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Impact of multinational companies on the host

country

Clearly, multinational corporations can


provide developing countries with critical financial infrastructure for economic and social
development. However, these institutions may also bring with them relaxed codes of ethical
conduct that serve to exploit the neediness of developing nations, rather than to provide the
critical support necessary for countrywide economic and social development.
When a multinational invests in a host country, the scale of the investment (given the size
of the firms) is likely to be significant. Indeed governments will often offer incentives to
firms in the form of grants, subsidies and tax breaks to attract investment into their
countries. This foreign direct investment (FDI) will have advantages and disadvantages for
the host country.

Advantages
The possible benefits of a multinational investing in a country may include:

Improving the balance of payments - inward investment will usually help a


country's balance of payments situation. The investment itself will be a direct flow of
capital into the country and the investment is also likely to result in import
substitution and export promotion. Export promotion comes due to the multinational

using their production facility as a basis for exporting, while import substitution
means that products previously imported may now be bought domestically.

Providing employment - FDI will usually result in employment benefits for the host
country as most employees will be locally recruited. These benefits may be relatively
greater given that governments will usually try to attract firms to areas where there
is relatively high unemployment or a good labour supply.

Source of tax revenue - profits of multinationals will be subject to local taxes in


most cases, which will provide a valuable source of revenue for the domestic
government.

Technology transfer - multinationals will bring with them technology and


production methods that are probably new to the host country and a lot can
therefore be learnt from these techniques. Workers will be trained to use the new
technology and production techniques and domestic firms will see the benefits of the
new technology. This process is known as technology transfer.

Increasing choice - if the multinational manufactures for domestic markets as well


as for export, then the local population will gain form a wider choice of goods and
services and at a price possibly lower than imported substitutes.

National reputation - the presence of one multinational may improve the


reputation of the host country and other large corporations may follow suite and
locate as well.

mbuntirea balanei de pli - investiii strine va ajuta, de obicei, situaia balanei de


pli a unei ri. Investitia se va fi o curgere direct de capital n ar i investiia este, de
asemenea, de natur s conduc la substituirea importurilor i promovarea exporturilor.
Promovarea exportului vine ca urmare a multinaionale folosind facilitatile lor de producie
ca baz pentru exportator, n timp ce substituirea importurilor nseamn c produsele
importate anterior pot fi cumprate acum pe plan intern.
ocuparea forei de munc Furnizarea - ISD va duce, de obicei, la beneficii de munc
pentru ara gazd, aa cum cei mai multi angajati vor fi recrutai pe plan local. Aceste
beneficii pot fi relativ mai mare avnd n vedere c guvernele vor ncerca de obicei s atrag
firmele n zone n care exist omaj relativ mare sau o bun aprovizionare de munc.

Sursa de venituri fiscale - profit de multinaionale vor fi supuse taxelor locale, n cele mai
multe cazuri, ceea ce va oferi o surs valoroas de venituri pentru guvern intern.
Transferul de tehnologie - companiile multinaionale vor aduce cu ei de tehnologie i de
producie metode care sunt, probabil, nou pentru ara gazd i, prin urmare, o mulime
poate fi nvate de la aceste tehnici. Lucrtorii vor fi instruii s utilizeze noile tehnici de
tehnologie i de producie i firmele autohtone vor vedea beneficiile noii tehnologii. Acest
proces este cunoscut sub numele de transfer tehnologic.
Creterea alegere - dac produce multinaionale pentru piaa intern, ct i pentru export,
atunci populaia local va ctiga forma o gam mai larg de bunuri i servicii i la un pre
mai mic dect, eventual, nlocuitori importate.
reputaie naional - prezena unei singure multinaionale poate mbunti reputaia rii
gazd i alte corporaii mari pot urma privat i localiza, de asemenea.

Disadvantages
The possible disadvantages of a multinational investing in a country may include:

Environmental impact - multinationals will want to produce in ways that are as


efficient and as cheap as possible and this may not always be the best environmental
practice. They will often lobby governments hard to try to ensure that they can
benefit from regulations being as lax as possible and given their economic
importance to the host country, this lobbying will often be quite effective.

Access to natural resources - multinationals will sometimes invest in countries


just to get access to a plentiful supply of raw materials and host nations are often
more concerned about the short-term economic benefits than the long-term costs to
their country in terms of the depletion of natural resources.

Uncertainty - multinational firms are increasingly 'footloose'. This means that they
can move and change at very short notice and often will. This creates uncertainty for
the host country.

Increased competition - the impact the local industries can be severe, because the
presence of newly arrived multinationals increases the competition in the economy
and because multinationals should be able to produce at a lower cost.

Crowding out - if overseas firms borrow in the domestic economy this may reduce
access to funds and increase interest rates.

Influence and political pressure - multinational investment can be very important


to a country and this will often give them a disproportionate influence over
government and other organisations in the host country. Given their economic
importance, governments will often agree to changes that may not be beneficial for
the long-term welfare of their people.

Transfer pricing - multinationals will always aim to reduce their tax liability to a
minimum. One way of doing this is through transfer pricing. The aim of this is to
reduce their tax liability in countries with high tax rates and increase them in the
countries with low tax rates. They can do this by transferring components and partfinished goods between their operations in different countries at differing prices.
Where the tax liability is high, they transfer the goods at a relatively high price to
make the costs appear higher. This is then recouped in the lower tax country by
transferring the goods at a relatively lower price. This will reduce their overall tax
bill.

Low-skilled employment - the jobs created in the local environment may be lowskilled with the multinational employing expatriate workers for the more senior and
skilled roles.

Health and safety - multinationals have been accused of cutting corners on health
and safety in countries where regulation and laws are not as rigorous.

Export of Profits - large multinational are likely to repatriate profits back to their
'home country', leaving little financial benefits for the host country.

Cultural and social impact - large numbers of foreign businesses can dilute local
customs and traditional cultures. For example, the sociologist George Ritzer coined
the term McDonaldization to describe the process by which more and more sectors
of American society as well as of the rest of the world take on the characteristics of a
fast-food restaurant, such as i ncreasing standardisation and the movement away
from traditional business approaches.

Lipsey's analysis suggests that, if anything, both home and host countries would be worse
off in a world without globe trotting multinationals. For example, examining the critique that
a company's foreign operations inevitably will hurt domestic jobs and wages, Lipsey notes
that among those who have studied the situation, such fears have "mostly dissipated."

Lipsey does not deny that problems, such as job losses at home, can occur when a domestic
company invests in foreign production facility. But he notes that critics of globalization often
fail to consider the broader picture. For example, in the United States, while there has been
considerable attention to jobs lost because of a domestic firm shifting production abroad,
less attention has been paid to how this may be offset by foreign firms investing in U.S.
facilities. Lipsey notes that U.S.-based manufacturing employment and output provided by
U.S.-owned companies indeed declined from 1977 to 1997, but "most of the reduction...was
offset" by the increased output and employment resulting from an surge in foreign owned
affiliates moving into the United States. "U.S. and foreign firms were both internationalizing,"
he writes. "Each group was expanding in the other group's home region."
Lipsey points to other instances in which a company's investment abroad provides benefits
at home. For example, investing in a particular country may give a company access to
markets that it would not be able to penetrate with a domestic operation alone. This has the
effect of increasing the company's exports overall, the benefits of which accrue to domestic
operations. In addition, having operations abroad can shield a company from the damaging
effects of currency fluctuations and trade-inhibiting tax policies in the home country. In both
instances, the foreign investment could end up protecting jobs at home by strengthening the
parent company.
Overall, Lipsey argues it's not always or even often the case that an investment in
production abroad "substitutes" for or displaces what would otherwise be production
capacity at home. Looking at exports alone, Lipsey notes that economists have found more
evidence associating foreign investments with an increase in home country exports than a
decrease. Even in Europe -- where rising unemployment in proximity to an increase in
foreign investment lead to suspicions that the two were related -- Lipsey notes that
economists found foreign investment was more likely to boost rather than to reduce the host
country's exports.
As for its effect on the foreign country, again, Lipsey finds little, if any, support for the antiglobalization gospel. For example, considering the charge that foreign investment leads to
depressed wages and thus exploits "host country" workers, Lipsey finds that the opposite is
true. "Within host countries it has been abundantly shown that foreign-owned firms pay
higher wages than domestically-owned firms," he writes. Lipsey notes that foreign firms tend
to be in "higher wage sectors," generally hire "better educated and more qualified workers"
than locally-owned firms, and "tend to be larger and more capital intensive." He finds only
sparse evidence of those higher wages having a "spillover" effect on wages paid by local
companies, but he claims that whatever evidence there was points to an increase in average
wages.
Lipsey observes that the research offers a mixed view of whether the presence of foreign
firms has a positive effect on productivity in the host country, with some studies reporting a
significant effect and others viewing the evidence as inconclusive. However, Lipsey believes
that, with productivity in foreign firms generally superior, this "suggests that overall
production is improved by the presence of foreign-owned operations, although that question
is rarely, if ever, examined."

More conclusive, according to Lipsey, is evidence that foreign investment significantly


boosts exports and economic growth in the host country. But he acknowledges that such an
association "would not necessarily please critics of multinationals." For example, he notes
that the encumbrances of trading relationships can be viewed as restricting a government's
freedom to act domestically while "fast growth involves disruptions and the destruction of
the value of old techniques of production and old skills."
"Those who value stability over economic progress will not be convinced of the worth of the
gifts brought by foreign involvement," Lipsey observes. "That is especially true if the gains
are captured by small elements of the population or if no effort is made to soften the impact
of the inevitable losses."
-- Matthew Davis

the maximizing benefits of FDI for the host


country can be significant, including technology spillovers, human capital formation
support, enhancement of competitive business environment, contribution to international
trade integration and improvement of enterprise development. Moreover, further than
economic benefits FDI can help the improvement of environment and social condition in
the host country by relocating cleaner technology and guiding to more socially
responsible corporate policies. All of these benefits contribute to higher economic
growth, which is the main instrument for alleviating poverty in those economies.

Foreign direct investment can make a positive contribution to a host economy by


supplying capital, technology and management resources that would otherwise not be
available. Such resource transfer can stimulate the economic growth of the host economy
(Hill, 2000).
Capital
As far as capital is concern, multinational enterprises (MNEs) invest in long-term
projects, taking risks and repatriating profits only when the projects yield returns. The
free flow of capital across nations is likely to be favoured by many economists since it
allows capital to seek out the highest rate of return. Many MNEs, by virtue of their large
size and financial strength, have access to financial resources not available to hostcountry
firms. These funds may be available from internal company sources, or, because
of their reputation, large MNEs may find it easier to borrow money from capital markets
than host-county firms would (Hill, 2000).
The crucial role played by the technological progress in the economic growth is now
widely accepted (Romer, 1994). Technology can stimulate economic development and
industrialization. It can take two forms, both of which are valuable. Technology can be
incorporated in a production process (e.g., the technology for discovering, extracting and
refining oil) or it can be incorporated in a product (e.g., personal computers) (Hill, 2000).

Technologies that are transferred to developing countries in connection with foreign


direct investment tend to be more modern, and environmentally cleaner, than what is
locally available. Moreover, positive externalities have been observed where local
imitation, employment turnover and supply-chain requirements led to more general
environmental improvements in the host economy.
By transferring knowledge, FDI will increase the existing stock of knowledge in the host
country through labour training, transfer of skills, and the transfer of new managerial and
organizational practice.
FDI can have a great contribution to economic growth in developing countries
by supporting export growth of the countries.