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Multinational Firms Impacts on the Economic Growth Essay

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Introduction

Multinational organisations (MNCs) are big global companies that have a market presence in many parts of the world. The two main factors that distinguish these companies from other companies are their centrally controlled operations and their huge global presence (Jenkins 1987). Globalisation has recently brought a lot of attention to the role of multinational companies in the world economy. This attention emerged in the 1960s when different economies around the world started to experience increased foreign direct investment (FDI) flows from MNCs. Critics and proponents of globalisation have argued for (and against) the impact of these MNCs in the world economy (Drew 1995).

Critics say these companies have had a negative impact on their host economies, while proponents of globalisation say they have had a positive impact on the same (Held et al. 1999). After evaluating the merits of both arguments, this paper argues that MNCs have a more positive (than negative) impact on global economies. Evidence of this claim comes from the impact of these MNCs on wages, market structures, and foreign trade balances of national economies. This paper explains these indicators by analysing the effects of the companies on three economic indicators – FDI inflows, wage rates, and technological development.

FDI Inflows

Latorre (2008) says MNCs have a positive impact on the global economy because they contribute to global capital movements. Similarly, Helleiner (1989) says the MNCs help to move the global capital from abundant capital countries (wealthy countries) to countries that have scarce capital (poor countries). Many scholars affirm this view. However, Mundell and MacDougall (early theorists who investigated the role of MNCs in this regard) have a different opinion (Latorre 2008). Mundell (cited in Latorre 2008) says host countries need to meet special conditions to benefit from capital influxes. Indeed, he used the Heckscher-Ohlin model to explain MNC influences in the global economy and found out that unless two countries have different factor endowments, multinational companies may have an insignificant effect on their host economies (Latorre 2008).

Unlike Mundell, MacDougall (cited in Latorre 2008) affirmed that MNC influences promote economic growth. He used a simple approach of evaluating the effects of MNC activities and found out that these companies lower the capital rent and improve the business climate of the host economies (Latorre 2008). In turn, host economies benefit from increased labour productivity and improved standards of living. These contributions give multinational companies a strong economic influence in their host economies (especially in developing economies). This influence allows them to start vital economic projects in developing countries, which could potentially have significant political and economic ramifications for host countries.

Although Byres (1972) affirms that MNCs may have a positive economic impact on their host countries, he says the economic sectors that align with their operations benefit from the companies, at the expense of other economic sectors. Therefore, through their activities, global companies promote dualism in developing economies. For example, many MNCs produce expensive products that create a stronger economic divide between the rich and the poor (Jenkins 1987). The same products also distinguish the urban population from the poor population. The “divisive” economic outcomes of MNC activities mainly premise on the mercantile view, which explains why critics view the interests of MNCs suspiciously. It says that these companies adopt their “home identities” by pursuing the interests of their parent companies in the global economy (Leornard 1980).

Therefore, because they are foreign agents, critics say their interests are often suspicious (Helleiner 1989). A similar ideology that explains why critics view MNC activities suspiciously is the revolutionary view. It says that because many MNCs have a lot of economic power, they could easily control a government and make it act on their behalf (Leornard 1980). Usually, governments that are under their control use public policies to advance the interests of these corporations. Thus, like the mercantile view, the revolutionary view also suggests that developing countries should treat MNCs as “suspicious foreign agents.” Although these views exist, multinational corporations promote FDI flows in the global economy.

Wages

Many researchers have investigated the impact of MNCs on the wage rates of their host countries (Latorre 2008). They agree that, often, MNCs pay higher wages than local firms do. However, as demonstrated by other researchers, MNCs also have a negative effect on the average wages in their host countries. For example, Latorre (2008) says big multinational companies have had a negative effect on the average wage rate of domestic workers in Venezuela and Mexico. Relative to this observation, researchers have used the knowledge capital model to expound on this relationship. They have found out that MNC activities increase the average wages of skilled labour and decrease the same measure for unskilled labourers (researchers affirmed this fact after conducting several studies in Mexico). Finland has also experienced the same effect (Latorre, 2008).

Some researchers have found concrete evidence regarding the negative effects of MNCs on national economies. For example, Casson & Pearce (1987) say multinational companies have a negative spillover effect in developing economies. They base their findings on the negative effects of MNCs on wage rates in the Venezuelan economy (a sample study). In detail, they say the FDI inflows created by these MNCs have created inefficient production systems in the South American nation, thereby increasing production costs and decreasing national wage rates (Casson & Pearce 1987). Many researchers who have strived to highlight the negative economic impact of MNCs on national wage rates use economic indicators to draw political inferences about the impact of these companies in the global economic environment (Leornard 1980).

Many researchers have also evaluated the economic impact of MNCs by focusing on developing economies and evaluating how these companies affect income levels, standards of living, and market structures of such economies (Meier 1995). Based on their immense political influence, Leornard (1980) says multinational companies are powerful organisations that could easily affect national wage policies. Relative to this observation, Leornard (1980) says, “As a matter of self-interest, multinational corporations will use their economic power in bargaining to extract concessions from governments on such matters as protection, tax rebates, investment allowances, choice of factory sites, and access to resources” (p. 456).

Since many multinational companies do their business with elitist groups in these developing countries, critics accuse them of alienating people from their governments (Leornard 1980). In the same breadth of analysis, critics also accuse them of tying some governments to mutual circles of economic dependencies, which leave little room for wage negotiations (especially in developing countries) (Leornard 1980). However, Jenkins (1986) cautions people against highlighting the impact of MNCs on less developed countries through moral or value judgements because it is a normal business practice for such companies to conduct their business this way. Moreover, many multinational companies work in less developed economies to exploit the low wage rates that exist in these countries. However, he agrees that these companies have a huge influence in shaping their economic outcomes (Jenkins 1987).

Besides understanding the effects of MNC activities on individual wage rates, many researchers have also analysed the effects of the same firms on the average wages in the industry. Using the Venezuelan case study, Latorre (2008) established that the average wage increase among specialised workers counteracted the average wage decrease of non-specialised workers. Consequently, the South American economy experienced an overall increase in wages. This analysis shows that although MNC activities may have a negative effect on the wages of some workers, it creates an overall increase in industry wages (in the end).

Technological Development

As shown above, many studies that have investigated the role of MNCs in the world economy have explored this relationship by understanding how global firms influence economic growth. In line with this focus, many researchers agree that MNCs promote technological innovation as a way of promoting economic growth. This contribution emerges from the R&D investments that such companies make in their host countries. Many studies that affirm this view base their findings on US studies that show the positive role played by US MNCs in promoting economic growth, through technological innovation (locally and abroad).

For example, Latorre (2008) says MNCs have contributed to more than 31% Gross Domestic Product (GDP) growth in the US private sector. The same researcher says MNCs have contributed to about 74% of the total research and development (R&D) spending in the US (Latorre 2008). A broader outlook on the role of MNCs in promoting global economic development shows that, in the 1990s, these companies accounted for a GDP increase of more than 8%. This figure has recently increased to about 17.5% (Latorre 2008).

Based on the above analysis, researchers who affirm the positive impact of MNCs on national economies say host countries benefit from the technological spillover effect of these companies. For example, Latorre (2008) says the United Kingdom (UK) has benefitted from the spillover effect of US MNC activity in Europe. Although many researchers affirm this view, some observers oppose the idea that multinational corporations always have a positive impact on national economies (Latorre 2008).

For example, by focusing on the UK economy, they say, although MNCs have had a positive spillover effect on the European economy, the benefits accrued from their activities do not justify the cost incurred by the western European country in attracting foreign investment. (Latorre 2008) Other European countries, such as Lithuania have reported mixed results regarding the effects of MNC activities in national economies. Relative to this observation, Latorre (2008) clarifies that the positive impact of MNCs on this economy comes from forwarding linkages (the same positive outcomes do not exist in backward linkages).

Overall, Latorre (2008) says the technological benefits accrued from MNC activities exist in countries that have an absorptive capacity of the technology. For example, he says rich countries benefit from increased FDI inflows (from MNCs) because they have diversified economies, well-developed markets, and high-income levels. Therefore, poor countries may not experience the same technological spillover benefits that multinational companies bring. However, the views of Carkovic and Levine (cited in Latorre 2008) contradict this view because they studied the effects of MNCs on more than 72 economies and established that the levels of education, economic development, and trade openness did not affect technological transfer rates between MNCs and their host economies. Nonetheless, many researchers affirm the contrary. Based on this analysis, many countries around the world enjoy technological transfers from MNC activities.

Conclusion

After weighing the findings of this paper, we establish that MNCs have a mixed effect on national economies. This paper has mainly highlighted national wages, FDI inflows, and technological development as key economic indicators for MNC performance. Regarding the effects of MNCs on national wages, this paper shows that, although MNCs have a negative effect on the wage rates of unskilled workers, they have a positive effect on average national wage rates. Moreover, this paper shows that such companies promote technological development in their host countries. The companies achieve this outcome through increased R&D investments. Similarly, the same companies increase FDI inflows from wealthy economies to developing economies. Based on these factors, this paper affirms that multinational firms enhance economic growth in an economy.

Nonetheless, although this paper has strived to focus more on the economic effects of MNCs on national economies, it is important for future studies to investigate how political forces influence the economic outcomes of MNC activities in the global economy. Leornard (1980) supports this view by suggesting that the impact of MNCs on the global economy needs to have both political and economic dimensions (he says that Marxist and dependency analyses have eliminated all probabilities for people to understand the economic influences of MNCs without understanding their political impacts).

Liberals also share this view because although they see MNCs as apolitical in motivation, they agree that the corporations are powerful political forces, especially in developing countries (Leornard 1980). Therefore, while this paper concentrated on addressing the economic impact of such corporations, future studies should investigate the political impacts of MNCs with their economic impacts.

References

Byres, T, J 1972, Foreign resources and Economic Development, Frank Cass and Company, London. Web.

Casson, M & Pearce R, D 1987, ‘Multinational enterprises in LDCs’, in N Gemmel (eds), Surveys in Development Economics, Basil Blackwell, Oxford, pp. 90-132. Web.

Drew, J 1995, Readings in International Enterprise, Cengage Learning, London. Web.

Held, D, McGrew, A, Goldblatt, D & Perraton, J 1999, Corporate Power and Global Production Networks in Global Transformations: Politics, Economics and Culture, Blackwell Publishing, Oxford. Web.

Helleiner, G. K 1989, ‘Transnational Corporations and Direct Foreign Investments’, in H Chenery & T Srinivasan (eds.), Handbook of Development Economics, Elsevier, The Netherlands, pp. 1411-1480. Web.

Jenkins, R 1986, ‘Third World Multinationals: Rhetoric or Reality,’ Journal of Development Studies, vol. 22. no. 2, pp. 458-463. Web.

Jenkins, R 1987, ‘Transnational Corporations and Uneven development: The Internationalisation of Capital and the Third World’, The Economic Journal, vol. 98. no. 393, pp. 1237-1239. Web.

Latorre, M 2008, . Web.

Leornard, J 1980, ‘Multinational Corporations and Politics in developing Countries’, World Politics, vol. 32. no. 3, pp. 454-483. Web.

Meier, G 1995, Leading Issues in Economic Development, Oxford University Press, New Delhi. Web.

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IvyPanda. 2020. "Multinational Firms Impacts on the Economic Growth." May 25, 2020. https://ivypanda.com/essays/multinational-firms-impacts-on-the-economic-growth/.

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IvyPanda. (2020) 'Multinational Firms Impacts on the Economic Growth'. 25 May.

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