The Author, Divya Tirkey is a 3rd year, BA LLB student at Rajiv Gandhi National University of Law, Patiala. She is currently interning with LatestLaws.com.
Multinational corporations (MNCs) or transnational corporations are large businesses incorporated in one country but function across different nations and distribute their management, production and distribution process accordingly. Usually, the control and management remains within the headquarters while the manufacturing of goods and services are done on foreign lands according to the resources available there that the MNC considers are of value. For example, the business giants incorporated in US and UK are known to set up their production units in the countries of Middle East which are rich in oil resources. Other variables like political stability, infrastructure, education and skill levels, potential markets, etc. also affect this decision.
Being businesses, MNCs are naturally formed with the intention of profit maximisation while operating in markets transnationally, but they play an equally significant economic role, especially for developing and under-developed economies. The favourable and unfavourable lens through which MNCs are treated has fluctuated through history. With 51 out of the 100 biggest ‘economies’ being corporations, as stated famously by Anderson and Cavanaugh in 2000, MNCs are larger than the average nation-state in terms of their net worth, understandably commanding both awe and fear. Developing nations (which are of concern for this article) have ended up treading a thin line which separates concepts of liberalised markets and protectionist welfare measures.
Most developing nations in reality need foreign investments to balance trade deficits and thereby survive in light of their international indebtedness. MNCs are therefore favourably looked upon for being a medium for FDIs to flow into the developing economies ever since the inclination of developed nations to provide external assistance to other economies in need declined as was in the case of Asia. Beginning from the 1960s, for nearly three decades, MNCs played a huge role in the growth of trade in Southeast Asia, exporting their products to these regions and allowing for an influx of foreign capital. Foreign investments through MNCs flow in through four methods of their foreign asset management:
1. Agreement with local firms to sell products of MNC in the foreign markets.
2. Setting up wholly owned subsidiaries in the foreign nation while retaining considerable control over the business operations. The subsidiary firm benefits from the managerial skills, financial resources and international reputation of the parent company.
3. Setting up branches instead of subsidiary in the foreign country.
4. Setting up of joint ventures with foreign firms to sell its product in that foreign market, to obtain raw materials, to reduce production costs, to manufacture sub-components, etc.
The physical and financial capital that thereby enters the foreign markets has the same multiplier effect that domestic investment does. Increase in investment leads to increase in wealth, which leads to increase in employment, to increase in tax collected, which is then used for infrastructural development and improvement of human capital. Also, besides the direct injection of foreign investment and transfer of upgraded technology, there are positive externalities recorded as a consequence of MNCs in the host countries.
The unfavourable view of MNCs, on the other hand, is not a new concept. The public condemnation and redemption of corporations have not been much different from any other growing phenomenon. When their presence is needed protectionist governments extend an easy route for them to navigate into the country, and when it seems like their presence is depleting the resources the strictures they face is not forgiving. The 1960s and 70s are an example during which transnational corporation, especially those that were of American origin, were viewed as evil forces attempting to take over the world. Features of “large” and “American” were enough to make them detestable. Only a decade later, in 1980s, they symbolised progress with the world opening up to the idea of integration. The young urban professionals were eager to be hired by large corporations.
The recent years have again shown a complete turn of their image. Now, they are pernicious institutions with excessive powers. With the MNCs having increased in size greater than ever, they are now considered a threat to democracy by influencing politics and giving way to corruptions, and are accused of perversion of culture through sale of products that lure emotionally instead of on the basis of need. The social, political, economic and environmental costs of their activities are something that they are expected to now take responsibility for. In fact India in 2014 became the first country to mandate CSR (corporate social responsibility) spending, which in other nations is governed by a mixture of voluntary and absolute provisions.
The contention that multinational corporations are growing larger than nations is based on comparisons of total sales of the former with GDP of the latter. Paul De Grauwe in 2002 tried to refute this by comparing the growth rate of the sales of MNCs and GDP of nation-states (not taking into account the regional differences). He found that on the whole, the latter showed a slightly higher rate of growth thereby discounting the idea that corporations had had a threatening increase in size. Data also shows that MNCs shrunk in those countries that implemented open door policies (East Asian nations) while expanding in those that did not (African countries), implying that in the case of the former group of countries, the growth of the economies outran that of the MNCs in those economies.
To deny the significance of growth of MNCs in terms of quantitative measures like size does not do justice to their actual impact in the world. Immeasurable factors like power and influence tell a different tale.
MNCs exercise their economic power by imposing prices exceeding marginal costs, generating excess of profits. This power is dependent upon substitutability of products and on the competition in the market. A firm exercising monopoly would have the ultimate power in this regard. However, when measured through concentration indices (market shares), there have been no systemic increases in the past. Monopolies emerge and grow only to shrink and then grow again. The biggest example is telecommunications over which there existed monopoly through domestic companies not long ago but which has been replaced by a competitive market. The Marxian prediction, in this sense, that the capitalists would with time increasingly create monopolies, never came true.
The penetrating power of politics into various sectors of the economy makes it harder to estimate the political power of MNCs in developing regimes. The success of any business in an economy is described by its ability to stand strong through various waves of changes, like being able to face new competition, being able to adapt to technological changes, etc. The lesser performing businesses end up having to leave the market. This is fine except when corporations resort to bribing authorities to create artificial monopolies. The longer a corporation is present in an economy, the more time it has to form connections through their reputation and financial powers to establish a market that favours only them, although historically corporate powers have been found to be susceptible to quick changes. Bribes paid by corporations were estimated to be over US $1,000 billion by a 2004 report of the World Bank.
On the international forefront as well, the MNCs have been influential in the formation of legal norms that bind all nations. The international organisations have often been criticised for being institutions that facilitate the interests of the developed nations while only allowing for small window for the developing nations to meet those standards even if it is to their detriment. MNCs have been able to influence the creation of standards that allow for their protection, competition and investments (through the WTO, the IMF and BITs) in various nations. Developing nations, in order to make up for the pitfalls of relatively absolute liberalization and deregulation, enter into BITs to avoid loss of investment. But entering into BITs forces the nations towards arbitrations that is not always beneficial for the economy as a whole, perhaps even interfering with their sovereignty.
Like good citizens of a nation, corporations are expected to contribute towards society and take responsibility of their economic, political, social and environmental impact on the society. Knowing that they have the power to extract profits and remit them back to their home country, one might think that as a good solution would be to legally control the prices or that the MNCs should participate in charitable activities (like a good citizen who has something to spare for the public good). But artificially controlling the prices to the extent that the price mechanism of a market strays far away from that of a free market could also possibly lead to shortages in supply of products and labour, and the situation may give rise to grey and black markets (Friedman, 1962). It is however contended that when monopolies and cartels that are government sponsored operate for too long in an economy, they eventually crumble. In the 1970s, OPEC distorted oil prices that became a major factor in the world recession that followed, resulting in debt and poverty of developing nations. In 2000 again the cartels of OPEC, ACPC and CPA tried to force the increase in price unsuccessfully.
The accusations of MNCs being immoral forces in developing economies manipulating authorities and exploiting easy environmental regulations and cheap labour is not backed by definitive data. MNCs tend to be heavily monitored, through voluntary and mandatory regulations not only in developing nations but also in the developed ones. The prime role that the UN assigns to multinational corporations is to foster healthy competition in both domestic and international markets. While MNCs have been alleged to commit bribery, another UN survey shows that economic and political corruption in countries, in fact, deter MNCs from investing. Whether the environment is getting worse for allowing corporations to set up industries under loose environmental regulations or not is one aspect of the question because on the other hand it is the big corporations who usually decide to delve into production of greener products and technologies.
Therefore, multinational corporations are not involved in economies unilaterally trying to destroy them, or worse exploit them till they run dry of their valuable resources. It is a mutual relationship, and while the nation states and MNCs have comparable strengths, neither one alone poses a threat to destroy the other.
