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MNCs in Asia Have Been Engaged With SMEs of the Host Countries Essay

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Updated: Dec 7th, 2021

Introduction

For a while, expectations on the role of Multi-National Corporations (MNCs) in Asia have been changing drastically as the corporations aim at improving their host countries’ economies. The main questions that arise regarding the increase in the Asian MNCs in other countries’ economies are:

  1. The corporations have an institutional obligation to the Asian countries in which they serve, but to what extent?
  2. With this institutional obligation, does it infer that the corporations ought to hold extra or higher standards than what is required of them by Asian law?

Since the 1990s when there was public outcry over the wages paid by Nike multinational to its workers, the issue of the corporations’ social responsibility and its impact on the small and medium-sized micro-enterprises has become of great concern to corporate executives. Expectations are now changing as the corporations take a different dimension towards the business enterprises (Hanna 2004).

According to Hanna (2004), it is clear that most countries depend on their small and medium enterprises for the growth of their economy and despite the great contribution of these enterprises towards the economy; there is still lack of proper support by the government. However, the SME enterprises have continued to thrive even without the maximum support from the government and the private enterprises have taken control to advance the SMEs and invest more in the economy. It is through this that the multinational corporations have come in with a new perspective of helping the private sector flourish.

Strategies of Multinational Corporations in Asia

The MNCs use the foreign direct investment strategies towards financing the small and medium-sized enterprises. With the investment in the SMEs the multinational corporations enhance globalization of the Asian countries’ enterprises. There are three measures of globalization of the SMEs which enhance the aspects of international trade and the foreign direct investment through the MNCs. These are the total exports of the Asian countries, the exports by the SMEs and the assets that have been invested by the MNCs in the small and medium enterprises. These measures help the MNCs to extend their operations in the Asian economy and in turn promote the small and medium enterprises in the global markets (Smith 1992).

According to Hanna (2004), the MNCs work on the effort towards making the small and medium enterprises a global market. The assets of the MNCs serve as a proxy for the foreign direct investment and this creates credibility for the small and medium enterprises towards the global market. The foreign direct investment of MNCs is actively being invested in the small and medium-sized enterprises. It has been noted that as much as half of these investments by the Asian MNCs are taken by the SMEs and this has an important effect on the networking of the MNCs towards different countries.

The Asian MNCs which have established networks in Asia by involving the SMEs tend to set up networks in other parts of the world by involving the same enterprises as in Asia. This, according to Hanna (2004) becomes one effective strategy of promoting the corporations in other parts of the world and it is also through this networking that globalization is enhanced. The investment goals of the foreign direct investment of the Asian MNCs towards other countries depend on their establishment. The goals and motives of the FDI differ in respect to the location of the affiliate corporations in the host countries.

For instance, where the corporations intend to achieve low production costs and raise their exports, they would establish affiliates in Japan, where technology is advanced and there is availability of machine and human labor. On the other hand, where their motive is to obtain more resources in terms of raw materials at low costs, they would establish affiliates in the United Kingdom where there is easier availability of these materials at more improved technology. If their desire was to expand sales to the third-world countries, they would establish affiliate MNCs in Latin America since the economy of Latin America is only slightly higher than that of the third-world countries (Haak 2004).

Since the major goal of the Asian MNCs was to expand exports, there is increased establishment of affiliates in Japan and the local sales are increasing. Haak (2004) notes that the small and medium enterprises in Japan are expanding their sales and the demand for products in the country is increasing due to the rise in economic growth in most Asian countries.

Ways in which MNCs engage the SMEs of their host countries in their operation

Multinational corporations have been playing a major role towards improving the activities of the small and medium business enterprises in both Asia and the host countries of affiliate MNCs. The corporations do not only work for the SMEs but also towards developing the large business enterprises. However, since the Asian economy is largely for the private sector of the small and medium enterprises, the corporations work towards financing these enterprises and they operate the same way as in other countries in which they base their corporations (Smith 1992).

Smith (1992) argues that one of the ways of improving a country’s economy especially the African countries is by developing the private sector. The private sector comprises mostly of the small and medium enterprises and the MNCs come in to help the enterprises unlock their potential so that they may contribute towards the country’s economic growth. One limitation of the MNCs, however, is that they tend to emphasize more on the on the large countries than on the small enterprises. There has been needing to create corporate social responsibility towards the multinational corporations in order to make them derive favorable investment conditions that will benefit the majority of small and medium enterprises other than solely focusing on the large enterprises. With the realization that creating a good investment environment for the SMEs will also improve the large enterprises, the MNCs will be developing the enterprises a great deal.

This realization has made Asian countries concentrate more on developing their home-grown corporate enterprises and through this foreign direct investment has gone up. With the high levels of foreign investment, the Asian MNCs have been able to implement sufficient strategies directed towards developing the manufacturing and industrial sectors of the countries in which they are based. The host countries mainly the developing countries are able to create more SMEs and ensure they are directed towards improving the economic development of the country and hence reducing poverty levels (Haak 2004).

According to Zachiki (2004) since investments in host countries of the Asian MNCs are mainly enhanced by the FDI, it is clear that the corporations are greatly enhancing development and the government should support these corporations by developing supporting industries, which are the small and medium-sized enterprises. Therefore, apart from developing effective policies that will guide the corporations in the host countries, there is also need to ensure that policies supporting the small and medium enterprises are also put in place.

Challenges faced by the Asian MNCs in their operation

The multinational corporations for Asia have been able to develop production and distribution networks for industrial goods through foreign direct investment in the small and medium-sized enterprises. However, their operations still face a number of challenges which they have been trying to overcome in order to keep enhancing their profitability and the growth of the SMEs. Haak (2004) has identified the following challenges faced by the Asian MNCs:

  1. There has been increased competition from MNCs of other countries as well as the local companies of the host countries. There has arisen the need to improve the MNCs in order to overcome this high competition.
  2. There has also been the technological challenge towards improving the small and medium sized enterprises of the different companies. By establishing MNCs in other countries other than Asia, there has been the need to import technology since most of the host countries lacked the improved technology. With the more advanced countries, the Asian MNCs have had to work towards improving their own technologies in order to appropriately serve the SMEs in these advanced countries.
  3. The Asian MNCs have also had to make use of foreign workers both in the parent companies and the affiliate companies in other parts of the world. This is necessary in order to improve the efficiency. However, it is clear that the corporations have not effectively been able to recruit qualified workers.
  4. The multinational corporations also experience a major challenge in the parent countries, which arises from the shortage of workers and increased level of wages. The Asian MNCs aim at maintaining effective operations like research and development but the unavailability of qualified personnel hinders this and in turn prevents advancement in their host countries.
  5. There is also the challenge of trying to convince the government of the host countries of their intentions. Most countries feel that the MNCs are out to make profits and reimburse it back to their home countries. They feel that the SMEs may only benefit from the corporations for a temporary period after which the corporations will withdraw. The MNCs are therefore faced with the challenge of properly creating awareness to the other economies on the need for globalization.

Smith (2001) notes that the Asian MNCs have been working towards creating global change and despite the challenges that they face, they are able to be one of the most networked multinational corporations in the world.

Importance of the Asian MNCs towards the small and medium-sized enterprises

Hanna (2004) argues that the Asian multinational corporations have been a potential source of capital for the small and medium-sized enterprises. The capital obtained from these corporations has been used as a form of bridging with other enterprises in different lines of production. They enhance the creation of new ideas and opportunities for the developing SMEs through bridging with other enterprises.

According to Hanna (2004), the Asian MNCs have also facilitated internationalization among the SMEs through the provision of the social capital. Internationalization promotes sufficient collaboration between the small and medium enterprises and the multinational corporations. Through the formation of social capital, knowledge outcomes regarding the importance of the MNCs are brought out and this in turn leads to internationalization of the enterprises. SME internationalization is important because it creates the need to recognize all the under-utilized sources of capital and develop appropriate measures towards enhancing their utilization.

Since foreign direct investment is directly related to external trade, it implies that the economic integration between Asian countries and the host countries will improve and it will also promote the FDI of the host countries as well. The small and medium enterprises of the host countries will be able to enhance their activities and thus create their own foreign direct investment through the MNCs and as a result the country will benefit through employment creation, export growth and the transfer of technology (Smith 2001).

According to Smith (2001), the key towards increasing the productivity and competitiveness of small and medium-sized enterprises is by improving their technologies. The technologies may be developed through internal management or they may be accessed from the external sources and the multinational corporations play a major role in advancing the technology of the SMEs. Asia has been experiencing improved technology in the last decade and this has greatly enhanced the transfer of its technology towards the SMEs of those countries in which its affiliates are located. Hence, as the technology in Asia improves, the host countries also benefit from this through technology transfer.

Hence, it can be seen that, despite the challenges Asian economy has been experiencing, there has still been room for improved efficiency of its multinational corporations towards developing the small and medium enterprises in the countries in which the corporations are located.

The sustainability of SMEs through the Asian networks

Asia targets a number of economies in the world through its multinational corporations. The key countries where their MNCs are located and which contribute to its economic growth are USA, Korea, Taiwan, China, Thailand, UK and Hong Kong. With the interaction of these developed economies, Asia is able to improve the operations of its multinational corporations in its parent country as well as other parts of the world (Palacios 2003).

The size of Asia’s markets has most often attracted multinational corporations from other countries. On the other hand, Asia is able to obtain markets for the location of its MNCs from other more developed countries and this is what creates comparative advantage towards the host countries’ SMEs. The investment of Asian MNCs in UK has positively resulted in the growth of the small and medium–sized enterprises in other countries in which the affiliate corporations are based. The Asian MNCs have come up with objectives that enable them make an entry into the UK economy and in turn promote their activities in the other countries. These objectives are (Smith 2001):

  1. To reduce their global cost of production through cheap labor: Since UK has advanced technology and greater availability of human and machine capital, the MNCs are able to advance and transfer the qualified labor to other developing countries that mainly rely on the contributions of the small and medium enterprises.
  2. To seek expansion by obtaining new markets: UK and other developed countries of the world act as a strong base towards creating new markets for the Asian MNCs. With the broader markets, the corporations promote the activities of the SMEs that they are engaged in. For instance, the Asian MNCs in Zambia control the activities of the country’s SMEs. With new markets in UK or Hong Kong or any other developed country, Zambia’s SMEs grow and enhance their markets.
  3. To obtain resources: UK produces minerals, hydrocarbons and other construction materials in abundance. By establishing corporations in UK, Asia is assured that the small and medium enterprises in other parts of the world will have resources for their activities.

For Korea, the comparative advantage of Asia is its low cost of production and the ability to produce large capacities of manufacturing goods. Once Asia invests its MNCs in this country, it is able to benefit from these economic developments and in turn enhance the multinational corporations in the country and in other countries. The low production cost and large manufacturing outputs promote the small and medium enterprises of the countries in which Asian MNCs are based.

Hence, through production and distribution networks created by Asian countries with the more developed countries, there has been enhanced operation of the multinational corporations and since they are focused on promoting the development of the small and medium enterprises, the other countries of affiliate corporations indirectly benefit from the networks

Conclusion

To conclude, it can be argued that the multinational corporations for Asia have strongly advocated for the advancement of the SMEs in different economies. The Asian MNCs are based in both developing and the developed countries and since most of the developing countries economies are constituted of the small and medium enterprises, the MNCs have found the need to engage them in their operations. This way, the enterprises are able to improve their operations and promote the country’s economic growth.

Works Cited

Haak, R and Tachiki, D, 2004. Regional Strategies in a Global Economy: Multinational Corporations in East Asia: IUDICIUM; Verlag.

Hanna, J, 2004. How Corporate Responsibility is changing in Asia: Routledge.

Palacios, J, 2007. Multinational Corporations and the Emerging Network Economy in Asia and the Pacific: Routledge.

Smith , D, 1992. Pacific Asia: Routledge.

Smith, G, 2001. Globalization, Employment and the Workplace: Diverse Impacts: Diverse Impacts: Routledge.

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