Multinational Companies

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Table of Contents

Introduction
Contribution to Industry Development by Multinational Companies
Multinational’s Contribution towards Trade Competitiveness in Host Countries
Criticism towards Multinational’s Operations
Impact of UK Multinational Operations on the Kenyan Economy
Government Support for Multinationals
Conclusion and Recommendations
References

Introduction

This essay discusses how multinational companies can help host countries achieve industrial and trade competitiveness. Multinational companies are enterprises that operate in more than one country. The foreign markets in which the multinationals operate are known as host countries.

Most multinational companies have their headquarters in their country of origin, which is referred to as home country. In often cases, multinationals have operational offices, branches, or plants that complete different aspects of the manufacturing process in many different countries.

Ford and Sony are an example of multinational companies. Other examples include car manufacturers like Toyota, Honda and Volkswagen, oil companies like Shell and BP, then Dell and Microsoft, which are technology companies.

Coca Cola, which is a soft drink company, is also a good example of a multinational company while McDolalds is the best example in the food industry.

Contribution to Industry Development by Multinational Companies

Multinationals have a great impact on many local economies and, by extension, the world economy at large. They play a big and important role in international relations and globalization. In different ways, multinational companies have come up with products and services that have affected so many countries in the world (Mamarinta 2003, p. 2).

These companies have been known to uplift almost every area of business life in the world. They use high technology and automation which have made efficient manufacturing, commerce and services around the world possible. In most areas of operation or host countries, they are often the market leaders in commercial, manufacturing, tourism, banking, transportation, etc.

International business is approached differently by multinational companies. A Multinational can employ franchising, strategic partnering, or subsidiary development as way of entering and managing operations in host countries (Griffiths & Wall 1984, p. 23).

In most cases, the companies develop and manufacture new products in the home country and sell them abroad especially in developing or third world countries. However, increasingly, the multinational companies have shifted production operations to host countries.

The shift of operations, especially manufacturing, to host countries involves enormous capital goods transfer and setting up of industries.

Taking the Kenyan example, through the operations of multinationals like Unilever, general motors and British American Tobacco, Kenya boasts of industries that have put it ahead of other east African countries.

Currently, Chinese firms have a keen eye on operations in Africa. They are involved in infrastructural projects that require the transfer of tools and equipment that would otherwise not be available in host countries.

Apart from the transfer of capital goods which are used in industries put up in host countries, multinationals also necessarily transfer skills and knowledge in industrial operations. Taking the Kenyan example again, General Motors is a well respected company having a subsidiary in Kenya.

It holds to the philosophy of continuous improvement and thus offers best practices in management and vehicle assembly. To effectively run the subsidiary, locals are employed but top management is left to expatriates.

Trusting that the expatriates are well trained, they pass on their skills and knowledge or business models to the locals they work with. In this way, human capital necessary in the building of industries is developed.

Thirdly, the operations of multinationals contribute substantially to the growth of industries in host countries. Apart from transfer of capital goods, establishment of best practice i.e. interaction between expatriates and locals, the multinationals also transfer cutting edge technology to host countries.

Given they have cutting edge technologies that make them global competitors; they improve technology scope in host countries. In the medicine field, the Aga Khan Foundation runs a number of powerful medical centers across Africa and some parts of the Arab world. Their hospitals are equipped with the state of the art tools; they provide best technology.

The transfer of best technology and technological know-how to host countries helps improve general technological standards in the country. These multinationals provide a benchmark against which many local industries or companies are able to measure themselves thus grow.

Finally, necessarily to afford themselves smooth operations, multinationals often invest in infrastructure of these host countries thus helping them develop. A coal mining company in a remote area of say the Congo will find it economically sensible to invest in a road or rail network.

Infrastructure is a crucial element necessary for industrialization. Roads or transportation facilitate movement of raw materials and finished goods.

When raw materials can be moved to factory easily and finished goods are able to reach market just in time, business is facilitated (Griffiths & Wall 1984, p.15). The investment in infrastructure by multinationals, therefore, will gradually facilitate emergency or local industries.

Multinational’s Contribution towards Trade Competitiveness in Host Countries

Multinational use many kinds of strategies as a way of entering foreign markets. One of the most common methods is exportations. The exportation of goods to another country may not contribute to a favorable balance of payment but may provide commodity for local trade.

For example, the US exports pharmaceutical products to other countries like Uganda. This is a contributor towards unfavorable balance of payment for Uganda. However, given the drugs are needed, the exportation of drugs to Uganda provides Ugandan distributors with a business opportunity.

Another way through which multinationals provide business opportunities for the locals is through franchising and licensing. Some multinationals like McDonalds use franchising as an internationalization strategy. Through franchising, the multinationals offer a business opportunity that contributes to the economy of host country.

Some other multinationals enter host countries through joint venture investment. Joint venture investment or strategic partnership between multinationals and government or locals of given host companies develop trade in host country. For example, France Telecom formed a strategic alliance with the Kenyan telecom company.

The new outfit has more capacity than the former Kenya telecom. Therefore, through strategic partnerships with multinationals, host countries bolster their capacity and are able to compete more favorably in trading with other countries.

Direct foreign investments by western players have become more pronounced especially in the African continent. Companies from the UK and other parts of Europe are investing directly in countries like Kenya. A consortium of investors is putting up the first of its kind wind power generation station in Kenya.

These kinds of investments have an impact on the countries GDP and GNP (Barnet & Mueller 1975, p. 125). It also improves the per capita income thus the spending power of locals. Therefore, the investments have an awesome impact on the local trade which bolsters the countries capacity to tap into international trade.

As discussed under contribution towards industrialization, multinationals invest in infrastructure. Infrastructure helps towards development of industries but also improvement of trade.

For countries that have potential for tourism, investment in infrastructure supports such a service industry. More tourists will be able to visit a country if it has the scenic sites as well as the necessary amenities that provide comfort and relaxation.

Criticism towards Multinational’s Operations

Although multinationals continue to contribute in a big way to economies of host countries, they also stifle growth in the developing and developed world. Critics point out that indigenous industries in many nations have collapsed due to multinationals’ operations (Barnet & Mueller 1975, p. 128).

Due to their advanced nature, multinationals easily outshine national corporations in host countries. People in the host countries tend to believe goods and services from abroad are better than the ones manufactured in their own country and this affects the local industries a great deal (Griffiths & Wall 1984, p. 51).

Local corporations, sometimes, are forced to lower their prices in order to compete with the multinational industries. The collapse of National Corporations often leads to lost of jobs and source of income for many citizens.

Further, critics point out that due to holding host country economies, multinationals are able to wield great political influence. The political influence is often employed towards the exploitation of developing countries.

Impact of UK Multinational Operations on the Kenyan Economy

Multinational companies from the UK have impacted greatly on general business in Kenya and the economy at large (Kaplinsky, 1979, p.19). For example, human resource practices in Kenya have been affected greatly by models employed by the UK multinational companies.

Many UK based enterprises have overseas operations and they hire more labor in the host countries than in the home country (Kaplinsky1979, p.47). More job opportunities have been created in Kenya because of the multinational enterprises established by multinationals from the UK has opened.

The many industries established either as partnerships between Kenyans and Britons or purely and UK multinational subsidiaries have raised the countries competitiveness in international markets.

The presence of UK multinationals has also attracted other inward investment from rival multinational corporations, which has boosted the local economy (Kaplinsky1979, p.39).

The effect of the investments has helped the country towards alleviation of endemic poverty. The Multinational companies have enabled ideas and techniques transfer which has helped raise productivity standards in the country.

The multinational companies from the UK employ very many Kenyans. Apart from providing a source of employment to the locals, they also provide them with opportunities for training towards acquiring new skills. The acquired skills are critical as they help locals to actively contribute towards productivity and efficiency improvement.

Working in a multinational set up involves dealing with different kind of work place expectations and work ethic. Multicultural environments provided by multinational companies are a challenge that positively spurs people to higher levels of performance. Supply of skilled labor is improved since workers pass on labor to other unskilled workers.

This reduces the cost of training workers. Many young people in Kenya cannot afford to go to school for training but when they are employed in such companies they get the training they need from workers who have been in the company for long. This helps the country reduce the rate of crime.

Multinationals pay a lot of money as taxes. This has helped the developing Kenya improve her economy. Many multinationals have directly invested in improvement in infrastructure like roads, railways, communication facilities etc. this is of great importance to the whole country.

Despite the many positive contributions of multinationals to the Kenyan economy, there are still many disadvantages or negative impact associated with their operations.

In most cases, it is assumed that the host country does not have enough skilled workers leading to influx of expatriates into host country. Generally, in the Kenyan scenario, most senior managers are expatriates (Miller & Yeager 1994, p. 76).

The expatriates, often, do not bring much skill; however, they earn enormous amounts (Raj &Weekly 1982, 56). This means that the national resources are largely used to make foreigners more rich as the locals who do menial or manual jobs continue to languish in poverty.

Secondly, size and power of multinationals in Kenya has been used to exploit weak or corrupt governments to get better deal. There are many corruption cases in Kenya that involved UK based companies (Okoth 2009, 4).

One of them has to do with DELA RUE, a company that makes Kenyan currency. The company through fraudulent practices has managed to monopolize currency manufacture for a very long time (Okoth 2009, 2).

Another case is the Anglo Leasing Scandal. In this scandal, a UK company was used by corrupt ministers to fraudulently use tax payer’s money. The only problem with multinational corporations is that one can not easily hold them accountable. In case of fraud and corruption, money is lost and unless the international community helps by freezing accounts, no other course of action is possible.

Finally, multinational companies operating in Kenya have been known for having had no regard for environment related issues. Multinational that owns flower firms in a town called Naivasha are known to have continually led toxics into the lake to an extent that most aquaculture around the lake is now close to totally destroyed.

If a country has no good regulatory authorities to monitor multinationals activities on the environment, as has been the case in Kenya, it can cause long term problems.

For example in India, Coca-Cola has been accused of using up water supplies in its bottling plant in Kerala in Southern India and also of dumping waste products on land saying it was useful as fertilizer (Griffiths & Wall 1984, p. 69).

Multinationals have a direct impact on government policy, especially through the threat of market withdrawal (Barnet 1975, p. 128). For example, the Kenyan governments have often been forced to lower taxes to favor foreign investment (Okoth 2009, 9).

If by any chance a government refuses to follow multinationals’ demands, they often use threat to pull out to coax government agents. The threat to pull out by multinationals has for sometime now been the headache for the Kenyan government.

Government Support for Multinationals

Despite the mentioned criticisms against multinational companies, it is clear that their operations in host countries bring numerous benefits.

According to Fatemi et al (1976, p. 25) the world economy has been changing considerably due to the multinational companies; they invest heavily in foreign countries. As a result of the investments, local economies have grown industrially and in their trading capacity (Jensen 2006, p. 1).

Multinationals open up income generating assets in different countries thus expanding or growing the global market (Miller & Yeager 1994, p. 22). They have been able to transfer resources from their home countries to the host countries, such resources include, technical expertise, equipment, managerial skills, etc.

They have also helped to initiate developments in the developing countries where they have established their branches this is through the transfer of technology and capital. They have also helped the underdeveloped countries to develop their resources by investing in labor, raw materials etc, in the countries where they have established a base (Raj &Weekly 1982, 53).

As a result of the many benefits that accrue from multinational company operations both host and home governments have a big role to play in encouraging and supporting their operations. Host and home governments can support multinationals through a number of ways.

One such way is through streamlining bilateral or multilateral relations (Jensen 2006, p. 24). The AGOA arrangement between the United States and African countries has facilitated export trade between Africa and America. Through good bilateral and multilateral relations, companies are able to operate without meeting much local or foreign resistance.

Local governments can encourage direct foreign investment through forming of strategic alliances and joint ventures. Strategic alliances and joint venture kind of operations ensures both the locals and foreign country interests are represented thus more sustainable relationships based on mutual benefit (Jensen 2006, p.97).

Governments can also route for multinational investment by advocating for best practices and routing out corruption.

Despite corruption faced in the third world countries, common people have gained a lot in terms of skills, employment, business opportunities like in the case of Coca Cola where they provide kiosks for people and this has helped them raise their standards of living (The Coca-Cola Company, 2008).

It follows that if corruption and other malpractices were minimized, more companies would see sense in venturing out into foreign markets.

Governments can also encourage development of multinational companies by providing incentives e.g. subsidies, lower taxation and export compensation plans. Further, legislation plays a critical role in either restricting or promoting trade. Through proper legislation, governments are able to encourage foreigners to invest in their countries as well as locals venturing out into prime markets abroad.

Infrastructural investment is a critical measure to be considered so as to encourage trade. Host companies have to invest heavily in infrastructure as this facilitates trade and attracts investors. Partnership with development partners has seen the development of many infrastructural facilities in the third world countries.

The host government has a responsibility to provide a peaceful working environment for the multi-nationals. Clearly, no one would be attracted to invest in country dogged with political instability.

Political instability breeds internal fighting, which has brought down many economies especially in third world countries. When this happens, multi-nationals operating in such countries tend to close down fearing loses that can arise from unstable political state in the country.

There is high competition in today’s business space; companies are using all means to fight for a representation in the congested market. Most companies have resorted to unhealthy competition means to gain undue advantage over others.

Host governments need to set up and enforce regulations that ensure all the companies operate within the same legal frame work. The regulations should apply equally to all companies, local and international so that no company appears t enjoy undue advantage over the competing companies.

There is a need for host companies to forge international ties with other countries. Through the relations with other countries, the companies operating within the country are able to access international markets. They can export and import goods and services to and from countries that have a bilateral relations with the host government.

International legal frame works have been set up among relating governments to protect multinational business companies from acts of fraud and unfair business deals. This allows companies to seek for market, goods and services from other countries with confidence.

Conclusion and Recommendations

This essay has illustrated that multinational companies can have both far reaching positive and negative effects on host country economies.

In the recent past, third world countries have voiced the need to streamline trade relations as opposed to mere aid from developed countries. Supporting multinational can be a sure way of using trade to achieve global development.

In lie of the foregoing, it is recommendable that host countries develop positive policies in relation to multinational’s operations. The policies should aim at properly monitoring but also supporting these institutions.

The monitoring is important to hedge against any negative impact or effects this institutions can have on local economies. The support aims at maximizing benefits that accrue from the operations of the multinational companies.

References

Barnet, J. R., & Mueller, E. R., 1975, Global Reach, the Power of the Multinational Corporations. Simon and Schuster, New York.

Fatemi, S., N., Williams, W., G., l., & De Saint-Phalle, T., 1976, Multinational corporations: the problems and the prospects: a study prepared by the Graduate Institute of International Studies, Fairleigh Dickinson University, Associated University Press, New York.

Griffiths, A. & Wall, S., 1984, Applied Economics: An Introductory Course, Longman, Miami.

Jensen, M., N., 2006, Nation-states and the Multinational Corporation, Princeton University Press, Philadelphia.

Kaplinsky, R., 1979, Readings on the Multinational Corporation in Kenya, Oxford University Press, Oxford.

Mamarinta, P. M. 2003, The Role of Multinational Companies in the Middle East, the Case of Saudi Arabia, Universal publisher, Brisbane.

Miller, N., N., & Yeager, R., 1994, Kenya: The Quest for Prosperity, 2^nd Ed, Westview Press, San Fransisco.

Okoth, J., 2009, Are Multinationals Leaving Kenya? Web.

Raj, A., &Weekly, J. K., 1982, Western Firms Face Challenge of Third World Multinational, Modern Asia, With JK Weekly, pp. 51-52.

The Coca-Cola Company. Web.

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