The international business scenario and the total world economic environment are undergoing profound instances of change. Factors like the fast pace of the development in technology, changes in the world markets due to rapid changes in consumer preferences and tastes, formation of large global corporations due to mergers and acquisitions, the enlargement of business operations worldwide, the process of economic reforms in the form of liberalizations resulting in the advancement of the emerging economies and a complete restructuring of the industrial economies contribute in reshaping the world economy especially the trading practices.
During the last two decades, the world has witnessed rapid internationalization in the business and trading fronts. In addition to international trading, there is the increased flow of capital, movement of labor, processing, and transfer of information and communication through advanced technology and organization of the production processes internationally across the borders. There has been solid evidence to transform the 21st century to be a period of massive globalization.
Globalization – An Overview
Many meanings have been attributed to the term ‘Globalization’ depending on the context.
Though there is no precise definition of the term that has not been arrived at, globalization can be construed in general as encompassing increased movement of labor, goods, and services, capital, data, ideas, and technology.
Thus globalization is the process of opening up world trade, development of technologically advanced means of communication, internationalization of financial and capital markets, growing contribution of multinational and transnational companies, and increased migration of labor. The term globalization may be identified with the integration of the different economies of the world through uninterrupted commerce, trade, and financial flows and this process of uninhibited trade is largely facilitated through the mutual transfer of technology and transfer. It also involves the inter-country movement of labor without any barriers. (Krishn A Goyal)
The global business environment during the last decade was characterized by various emerging nations opening up their economies by way of economic reforms aimed at attracting more foreign direct investments. Chief among the economies were China which converted its economy into a market economy providing ample opportunities for investment by the industrially advanced countries including a vast domestic market for the products of multinational companies. The economic reforms were the result of economic compulsions at home and abroad which called for a complete overhauling of the economic policies and programs. The economic reforms attempted by most of the developing nations to increase their share of world trade include;
- devaluation of the respective currencies,
- disinvestment in the public enterprises to offer attractive industrial sectors to the international investors,
- soliciting and allowing enhanced foreign direct investments in various sectors,
- revamping the licensing system,
- reorganizing the import duties and domestic tariff structures,
- far-reaching financial sector and capital market reforms
In effect ‘globalization’ is a process that aims to integrate the economic and financial activities of every country in the world. It also intends to remove all the political and cultural barriers among different nations. The present-day economic scenario in almost all countries of the world encompasses a certain degree of globalization. Therefore the topic of ‘globalization has become a much-debated one ever since the process has started. Though there are arguments supporting the view that globalization by integrating the economic activities among nations bring progress and prosperity to such nations, it does have some negative impacts also.
The globalization process has a lasting influence on the promotion of democratic conditions in a country and by ensuring healthy competition both domestically and internationally, globalization also provides for the rapid economic development of the nations. Globalization has its positive and negative impacts on the environmental conditions prevailing in a country.
Clustering of market opportunities has provided for a larger number of global opportunities and the organizations because of the existence of similar basic segments are able to have a unified global orientation. Marketing globally enables the marketer with different types of advantages which are unique to global marketing. These advantages which the organization cannot achieve locally are wider experience and exposure, scale economies, better utilization of resources, and global strategy. Global volumes also enable the organizations to make a larger investment in research and development which will help them to improve upon the quality. (FAO)
The present-day business environment comprises a global village that has got integrated into many ways. The restrictions on the geographical boundaries that constrained the movement and growth of the business houses have disappeared for a long and have provided opportunities for the businesses to expand within and outside their respective countries.
Globalization contributes to the development of the global economy in a number of ways. Especially for developing countries, globalization has a profound effect on the growth and sustenance of their economies. By creating opportunities for new and improved business venues, expanded markets for trade, export of varied commodities, a larger amount of private capital inflows, and improved access to developed technology globalization helps the developing economies to further their growth.
In this process the role played by the multinational corporations is commendable. The rapid growth and proliferation of multinational corporations have been partly responsible for the process of globalization which radically transformed the whole world. It was the end of the cold war in 1991 that triggered the attitude of all nations in the world to reduce the role of the state in the development of the economy and to remove the barriers to the transnational movement of goods, services, capital flows, innovations, and technology. The gradual reduction of the barriers has enabled multinational corporations to spread their wings in pursuit of new markets and low-cost locations for sourcing the necessary factors of production. Multinational corporations (will be denoted shortly as MNCs in this thesis) have adopted two distinct ways of spreading their business. They are;
- expanded trade and
- capital flows through foreign direct investments (FDI).
Each of these factors has been instrumental in bringing stable and lasting economic benefits to different economies more specifically for the developing economies.
With the falling of the barriers that segregated the global economy, there emerged fewer and larger competitive arenas and this has necessitated the corporate managers to look for all possible avenues for expanding the business and increasing the scope of activities of the corporations. The advancement in information and communication technology has also aided the swift progress of the process of globalization by enabling the MNCs to overcome the barriers of geographical separation.
The economic liberalization coupled with the revolution in the information and communication technology area further facilitated the development of complex, integrated marketing and production networks which spanned through major parts of the globe. The removal of geographical barriers has made those business houses which were secluded earlier indulge in more fierce competition with each other. The managerial techniques which were made available from industrially advanced nations have enabled the affiliates in the developing economies to develop processes that could cater to the local customers and suppliers by adopting the strategies evolved from the offices in home countries.
While the technological developments have enabled the corporations to attain increased efficiency in their operations, the same forces acted to encourage even the smaller firms to pose stiff competition to even larger MNCs in the fight for market share and the provision of new goods and services. The relationship between globalization and the expansion of MNCs can be regarded as one of mutual causality although it is a fact that both processes are inevitable.
The objective of this paper is to study the impact of globalization on the MNCs and the enhanced role of the MNCs in the development of emerging economies. The study will use the research method of content analysis and case study through which the research aims and objectives will be achieved.
Aims and Objectives
The broad aim of this research is to examine the impact of globalization on the MNCs and the role played by the MNCs in the process of globalization with special reference to the developing countries. To achieve this aim the following research objectives have been identified which will be accomplished by established research methods.
- To examine the evolution and process of economic globalization and factors that aided the process
- To study the impact of globalization on the MNCs specifically the ways in which globalization has helped the proliferation of MNCs worldwide
- To study the role played by the MNCs in the growth and development of developing economies and the barriers that prevented the proliferation of MNCs in these countries
- To study the recent occurrences in the sphere of globalization and the part o MNCs in such occurrences
The research through the use of recognized research methods attempts to find plausible answers for the following research questions:
- Have the MNCs been really instrumental to the development of the process of globalization?
- What is the role of MNCs in the economic development of the emerging nations and what are the issues being faced by the MNCs in the process of setting their feet in the developing nations?
- Are there measurable benefits arising to developing countries through the process of globalization and the presence of MNCs in these countries? What are the shortcomings or disadvantages that the developing countries have to bear to derive the benefits out of globalization and the presence of MNCs?
Rationale behind the Research
In the present day business environment, the role played by the MNCs is tremendous especially in the context of the economies of developing countries. MNCs have through the tool of foreign direct investments have helped the growth of the developing economies. Although there are several criticisms that have been raised against the operations of MNCs in developing nations one cannot refute the contribution of MNCs for the industrial advancement and the consequent development of the standards of living of the masses.
One fitting example in this respect is the enviable development in some of the Asian countries including China and India. The changes in the economic scenario have intrigued the interest on the topic. The continued debates on globalization and the role of MNCs on globalization also have set the aim of making deep research on the subject.
Structure of Presentation
For a comprehensive presentation of the report on the research, this paper is structured to have different chapters. The first chapter which introduces the topic of study also details the research aims and objectives along with the rationale behind the research. This chapter is followed by chapter 2 which contains a detailed review of the available literature on globalization and the role of MNCs on globalization with specific reference to the developing economies. While chapter 3 presents a descriptive report on the research methodologies adopted by the research, chapter 4 presents an analysis of the findings of the research including a case study on the related issues. Chapter 5 concludes the report with some concluding remarks summarizing the issues dealt with by the study and few recommendations for further research.
The expansion in the number of MNCs and the growth in their scope and sizes have woven the different parts of the global economy into one which was subjected to cultural, geographical, or national differences. Although the initial wave of globalization was found to be in existence even before World War I, the war acted as a deterrent for the progress of globalization which was made to stop abruptly.
The impact of the war was felt in the destruction of trade and commerce among world nations and the war acted as a destroyer of internal cooperation. Subsequently, there have been a number of researches and studies undertaken on the subject of globalization which has added an abundance of literature. The recent proliferation of MNCs has also caused the development of multifarious literature on the topic. This chapter presents a detailed review of the part of the available literature on the topic of study as a part of the presentation.
Globalization as a process has been receiving several criticisms from the nation-states as well as a civil society about the possible contribution of the globalization process to the development of the economies in developing countries. Irrespective of these criticisms, it becomes vitally important for the policymakers in the developing countries and emerging markets to take into account the effects of globalization on their economies in their decision-making process. The decision-making process involves finding answers for the questions like whether the developing countries should welcome the investments and trade by the foreign MNCs.
They should also decide on the type of industrial policies to be implemented for attaining the benefits of globalization, and the kind of regulatory and legislative measures which the nations should adopt both at national and international levels to facilitate the MNCs flourish without hampering the democracy, culture or the environment. The following discussion based on the available literature throws light on these and other aspects of the impact of globalization on the MNCs and the role of MNCs in the economic development of developing countries.
Definition of Globalization
Widespread liberalization of trade and capital markets, enhanced internationalization of corporate production, innovative production processes and distribution strategies, and ever-growing technological developments characterize the process of globalization. The combined forces of these factors have the effect of effectively reducing the barriers to the free flow of capital between nations and thus increase the traceability of goods and services in the global market. In the context of international relationships, globalization can be defined as the emergence of economic interdependence among countries.
These growing interdependencies are reflected through the increased flow of different factors of production among the world nations. At any specific country-level globalization can be regarded as the extent of cooperation between the economy of that country with those of other nations in the world. There are measures like growth in exports and imports as related to the GDP, movement from and to the country of foreign direct investments, and the movement of royalties payable and receivable by the country on account of technology transfers.
In the industry, context globalization refers to the degree of the competitive strength of the industry in relation to relative positions of different firms within the industry as well as its interdependencies on the industrial activities in the other nations. Cross-border trade as compared to the total global production and cross-border investments within the industry as a ratio of the total capital invested in the industry including the revenues earned by the industry is considered to be the key indicators of the level of globalization at the industry level.
At the level of the individual company, globalization includes the extent to which the firm can expand its assets and earning capacities across different nations and cross-border flow of capital, goods, and technical know-how across the international level. Thus economic globalization can be regarded as a process that attempts a total integration of economic activity in the intermediate factors of production, finished goods, and services across the global markets. The objective of such integration is to expand the geographical boundaries and increase the importance and contribution of cross-border value chains in the international economic movements of goods and services.
Factors aiding Globalization Process
It is true that increased globalization would result in the creation of both winners and losers. Therefore some managers look at globalization as a potential threat to the development of trade and commerce while others view globalization as a challenge creating more opportunities for growth. There are the following forces that can be considered responsible for accelerating the drive for globalization. They are;
- enlarged expectations of customers in terms of quality, price, and service often necessitated the identification of newer production processes and methods,
- advancement in the information and communication technology has enabled transnational and multinational corporations to run their businesses in a most sophisticated way and at reduced costs,
- deregulation is another factor that has recently been considered as an effective tool for enlarging the scope of economic globalization – several countries have undertaken a number of measures in this direction to enhance their share of international trade and commerce and
- regional forces like low-cost destinations have also attracted the multinational corporations to enlarge their areas of operation beyond geographical barriers to take cost advantages and to remain more competitive.
Regional trade blocks formed with political motivation also has speeded the process of economic globalization. (Ashish Nath, 2000)
Globalization and Democracy
It has been argued that globalization promotes democracy by promoting gender equality and the protection of human rights in the countries. According to Nader Asgary (2005) – as quoted by Francis Fukuyama – globalization is likely to lead to the most perfect form of democratic government which is accompanied by up-to-date technological innovations in the areas of communication and transportation. It is further argued that globalization also results in the development of a large number of middle-class professionals as well as working classes who form the backbone of democracy in any country. So it can reasonably be stated that ‘globalization undermines non-democratic states’ (Asgary 13).
The country South Korea can be quoted as a good example of the contribution of globalization to the democratic process. The rapid economic and social changes caused by globalization were largely responsible for the radical change from military authoritarianism to political democracy in this country during the mid-1970s.
However, there are strong contentions against this proposition arguing that globalization obstructs a fair democratic process. For instance, Dalpino (2001) argues that globalization can only support authoritarian regimes. According to Dalpino (2001), it may be easier to deal with a government that does not give weight to public opinion and which adopts political decisions more quickly. Michael Parenti puts forth the argument that the international free trade agreements like NAFTA, GATT, and FTAA resulting from globalization have elevated the position of giant transnational corporations above that of the sovereign powers of nation-states.
An example of the existence of repression authoritarian government due to global investments can be found in Burma where the government continued to survive only due to large global investments by PepsiCo and other multinationals. These self-centered corporations would never be interested in the welfare of the citizens of the country which is the basis of democracy. It has been proved that globalization and democratization are two extremes and are controversial to the values accepted by a majority of the countries in the world.
Globalization does not promote the values of democracy but the values of the Western world which is clearly a deviation from the democratic principles. Brendon O’ Connor (2003) believes that although protection of human rights is crucial including for Islamic countries since globalization is promoted by Christian or atheistic countries – countries in Western Europe and the United States – globalization would result in the promotion of excessive religious and moral liberty which can harm the Muslim traditions developed through centuries through unification and empowerment of women.
Globalization and Economic Changes
Globalization has its own impact to a large extent on the local economies. One of the chief advantages of globalization was advocated as the greater access to the consumers of cheaper and better quality products. With the advent of globalization the market players have to compete in an international market place which necessitates the improvement in the quality of their products to remain competitive enough. They must also take all the efforts to keep the prices also competitive to sustain their market share. Richard Falk considers that the globalization “has raised standards of living for several hundred million people in Asia, in the process rescuing many millions from poverty” (Falk 128)
For example globalization has led to the expansion of international markets for Chinese products which are cheaper. The products are also available in a number of other countries as a result of globalization. This has enhanced the access of low priced and quality goods to the consumers in various countries. For example the Chevy cars with all the expensive features and functions are manufactured in China at cheaper cost and are comparable to similar more expensive cars.
However according to Anthony Giddens there is no truth behind the prosperity of the consumers offered by globalization. He reiterates “the share of the poorest fifth of the world’s population in global income has dropped from 2.3% to 1.4% over the past 10 years. The proportion taken by the richest fifth, on the other hand, has risen from 70% to 85%. In Sub-Saharan Africa, 20 countries have lower incomes per head in real terms than they did two decades ago”. The main reason for such a state of affairs is that globalization tends to destroy the local industries. For example items like traditional leather footwear are largely replaced by cheaper imported rubber or plastic footwear.
Even branded items like NIKE or REBOOK add to this situation. The local industries do not have the financial or other resources to face the competition from the multinational companies. Since there are vast changes in the needs and preferences of the consumers after they accept the Western ways of living styles and standards, the local products are no longer preferred to the branded goods that are being imported.
Globalization and Environmental Conditions
It is one of the arguments that globalization contributes to the development environment related technologies. According to Sampson globalization provides ample opportunities for the local Non-governmental organizations to develop and provide technical assistance to governments more particularly in developing economies when formulating the environmental management policies of the respective governments. In fact there are quite a number of practices exist which go to prove that this approach has a right to exist.
According to Brendan Gillespie and Xavier Leflaive (2007) in the year 2005 the market for environmental related technology accounted for about 4 percent of the turnover in Germany in respect of all sectors of trade and industry. However this percentage was expected to grow to the level of 16 percent in the year 2030, thanks to the globalization process.
The other argument is that since the globalization involves integration of national economies into international economy through trade, foreign direct investments, short term capital flows, international movement of workers and people and flows of technology, despite the creation of new opportunities globalization has placed pressures on the global environment and natural resources, straining the capacity of the environment to sustain itself (Adil Najam et al).
A globalized economy is more likely to produce globalized externalities and enhanced global inequities. Moreover since globalization requires rapid industrialization there is no priority for environmental factors. There are reports of sufferings by the humanity in certain parts of the world due to different kinds of pollution and shortage of clean air. The example in this connection is the criticism against the oil refining activity of the multinational Shell in some African countries (Friends of the Earth).
Multinational Corporations – An Overview
A multinational corporation can be defined as a business entity that involves itself in the production of goods and services on an international basis. However such firms base their managerial decision making bases on regional or global sources of factors of production. (Hadari, 1973)
Global Corporation, multinational enterprise and transnational corporation are some of the other terms that describe the multinational corporations. The different terms describe the conceptual differences in the way of doing their operations. The terms Global Corporation and Transnational Corporation describe a firm that has “shed (its) home-nation identity and operates as (an) essentially stateless entity on a global scale.” (Graham Edward, 1996)
There are a number of reasons attributed for the development of multinational corporations. The foremost reason being the economies of scale. Even though technological developments in the information and communication technology sectors may reduce the impact of size in some of the industrial sectors, many of the industrialized activities like automobile production can be undertaken efficiently only as large scale operations. The second reason for the proliferation of the MNCs is the comparative advantage.
Especially the manufacture of complex products like personal computers or automobiles can be produced more efficiently with the different factors of production arranged from various countries. This is a distinct advantage that can be reaped only by MNCs. Consumer tastes is another reason for the development of MNCs. It is often the case that the customers of different nations have similar tastes with respect to several consumer products. For example if the consumers in the United States want to buy and use German cars, it will become interesting for BMW brand to establish a dealership or operate a plant in the US.
The next reason for the MNCs to thrive is the nature of such corporations with the ultimate objective of making more profits. A constant pressure is exerted on the firms always to maximize its revenue and earnings to satisfy the stockholders who expect the corporation to declare more dividends through enhanced earnings and the workers who expect the corporations to pay higher wages. The firm would be able to maximize its revenue through enhanced productivity and reduced costs. This is easily achieved by the MNCs by expanding to those locations where they find these relative advantages. Similarly when a market for a specific product becomes saturated it becomes obligatory for the corporations to look for alternative markets in order to expand its revenue base.
One of the most powerful institutions in the world is the MNCs. This is evident from the fact that the MNCs control almost 25 percent of the world output. It is observed that almost 51 out of 100 world economies are controlled by the corporations. It is also observed that the total value of foreign sales of MNCs is in excess of the total global exports of goods and services. The quantum of intra-firm trade contracted by MNCs alone account for 33 percent of world trade. There were 63,000 corporations which could fit into the definition of MNCs involved in international trade with more than 690,000 affiliates from different nations. (UNCTAD 2000).
The reason for the rapid growth of MNCs can be traced to the economic liberalization measures introduced by different developed and developing nations. Large and diverse family of MNCs is being controlled by a few elite families. For instance 100 largest non-financial MNCs controlled $ 1.9 trillion of foreign assets accounting for global sales of $ 2.1 trillion with the 6.5 million and odd workers employed by them as of 1999. (UNCTAD 2000)
MNCs are regarded as the main source of foreign direct investment (FDI) and the flow of the FDI registered a phenomenal growth in the mid of 1980’s. The important characteristics of FDI are the long-term nature of investments with the associated transfer of technologies and managerial skills. These attributes have made the FDI a subject of continued debates and discussions. In the recent past, FDI has been regarded as one of the major determinant of economic growth especially of developing nations. Thus FDI through the MNCs can be seen as one of the driving forces of globalization.
Globalization and Multinational Corporations
In the early part of 1990s the developing economies were eager to receive more foreign direct investments, transfer of technological and managerial skills. At this point of time, the developing countries had also undertaken a number of economic liberalization measures which accelerated the proliferation of the multinational corporations in these countries. This has made these large corporations to become multinationals in their own strength and right. During this period the MNCs have made an aggressive inroad into the emerging markets of Latin America and Asia. With the dissolution of Soviet Union this phase extended to former Soviet Union countries and Eastern Europe block countries.
By undertaking to invest large funds as direct investments in these countries, MNCs being the major drivers of international trade and commerce have drafted the developing and transition nations into the system of world trade and commerce. As a result of this there has developed a major role for the developing countries in the total globalization process.
MNCs and Global Competition
With the reduction in the trade barriers, the corporations which were once inhibited by the national borders came into fierce competition with each other. In order to meet the challenge of global competition, the corporations undertook more merger and acquisition schemes to gain competitive strength through the synergies. With the increase level of global competition the national rules for competition were bound to be revamped and the global competition has become one of the important determinants of the economic policies of the developing nations.
One of the major criticisms leveled against MNCs is that they hinder the competition. Some are of the view that corporate globalization will naturally lead to oligopoly or monopoly. Economists opine that due to concentration of market share and power when acquired with the intention of maximizing the profits would lead to distortion in the allocation of resources, increase in prices, reduction in output and productivity, and in consequence reduces the aggregate welfare of public. Therefore it becomes important for the governments as well as the consumers to ensure that sufficient control is exercised on the MNCs so that the competition among the firms is uniform and healthy. This logic has resulted in the formulation of anti-trust legislations.
The proliferation of MNCs has resulted in the loss of consumer welfare. Because of the stiff competition among the MNCs studies have indicated that there is a decline in the profitability of the MNCs over the period (Gestrin et al 1998) It is stated that if the MNCs are not facing such strong competition they would making much higher returns. As per other researches, the increase in economic efficiency of any country has a direct relation with the proliferation of MNCs, although the MNCs by themselves do not enhance their profitability. (Rugman Alan, 1996)
MNCs and Developing Nations
Globalization has been found to enable the MNCs to generate more opportunities as well as challenges for the developing countries. Economic reforms undertaken by the developing nations especially by countries in Latin America and Eastern Europe have helped the increased presence of MNCs in these countries. The expansion of MNCs has taken place by both green field investments and acquisition of domestic assets in the developing countries both in the public and private sectors by the MNCs. With the adoption of capitalism by abandoning communism in the Eastern Block countries the chances for MNCs to find more opportunities in these countries had increased.
The place of MNCs in the development of any economy was seen with skepticism during the period after the Second World War. During this period most of the developing countries applied restrictions on trade and commerce in the fear of foreign influence on the domestic trade opportunities and they also feared the potential for increased market concentration. However there was a marked change in the attitude of these countries from the mid 1980s, with the managers recognizing the major advantages of attracting investments from foreign corporations. The benefits identified included FDI, transfer of sophisticated and improved technology which otherwise would not be available domestically and in most of developing nations the benefit of enhanced export earnings. (UNCTAD, 1999)
MNCs also help the developing economies to increase their share in the global economy. The MNCs act as the catalysts for integration of different economies of world. The ‘global scanning capacity; in particular enables the MNCs to plan and execute their operations in different countries utilizing the comparative advantage in terms of different factors of production of the respective countries.
The corporate advantage being exploited by the MNCs for their proliferation and growth often helps the developing economies to utilize their comparative advantage. (Meier Gerald 1995) With the proliferation of MNCs there is a complete overlapping in the interests of MNCs and the developing nations which results in the creation of definite advantages for both the economies and MNCs. The contribution towards internationalization of trade and commerce results in the integration of national economies into larger regional economies.
This also leads to the creation of a total global economy which enables the developing nations to take clear advantage of economies of scale. More specifically in the case of developing countries MNCs often help in the promotion of exports of more complex and technology embedded products manufactured by small and medium sized undertakings functioning in the developing economies.
For example, in the case of countries like Korea and Taiwan, on an average 67 percent of consumer electronic products being manufactured in these countries cater to the needs of large MNCs like GE, IBM and Toshiba on an “original equipment manufacture” basis. (Burki et al 2000). Further to this the increased presence of MNCs and their foreign affiliates in the developing countries result in the increased competition and enhanced productivity levels of all the manufacturers of goods and services. With the help of transfer of sophisticated technology transferred to them and due to increased competition the domestic firms also are able to increase their productivity and profitability. (Graham Edward,1996)
With the advancement in technology and sophistication of communication channels a majority of the MNCs are able to have a better control over their affiliates in foreign countries than it was in the past. MNCs have started implementing what is known as ‘integrated international production systems’ through which they are able to control the productivity and quality in all manufacturing locations. Through this system it is possible to control the movement in production even on an hourly basis.
This system is being practiced in respect of more than 33 percent of the world trade presently. (Burki et al, 2000; Yeats, 1997) Integrated international production implies “decoupling of production of a good into its subcomponent parts and processes, which in turn are distributed across countries on the basis of comparative advantage.”(Burki et al 2000) In this way the corporation is able to split the total production process into various components like finance and accounting, research and development, Human Resources, parts and components, actual production process, marketing and distribution or any division of these functions.
Such sub-divided functions are being carried out by affiliates in different locations which are considered best appropriate for the activity concerned. In effect by adopting this process MNCs are able to create an intra-firm division of labor that extends on an international level. This process also facilitates the growth of integration of international production networks. (UNCTAD 1998)
This can be illustrated by the split in the activities of an automobile manufacturer like Toyota. In bringing out a car of Toyota brand, design work might be carried out in Japan, car upholstery could be produced in Argentina, engine might be assembled in Mexico, car could get assembled in a plant in Brazil and finally shipped to a dealer point in Canada. This type of specialization is known as integrated international production through which more numbers of developing economies contribute to the making of the final product depending on the comparative advantage the individual countries possess.
This is an essential component of globalization, since it has the effect of integrating the efforts of several economies towards manufacture of specific goods. The important point is that the integrated international production results in increased efficiency through the exploitation of comparative advantages of the developing and developed economies taking part in the manufacture.
Dependence of MNCs on Developing Nations
Since all the MNCS are driven by the sole objective o maximizing their profitability, they become increasingly dependent on the developing countries for low-cost labor. They also look for new markets in the developing countries for the goods and services being produced by them. In turn the developing countries depend on the MNCs for additional inflow of capital and transfer of technology which are otherwise not available in the developing countries.
Thus the world is moving into a phase of increased interdependency between the MNCs and the developing countries. Such interdependency will lead to greater advantages for both the MNCs and the economies of the developing nations. (Muller, 1980) However in this process there is a greater challenge to be undertaken by the MNCs in structuring their economies in such a way that they offer conducive atmosphere to the MNCs for operating in their respective countries.
The economies must be equipped to provide the necessary human capital and other fundamental infrastructural facilities so that there will be a healthy growth of the MNCs. This can be achieved by the developing nations by adopting proper macroeconomic policies and creating appropriate legal and institutional frameworks to boost the confidence of the MNCs to continue to stay in the developing countries.
MNCs and Fears of Developing Nations
Despite having potential tangible advantages of inviting MNCs to invest more in the developing countries, the countries had several apprehensions especially during the period prior to 1990s. The countries were very reluctant to accept these corporations and their roles in the development of their respective economies. This has been the result of a number of concerns from the perspective of the developing countries due to fear of potential exploitation by the MNCs of the resources of the nations.
This fear in part may be considered to be more politic due to the apprehension that the control of economic assets by foreign corporations was considered to be an undesirable state of affairs. The potential for increased environmental deterioration and the erosion of workers’ rights and freedom are the other causes for concern by the developing countries. The countries apprehended that these will be manipulated by the MNCs to their advantage detrimental to the interests of the countries.
In addition to these fears, there was the potential danger of making the domestic firms uncompetitive. This fear of exploitation is macroeconomic in nature and in that the countries felt that increased and continued presence of MNCs will result in existing and prospective domestic market uncompetitive which might hamper the growth of the economy of the nation concerned. This, the countries apprehended would weaken the efforts of the local entrepreneurs. Another cause of fear for the developing countries is that the MNCs usually are known to pressurize the host nations to extend extraordinary tax advantages which the countries feared would lead to leakage of tax revenues to the host nation.
They also felt that these corporations would no doubt repatriate all their profits to their respective countries of origin without any additional infusion of capital and technology. Therefore there would really be no economic advantage to the developing countries. Traditionally the developing nations were in favor of Greenfield FDI rather than the foreign investments through mergers and acquisitions. They were of the view in the case of mergers and acquisitions there would be no development of new infrastructural or production facilities as only the existing facilities will be acquired by the MNCs. However this view cannot be accepted as having any merit.
Through mergers and acquisitions there can be a greater integration of the business enterprises of the developing countries with the global economic system. Like green field investments mergers and acquisitions also being newer technologies, managerial expertise and additional capital. Through mergers and acquisitions the salvage of the existing production facilities can be guaranteed which otherwise would not survive the wave of liberalization or other competitive pressures from the global firms. The one distinct advantage of mergers and acquisitions is that it improves the productivity and efficiency of the domestic firms and at the same time enhances the international competitiveness.
However in the periods after 1990s there has been tremendous change in the attitudes and outlooks of different developing nations. For example, policymakers from East Asia and Latin America could gain a great deal of knowledge from the experience of each other in terms of the advantages the countries can derive from the operations of the MNCs. It has been observed that each of the regions had altogether different experiences with the MNCs although both of the countries started attracting large capital inflows in the form of FDI from the MNCs.
This chapter presented the different perspectives of globalization and the role of MNCs in shaping the economies of developing nations through a detailed review of available literature. This chapter also reviewed the fears that the developing countries had on the potential involvement of MNCs in the developing economies. Next chapter on the research methodologies will present a detailed discussion on the research methods that are being adopted by this study for accomplishing the research objectives.
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