Management Term Paper

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Your final project report should include an executive summary, a table of contents, an
introduction followed by the subtitles aligned with your discussions and conclusive thoughts.
The report should be professionally referenced using the APA requirements(or Harvard
Referencing System). A typical report will contain at least 10-15 pages (double spaced)
not including the cover page, table of contents, list of references or appendixes.

Answer

Title: The Impact of Multinational Corporations in the Developing Countries

Executive summary

This paper is based on the thesis that multinational corporations (MNCs) have a positive impact on developing countries. This positive impact is demonstrated in five ways: greater economic stability, access to foreign direct investment (FDI), human welfare, rise in income levels, and instillation of progressive corporate values. The innovative measures that MNCs adopt to utilize capital, technology, and labor efficiently gives them leverage to yield huge profits, dominate industries and exert impact on the lives of billions of people around the world.

MNCs contribute to economic stability in the developing countries by channeling massive investments towards host countries in the process of jumpstarting their production activities. These investments play a critical role in spurring economic growth. Similarly, the resulting FDI inflows create opportunities for developing countries to benefit from technology transfer, positive externalities, and portfolio investment. Moreover, MNCs create a huge potential for improvement in human welfare because of the emergence of new employment opportunities for local people and tax revenue for the government. As income levels rise, consumers’ purchasing power increases, thereby stimulating more production activities. Finally, MNCs have greatly contributed to the adoption of progressive corporate values. They have done this by helping to destroy local monopolies, reorient traditional value systems, and change social attitudes towards business operations in the developing world.

Contents

Executive summary. 2

Introduction. 4

Greater Economic Stability. 5

Access to foreign direct investment (FDI) 7

Improved Human welfare. 8

Rise in Income Levels. 10

Instillation of Progressive Corporate Values. 11

Conclusion. 13

References. 15

Introduction

            Multinational corporations (MNCs) are businesses that play a crucial role in international business through direct investments in multiple countries. MNCs constitute some of the biggest economic institutions in the world today. They adopt innovative measures in efforts to utilize capital, technology, and core competencies with a view to offer a wide range of products that affect the lives of billions of people globally. The huge size of MNCs put them in a position where they are able to dominate the industries in which they operate. This dominant position has triggered a heated debate on whether MNCs are beneficial to developing countries.

            Throughout the 20th century, many developing countries have benefited immensely from the business activities of MNCs (Wacker, 2011). These corporations have been playing an important role in spurring economic growth as well as instilling progressive corporate values in the developing world. Despite these benefits, the debate continues to attract the attention of both proponents and critics of MNCs’ operations in developing countries. Critics of MNCs argue that their ultimate objective is to exploit natural resources and cheap labor from the developing countries. In contrast, supporters of these corporations view them as important agents of economic growth and development. This paper is based on the thesis that MNCs are beneficial to developing countries in five key areas: economic stability, access to foreign direct investment (FDI), human welfare, rise in income levels, and instillation of progressive corporate values.

Greater Economic Stability

            Today, MNCs are aggressively searching for resources to boost production as well as larger markets for their products, and developing countries are poised to provide both. Many developing countries are endowed with natural resources but they lack the capacity to exploit them for economic development. Incidentally, many MNCs are in a position to exploit these resources for production activities as well as service delivery.  The resulting economic activities bring about not just profitability for the prospecting corporations but also economic stability for the developing countries.

            Many MNCs turn to developing countries because of the presence of cheaper resources. Since their primary objective is to maximize profits, these MNCs are willing to direct massive resources towards the development of the economic capacity of countries where they hope to benefit from access to resources. Such efforts trigger a long-term process of economic growth that enables the host countries to develop their economic capacities to also exploit their own natural resources.

            During the last three decades, the level of investment in developing countries by MNCs has increased dramatically. This development may partly be attributed to globalization. As more MNCs invest in these countries, they create more opportunities for the developing world to integrate into the global village. This interconnectedness has greatly enhanced the economic competitiveness of developing countries. Consequently, many MNCs that have traditionally shunned the developing world because of economic instability are willing to investment in the economic stabilization process with a view to benefit from cheap resources and ready market for their products.

            Many developing countries have continued to struggle with unemployment and debt. However, as more of these countries continue to open up to the global economy through the investment activities of MNCs, these two problems are likely to be eased off. The foreign direct investment that continues to find its way into these countries will greatly contribute to economic prosperity. For this reason, MNCs are increasingly being viewed as an embodiment of prosperity and modernity. They are increasingly harnessing the power of technology, capital, and skills to generate wealth that ultimately trickles down to a majority of the population in both the developing and developed world.

To benefit from economic stability, many governments in developing countries are keen to attract as many MNCs as possible by eliminating some of the existing trade restrictions. However, not everyone supports this move; critics of the removal of trade restrictions argue that if left unregulated, MNCs can engage in exploitative behavior by violating existing environmental and labor standards (Javorcik, 2004). These concerns arise from the notion that most developing countries are structurally vulnerable to violations of labor and intellectual property rights by powerful conglomerates who may not necessarily be concerned about these countries’ interests and values. When restrictions are reduced, MNCs acquire the freedom to roam the world in the search for countries and regions where they can obtain the highest return on investment. Fortunately, the benefits that come with such unrestricted flow of foreign direct investment outweigh the risk of unfair trade practices. After all, it is better for developing countries to seek ways of addressing unfair trade practices in an environment of global economic integration than to lock itself out of the booming global economy using trade restrictions.

Access to Foreign Direct Investment (FDI)

            MNCs provide the most efficient way for developing countries to gain access to foreign direct investment. FDI is a crucial requirement for any underdeveloped society that aspires to attain the status of a developed country. Multinational corporations must direct FDI into these countries if they hope to be efficient in their business activities. A good example of FDI is when a company based in one country constructs a factory in a host country. Such an investment can benefit the host country by creating employment for local communities.

            The flow of FDI into developing countries through MNCs is a beneficial development given that these corporations play a crucial role in mediating most trade flows across the world. These economic interactions occur not just among MNCs from developed economies but also between MNCs and smaller business entities from different parts of the world. Therefore, an increase in FDI inflows into the developing world is an indication that more and more poor countries are being inducted into the global economy. This is an excellent way of preparing them for take-off on the path of rapid economic development and prosperity. It shows that more business entities operating from the developed world are likely to gain access to more opportunities arising from the mediating role of MNCs.

            FDI decisions are normally influenced heavily by exchange rates in target countries. To attract FDI, many developed countries are being compelled to regulate their exchange rate movements in such a way that the stability of financial markets is guaranteed. Although empirical evidence points to an insignificant effect of exchange rates on FDI inflows, the ability by a country to manage its financial markets well greatly contributes to overall investor confidence (Ramamurti, 2004). Moreover, exchange rate depreciations in host countries tend to receive popular press, thereby leading to booms in inward FDI.

            FDI also creates an environment of transferability of factors of production in a developing country. In most cases, it entails the acquisition of firm-specific assets. These assets can easily be transferred to different locations as demanded by a firm’s operations. Consequently, assets acquired using the currency of the host country can be used to generate income in any location where the firm operates without necessarily remaining tied to the currency of the home country. This creates a major advantage for developing countries, which can benefit from increased FDI inflows particularly in the form of technological assets that are designed for use in the host country.

Improved Human Welfare

            As more MNCs venture into the developing countries, it is likely that the welfare of citizens in these countries will greatly improve. To begin with, these corporations are an important source of employment for host countries. By helping to address of unemployment, they greatly contribute to the growth of the national economy. In many cases, the MNCs pay higher wages compared to those of existing local companies. Unlike most local companies, MNCs are used to paying high salaries in advanced economies. The wages that these multinational corporations consider low may in fact be high by the living standards of the developing world. This means that in additional to increasing their profits through “cheap labor”, the MNCs will also be helping to raise the living standards and quality of life of local populations.

            As investment in local labor by MNCs increases, so does the purchasing power of local consumers. A rise in income levels leads to an increase in the level of consumption. Moreover, rising income levels tend to coincide with a corresponding rise in tax base. This means that governments collect more revenue for use in meeting pressing domestic needs such as education, healthcare, and infrastructure. When such a trend is maintained, citizens benefit from better healthcare, quality education, better living standards, and improved opportunities.

            According to Richards, Gelleny & Sacko (2001), MNC operations can also impact positively on respect for human rights by governments in developing countries. However, this issue remains highly controversial, drawing both criticism and support in equal measure. For this positive impact to be realized, diffusion of FDI should be undertaken in the right way. Richards, Gelleny & Sacko (2001) argue that the right way to diffuse FDI is by using the Foreign Economic Penetration (FEP) approach. In FEP, focus is on the holistic aspects of penetration of foreign capital into a developing country. This means that developing countries should not conceive FDI inflows in isolation but in the context of larger, well-coordinated penetration of foreign capital.

            A holistic approach to the assessment of FDI inflows gives developing countries an opportunity to examine the different ways in which their economies have opened up to the world market. According to Navaretti & Venables (2004), the main dimensions that these countries should focus on include portfolio investment, long-term debt, and foreign aid. In most cases, the push for these dimensions in efforts by these countries to open up their economies to the world market tends to be greatly influenced by existing discussions on the countries’ abilities to safeguard their citizens’ fundamental human rights. For example, the inability by governments in developing countries to provide education violates the children’s right to education. To safeguard this right, these governments are often compelled to seek economic partnerships and foreign assistance arrangements with MNCs and foreign donors respectively. These two frontiers of economic engagement are interrelated because many MNCs also happen to originate from donor countries. These donor countries tend to bestow a lot of trust upon these home-country MNCs by awarding them contracts to implement most foreign assistance projects.

            The economic growth that results from FDI inflows and foreign aid gives domestic political elites more policy options that relate directly to the protection of human rights (Ramamurti, 2001). This increases the likelihood that more socioeconomic effects will trickle down to a larger section of the population. The resulting economic empowerment significantly contributes to greater awareness about human rights and a corresponding increase in the level of political participation by the citizens in the pursuit of these rights.

Rise in Income Levels

            The operations of MNCs can lead to a significant rise in income levels in developing countries. Improvements in incomes lead to the growth of a stronger middle class. This is an important development because it leads to modernization as well as success in challenging the status quo. As income levels increase, more people are able to maintain a resilient attitude in their pursuit of financial security, education, and increased participation in a country’s political process.

            Since the 1980s, developing countries such as Brazil and Indonesia have made remarkable economic progress because of rising income levels attributed to participation of MNCs in their economies. In these countries, many citizens have managed to save some of their earnings with a view to start their own businesses. The skills that these citizens acquire through exposure to the operations of the MNCs have enabled these local businesspeople to adopt efficient business practices that are relevant in today’s globalized world.  

            By focusing on the contribution of MNCs to local income levels, governments in developing countries are able to reorient their views regarding their cooperation with the developed world. When MNCs started venturing into the developing world, they were at first viewed as an embodiment of the uneven relationship that was characterized by huge inflows of official development assistance and foreign aid. Many poor countries lauded the efforts of MNCs primarily because they increased opportunities for foreign aid. However, things have changed dramatically since the 1980s. With trade liberalization, many developing countries have come to appreciate the importance of focusing on more fundamental issues such as the contributions of MNCs to a rise in income levels at the local level. This paradigm shift has translated into a transformation of economic worldview of developing countries. As part of this transformation, many developing countries have realized that the high-income opportunities provided MNCs are essential for the establishment of a strong middle class and a stable economy.

Instillation of Progressive Corporate Values

            A major reason why many developing countries continue to wallow in underdevelopment is that they are yet to embrace progressive corporate values. Corrupt governments in many of these countries encourage corruption, mediocrity, wastage, and poor management of public resources, leading to huge wage bills, massive long-term debts, and economic instability. Some of practices are not deliberate on the part of government officials but rather arise from lack of exposure to efficient, progressive corporate values. Many of the successful MNCs that venture into these countries are those that have managed to establish a culture of efficiency, proper management, and efficient use of limited resources. Their entry into the developing countries undoubtedly leads to exposure to a new way of doing business. Most of the governments that embrace these projects benefit immensely from a reorientation of corporate values at the national level.

Incidentally, such embracement of new corporate values happens to be a part of the greater scheme of integration into the global economy. In this regard, MNCs are viewed as agents of change abroad. Their ability to mobilize resources and to utilize them efficiently enables them to destroy local monopolies, reorient traditional value systems, and change social attitudes towards business operations. Such change can be beneficial to the developing countries if it influences governments to dismantle traditional business policies that local interest groups may have entrenched with a view to derive benefits at the expense of disadvantaged groups.

With the entry of MNCs into developing countries, the need for fundamental transformation becomes more evident. Governments gain numerous insights into ways of embracing a new rule of law in order to attract even more foreign direct investment. Similarly, policymakers at the national promptly realize that they stand to benefit immensely through the establishment of a policy environment that encourages competitiveness and non-discrimination. Such a policy environment not only stimulates FDI inflows but also encourages greater participation by local investors in the global market.

Once the values and institutions of a country are improved, governments acquire the ability to address important issues affecting citizens (Ramamurti, 2004). In return, citizens acquire a newfound ambition to develop a strong work ethic with a view to achieve higher levels of economic development similar to those of the developed world (Ramamurti, 2004). Such an attitude change makes developing countries more receptive to socio-economic change simply because of their participation on the global market.

            One way in which many developing countries have adapted to change in the global market is by embracing not just FDI but also portfolio investment. Portfolio investment entails the purchase of bonds and stocks of foreign firms. Developing countries stand to benefit a lot from participation in portfolio investment, which is an integral component of the ongoing process of trade liberalization. It creates an opportunity for borrowers in the developing world to gain access to surplus capital in the developed world. Today, many developing countries have succeeded in funding many state ventures by simply tapping into international sources of finance in the form of portfolio investment. Moreover, this approach is also beneficial because unlike debt financing, it does not involve fixed loan repayments. This explains why more developing countries are increasingly embracing the participation of MNCs and the equity capital opportunities that they bring into their national economies.

Conclusion

            This discussion has demonstrated that developing countries stand to benefit a lot from the activities of multinational corporations. These corporations can contribute to economic stability by boosting production, utilizing available resources efficiently, and creating employment. MNCs also lead to greater access to foreign direct investment. FDI inflows are beneficial to developing countries because they lead to a transfer of factors of production for use in economic activities in host countries. Consequently, these host countries derive benefits in the form of technology transfer and positive externalities.

            Multinational corporations have also contributed immensely to the improvement of human welfare in developing countries. They have created employment to local people, thereby increasing their purchasing power. As consumption levels increase, governments have been able to collect more revenue the form of taxes, which they use to build public facilities such as schools and hospitals. Finally, the efficient production, management, and resource utilization processes of MNCs provide a basis for the adoption of progressive corporate values in developing countries. 

References

Javorcik, B. (2004). Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers through Backward Linkages. American Economic Review, 94(3), 605-627.

Navaretti, G. & Venables, A. (2004). Multinational Firms in the World Economy, New York, NY: Blackwell Publishing.

Ramamurti, R. (2001). The Obsolescing ‘Bargaining Model’? MNC-Host Developing Country Relations Revisited. Journal of International Business Studies, 32(1), 23-39.

Ramamurti, R. (2004). Developing countries and MNEs: Extending and enriching the research agenda. Journal of International Business Studies, 35, 277-283.

Richards, D., Gelleny, R. & Sacko, D. (2001). Money with a Mean Streak? Foreign Economic Penetration and Government Respect for Human Rights in Developing Countries. International Studies Quarterly, 45(2), 219–239.

Wacker, K. (2011). The Impact of Foreign Direct Investment on Developing Countries’ Terms of Trade. United Nations University, Working Paper No. 2011/06, February 2011.

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