are MNC’s?

 A Multi-National corporation (also sometimes known as a multi-national-enterprise) is a corporation or an enterprise that manages production or delivers services in more than one country. MNC’s may also be referred to as international corporations. The International Labour Organisation has defined an MNC as a corporation that has its management headquarters in one country, known as the home country and operates in several others known as host countries.

Some multinational corporations are very big, with budgets that exceed some nations' GDP’s Multinational corporations can have a powerful influence in local economies, and even the world economy, and play an important role in international relations and globalization

According to Anderson and Cavanagh, among the largest 100 economies in the world, 51 are multinational corporations (MNCs), whereas only 49 are countries. The analysis is based on a comparison of the corporate sales of MNCs and the GDPs of the countries. The study further shows that, out of the 200 largest economies of the world, 144 are MNCs. The combined sales of the top 200 corporations are bigger than the combined economies of all the countries of the world, minus the largest 10. The income of MNCs is 18 times higher than the combined annual income of the 1.2 billion people of poor countries (24 percent of the total world population). The study has found that the growth of sales of top 200 corporations is faster than overall global economic activity. Between 1983 and 1999, their profits grew by 362 percent whereas their combined sales grew from 25 percent to 27.5 percent of the world GDP.

Anderson and Cavanagh (2000), further reveal that the US dominates the top 200 corporations, accounting for 82, i.e. 41 percent of the total. Japan is second, with 41 corporations, Germany comes in third, with 20, followed by France and UK, which account for 17 and 11 corporations, respectively.

According to the UN Committee on Trade and Development (UNCTAD), MNCs account for 70 percent of the total world foreign trade, which is US $7 trillion.

Most of these MNCs belong to the rich countries; therefore, it is natural that MNCs and their respective countries should safeguard their mutual economic, political, and cultural interests under the cloak of globalization. Economies are the catalysts of the globalization process, and they are represented by MNCs and transnational corporations (TNCs), which maintain the highest stakes and stand to gain the maximum benefits.

I have mentioned TNC there so I will elaborate

A Transnational Corporation (TNC) differs from a traditional MNC in that it does not identify itself with one national home. Whilst traditional MNCs are national companies with foreign subsidiaries, Druker, P (1997) The Global economy and the Nation State . TNCs spread out their operations in many countries sustaining high levels of local responsiveness. An example of a TNC is Nestlé who employ senior executives from many countries and try to make decisions from a global perspective rather than from one centralised headquarters. Schemerhom J (2009) Exploring management  However, the terms TNC and MNC are often used interchangeably.

Multinational corporations because of their enormous size, enjoy massive economic and political power which enables them to dictate terms to the under-developed countries. They are able to manipulate prices and profits and restrict the entry of potential competitors through their dominant influences over new technology, special skills, ability to spend enormous fund on advertising etc.

MNCs organize this operation in different countries through any of the following five alternatives:

1.      Branches 2. Subsidiaries 3. joint venture company 4. Franchise holders 5. turn-key projects

Through these various methods of operations, MNCs carry their technology to the developing countries. If MNCs set up a branch or a subsidiary company, it is claimed that there is a direct injection of foreign experience and expertise in the developing country. The branch or the subsidiary company can provide a channel for the transmission of the latest improvements from the developed to the underdeveloped countries. In the words of A.K. Cairecross, There is a no question that the branch factory is a highly effective way of improvement technology. It usually provides, along with the technical expertise, the capital that is not easily mobilized in underdeveloped countries for new industrial countries for new industrial ventures and the managerial experience that can so rarely be supplied by them.

The modus operandi of the multinationals in spreading there is very interesting. Like the East India Company which came to India as a trading company and then spread its net throughout the country to become politically dominant, these multinationals first start their activities in extractive industries or control raw materials in the host countries and then slowly enter the manufacturing and service sectors.

The economic role of multinational corporations (MNCs) is simply to channel physical and financial capital to countries with capital shortages. As a consequence, wealth is created, which yields new jobs directly and through “crowding-in” effects. In addition, new tax revenues arise from MNC generated income, allowing developing countries to improve their infrastructures and to strengthen their human capital. By improving the efficiency of capital flows, MNCs reduce world poverty levels and provide a positive externality that is consistent with the United Nations’ (UN) mission — countries are encouraged to cooperate and to seek peaceful solutions to external and internal conflicts.

Strategies used by MNC’s

Lobbying: Given their huge capital resources and production capacities, MNCs are able to dictate their own terms in economic dealings. For the sale of their enormous production, MNCs require access to large markets; tariff issues, access restrictions and similar “barriers to trade” are hurdles in this access. What MNCs need is a global system for the free flow of their goods. They therefore use their sheer economic weight to influence international trade rules. With their huge resources, they employ lobbyists with the highest expertise and influence at international trade organizations. The rich West, influenced by such lobbying, makes decisions in favor of the MNCs, irrespective of the economic, social or cultural consequences for the poor of the world. This lobbying power is what MNC’s should be using to development rural areas at home and in the developing world

Entry in Host Countries: Having poor economic infrastructure and little capital, developing countries very easily agree to host MNCs. At times, their weak regulatory positions are subsequently exploited by MNCs.

Pushing Local Producers Out: MNCs either buy out the local companies of the host countries or push them out of the markets by offering cheaper and better quality goods for some time. Where aggressive marketing is needed, MNCs can, in the initial phase, even provide their products free of cost to coax the public into developing appropriate consumption habits. An example as highlighted in an article on MNC’s in Pakistan is An interesting example is the advertisement of the global beverage brand, Pepsi, which openly ridicules indigenous drinks such as Rooh Afza and Jam-e-Sheereen

Benefits of MNC’s to host countries
When MNCs enter host societies, there are some benefits, which are outlined below:

Financial and Technological Resources and Expertise: MNCs provide immense resources and investments, technology, innovation and expertise to the host societies. A culture of research and development is encouraged and human resources are developed, at least within the organization. MNCs also contribute significantly to the national exchequer by paying taxes.

Good Business Practices: Good governance, organizational transparency, clear command structures, and performance-based evaluation and incentives programs for employees encourage the merit system. MNCs introduce a professional working environment and culture for local organizations to emulate, thereby promoting sound management and business education.  

Comforts of Life: In some cases, large-scale economies, quality control and a healthy competition lead to price cuts and other benefits for the end-user. People have more access to the comforts of life with a large variety of choices.

Infrastructure Improvement: Many MNCs help in improving the infrastructure and provision of basic needs in their specific areas of operation. They either do so directly or provide funds for this purpose to civil society organizations. This also improves business conditions within and in the vicinity of the areas where they are operating. A simple example in the case of Pakistan is that of petrol pumps, which used to be filthy and inhospitable places but are now not only clean and aesthetically laid out, but also offer many facilities for travelers. These improvements have been a result of the moving in of Shell

Pluralism: MNCs help boost cross-boundary interaction among people. Even education, particularly, business education, has taken on a global perspective. The global perspectives and opportunities for cross-cultural understanding increase the adaptability of students to alien environments. This leads to the mixing of cultures and practices and encourages pluralism as well as competition.

Nevertheless, MNCs can also pose problems for host societies in the spheres of social and economic development and cultural diversity. How this happens is outlined below.

Cultural Changes: MNCs use, develop and continually refine their marketing tactics to create consumers’ need for their products. They use social marketing and stars from the worlds of sports and show business to project their products, especially affecting the youth, women and children as they are generally attracted to glamour. Special events, festivals and campaigns are organized to create hype. In this atmosphere, ethical and moral considerations have no place, and corporate interests start determining what is to be celebrated and how.

With the spread of MNCs’ operations in a society, the importance of foreign languages increases because these firms mostly operate among the classes equipped with foreign language skills and hire and promote the people from the same groups. Culture in such a space is eroded, Matunhu J (2011) posits that, in the process of mordenising Africa, the people of the continent lost their identity and development path. This is not to say cultural diversity is bad but development for Africa must be embroiled in African values. As the world moves towards becoming a universal village, it must maintain its cultural diversity, which is the beauty of life and an asset of all mankind. Any effort by a dominant group to impose a particular culture on the rest of the world will create problems globally. To be just and fruitful, globalization must always have a human face.

Conflicts of Interest: MNCs are commercial organizations and their only interest is to gain maximum return on their invested capital, occupy market shares and ensure their long-term competitiveness. This leads to conflict of interests between the MNCs and host societies on issues like repatriation of profits, patents, and major operational decisions. Host countries would want MNCs to work in a manner that is harmonious with the social and political needs of their societies and communities, whereas the MNCs make their choices based purely on economic criteria. This conflict of interests leads to conflict within societies.

Increasing Materialism and Consumerism: MNCs promote a culture of conspicuous consumption, in which presentation and cosmetic changes matter the most. The product models change very fast and the older ones lose relevance in a short span of time. Consumerism has an overwhelming impact on societies. For example, departmental stores and shopping malls/plazas are mushrooming everywhere both as an outcome of and an impetus to further consumerism. Eating habits are also changing, with increasing consumption of processed, instant, fast and junk food, especially products of international brands. The emphasis is on instant access and quick relief. Many products also glamorize life in the fast lane, leading to increased consumption of faster communication products, cars, as well as stimulants such as cigarettes, and alcohol. As outward looks become central in the vision of success, a vibrant fashion industry is changing the dress and outlook of ordinary people. Spending priorities have changed.

Contrary to the conventional view, taking loans is now considered a status symbol. The availability of easy credit, consumer financing, credit cards and personal loans by the banks to the middle class is promoting a culture of people living beyond their means.

Simplicity is losing currency and people strive to live in luxury. This trend makes the disparity of resources among people, groups and even regions look wider. Previously, education was aimed at developing a balanced personality and ethical and social values and character building were emphasized. Now, however, materialism has taken over. We may then conclude that MNC’s are perpetuating Modernization in the less developed world.

Corruption and Crime: In the race for maximum profit, the MNCs deem their ends to sometimes justify the means: they use their considerable buying power to corrupt people to capture markets. For example, a report titled Milking Profits, which is based on a disclosure by a former employee of an MNC in Pakistan of the unfair tactics the company uses to increase its sales of formula milk and earn profits, compromising infants’ health. The tactics include interfering in government efforts to regulate the industry, bribing doctors with perks and persuasions such as money for signboards and free lunches as well as cost free supplies and samples. (The Network for Consumer Protection, 1999)

Healthcare Attitudes: Healthcare attitudes are changing and people expect better health services. The job is made easier by the new norm of “third party cashless payments,” where payment is made via credit cards or health insurance. The focus has now increased on preventive healthcare. Although it is good for those who can afford these facilities - and they are the targets of MNCs- yet it is extremely frustrating for those who cannot afford them. Hectic routines, targets and deadlines are resulting in stresses and pressures. A destructive lifestyle has led to a host of medical crises: sexual problems from over-performance at work, stress, mid-life crisis, ulcers, nervous disorders, hypertension, obesity, cardiac disease, diabetes etc., are all lifestyle-related ailments that are on the rise. These are problems associated with the developed world that are gradually trickling down to the developing world in the vein of MNC’s and development. For example according to Datta (2006),  In the US, Caesarian rates have hit an all-time high at 29.1 percent. In the UK, one in five births is a surgical procedure compared to less than 3 percent in the 1950s; in Brazil, a joke goes, the only way you don’t get a Caesarian in Rio De Janeiro is if your doctor gets stuck in traffic.

Brain Drain: The term “brain drain” is commonly used for the situation when talent goes out to other countries. The MNCs are involved in another kind of brain drain. Their lucrative salaries attract talent that might have contributed to the host society to work for their ‘multinational’ interests without leaving the country. The human resources that could have been actively working towards the development of their home countries rush to the big corporations and end up working to further build the corporation without necessarily contributing to the betterment of their own nations

Promotion of Non-Issues: Importantly, poor people are not the target of MNCs. They target the middle classes, who have the buying powers, and trying to change their priorities in everyday life, spending and consumption. MNCs establish close linkages with intellectuals, legislators, media and some non-government organizations (NGOs) to highlight specific issues that suit their business interests.

Negative marketing: When introducing their products, MNCs exaggerate the qualities to the level of cheating and lying. Aggressive campaigns with false claims are launched. Local products are ridiculed. Children and youth are special targets, while women are treated as commodities to project the products, affecting the existing value framework of the societies.

Violation of Human Rights: Exploitation of workers by large business corporations is a common phenomenon. Most workers are exposed to hazardous and inhuman conditions, overexertion and financial abuse. This happens despite the fact that many of the world’s largest business associations, including the International Chamber of Commerce, have endorsed the UN Secretary General’s “Global Compact,” a mechanism for self-regulation by business companies.

Stresses on the Family: MNCs affect the host society’s family fabric in many ways. The new cultures and lifestyles introduced by MNCs are proving harmful to the family fabric in host societies. Overspending and living beyond means eventually creates economic pressures and develops tensions and stresses within families. Various indicators also prove that women working with MNCs and other big corporations undergo extra stress when entering into marriages and bearing children. Parents have little time for their families, particularly children. One out of six women in the world opts out of natural birth, according to the World Health Organization (WHO). Earlier, this trend was specific to the developed countries but it now prevails in the least developed world too.

 The question then is how do developing countries move forward  when those bringing ‘development’ have a lot of negatives attached as well.                            
MNCs have both a positive and a negative impact on host societies, even in the developed world. MNCs have contributed a lot in the growth of developed countries and both have progressed side by side. This has been an evolutionary development and, therefore, there are now strong institutions, including legislating bodies, regulatory agencies, judicial system, and consumer societies, to check and maintain the balance from within. In the case of developing host societies, however, a rather uneven contest is taking place.

So has anything be done to monitor MNC’s?

An important role currently undertaken by the UN is the provision of a valuable and detailed assessment of the economic impact of MNCs through its publication of the World Investment Report. In addition, the UN’s publication of the Human Development Report and the World Bank’s World Development Report, provide researchers with a broad picture of trends in world welfare. These reports, however, present static measures of income inequality and are thus too limiting. The UN and World Bank should also analyze measures of mobility. Studies that focus only on income inequality, may be highly misleading because countries may have identical income distributions but far different social welfare levels due to differences in economic and social mobility.

Conclusion

At the end of the end the analysis reveals that although MNC’s bring about improvements in host countries such as infrastructure , there is a lot more that they could be doing to foster development considering their massive influence in decision making worldwide, their economic power, and their influence on world markets. It is apparent that most MNC’s are more concerned with earning profit and all their efforts in developing countries particularly are a means to an end, in all this they are doing more harm than good. According to The World Revolution Three billion of the world’s people (one-half) live in “poverty” (i.e. on less than $2 per day). Among these, 1.3 billion live in “absolute” or “extreme” poverty (i.e. on less than $1 per day). Some 800 million people lack access to basic healthcare. About 17 million people, including 11 million children, die every year from easily preventable diseases or malnutrition. In addition, 800 million people are hungry or malnourished; nearly 160 million children are malnourished worldwide, and 11 million people die every year from hunger and malnutrition. Approximately 2.4 billion people lack access to proper sanitation; 1.1 billion do not have safe drinking water. By 2025, at least 3.5 billion people or nearly two-thirds of the world’s population will face water scarcity. More than 2.2 million people, mostly children, die each year from water related diseases. Some 275 million children never attend or complete primary school education; 870 million of the world’s adults are illiterate. There is therefore a lot that still needs to be done and MNC’s may not be the answer. The MNC-led globalization currently under way emphasizes economic integration. As Nelson Mandela admitted at the “Bridging the Divide” Conclave 2006, held by India Today, “It worries me that our world is becoming a global village only for the exchange of goods and information — not as a place of shelter, livelihood, security and dignity for all who live in it.”

References

ActionAid International. 2006. Under the influence: Exposing undue corporate influence over policy making at the World Trade Organization. Johannesburg.

Anderson and Cavanagh. 2000. Top 200: The Rise of Corporate Global Power. Oakland, CA: Institute for Policy Studies.

Datta, Damayanti. 2006, July 31. “Birth Controlled.” India Today.
Finance Division, Government of Pakistan. 2006. Pakistan Economic Survey 2005-06. Islamabad.

Gell-Redman, Micah and Kang, Caren. 2006. ‘Plenty of “Unfinished Business”.’ The Current, Volume 10, Number 1, Fall 2006. Cornell Institute of Public Affairs

ICI Pakistan. 2006. Official website (www.ici.com.pk/files/ici_financial.html) Kondap, N. M. 2006, October 22. “Changing Paradigms.” Business India.

Matunhu J. 2011.  African Journal of History and Culture Vol 3(5) pp 65-72, A critique of mordernization and dependency theories in Africa: Critical Assessment

Purie, Aroon. 2006, September 18. India Today.
Schroeder, Gerhard. 2006, March 27. “Wanted a Stronger UN.” India Today.

Shell, 2005. Official website. (www.shell.com/static/pk-en/downloads/ about_shell/ financial_reports_2005) Singh, V. B. 1979. Multinational Corporations and India. New Delhi: Sterling Publishers.

The Network for Consumer Protection. 1999. Milking Profits – How Nestlé puts profits ahead of infant health. Islamabad.

UNCTAD. 2002. Multinational Corporations in Least Developed Countries. (http://www.globalpolicy.org/reform/2002/modelun.pdf)

UNDP. 2006. “Overview.” Asia-Pacific Human Development Report 2006 – Trade on Human Terms. New York.

http://www.ips.org.ik/globalisation