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Multiplier analysis
Malaysia’s realistic and flexible management approach has made its economy raise competitiveness and has increased its spirit in facing challenging circumstances. Measures have been taken to make the economy more diversified and multinational to ensure sustainable growth this includes the approval of the Swedish company IKEA to invest in the country which has led to the increase of job opportunities (Behrman et al 46).
Multiplier analysis is used to identify the degree to which different sectors and households can generate income and employment in the economy (Case 34). A multiplier is a ratio and not an absolute number, the multiplier effect, therefore, refers to the number of jobs created or the amount of income earned from the basic jobs (Case 44). To measure the total number of jobs created in the economy as a result of an increase of employment in a sector; we use employment multipliers. With this, employment effects can be seen through a measure of employment generated in the economy as a result of an increase in demand of its output which is the employment of 450 people, with expected sales of approximately 50 million US dollars in the first year (Behrman 55).
The simple economic base employment multiplier can be presented in different forms but all emphasize Total employment (T), Basic employment (B), and Non-basic employment (N).
Multiplier formulation:
Total employment (T) =Basic employment (B) + Non-basic employment (N); T = B + N
Basic employment = Total employment – Non-basic employment; B = T – N
(B/T = T/T – N/ T) = (B/T = 1 – N/T)
= {= B/ (1-N/T)} the multiplier therefore is 1/ (1- N/T) which can further be simplified to M (Multiplier) = T/B
To get the multiplier effect from the above equation, we are required to multiply the basic jobs by the multiplier and then deduct the basic employment or income because the effect should not include the motivation.
The main concern is the effect it has on local employment because the company wants to open another store, the job impact is that the new jobs will go to new residents which will lead to population increase and hence increased consumer spending on products. The ratios of foreign direct investment to gross domestic product (GDP) are not related to the distribution of income and as long as the investment of IKEA Company will increase average incomes as it is doing by creating new job opportunities in Malaysia and not increase national income inequality, it will not affect the Malaysian national income (Behrman 61).
Activities of multi-national companies
A multi-national company is a big business which has its head office in one country but has operations in many other different countries. The activities of these companies are not always beneficial; Some of the benefits however are that they lead to economic growth and development as they bring inward investment to countries that are not their home improving local and national economy (Kogiku 113).
They bring new ideas and techniques that help improve the quality of production and bring improvement in the quality of human capital. This is because they don’t only aim at employing people but provides them with training and new skills and techniques which help them improve productivity and effectiveness. This is very important because the skills that workers get can be passed on to another workforce thus improving the supply of skilled labor which can make the area attract new industries as the cost of training will be reduced (Kogiku 115).
They make it possible for the host country to gain access and have quality goods and services which could not have been the case if the inward investment was not allowed.
These companies may get subjected to the tax regime of the host country resulting in payments of large sums of tax.
They do not only invest in production or distribution facilities only, in some cases they may invest in additional infrastructure facilities such as road, rail, port, and communication facilities which benefit the whole country.
However, the employee may not be as widespread as expected as in some instances these organizations give jobs to skilled workers from other countries rather than to home workers.
Also, the effect on the economy depends on how big the investment is as it happens that some have minimal effect on the local economy.
The size and power of multinationals can be used where economically stable countries can exploit weak and corrupt governments to get better deals for their companies (Kogiku 119).
Depending on the type of investment, some countries may have weak authorities who monitor the environment leading to pollution and environmental damage which may have long-term problems to the host country.
Works Cited
Case, K. E., and Fair, R. C. Principles of Economics, Prentice-Hall, Inc., Englewood Cliffs (1994) 34-67.
Kogiku, K. C. An Introduction to Macroeconomic Models, McGraw-Hill Book Company, New York (1968) 113- 122.
Behrman, J.N. and Mikesell, R.F., The impact of foreign direct investment on the U.S. Competitiveness in third world markets, mimeo, (1980) 45-67.
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