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Multinational Corporation: Boon or Bane? Neo-Liberalists Confession

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Multinational Corporation: Boon or Bane? Neo-Liberalists ConfessionLIRDS

Clement Henry
Hugh Todd

Contemporary estimates on production by Multinational Corporations (MNCs) claim that these enterprises account for approximately one-fourth of the world’s output and one-third of world’s trade. It has been noted that annual revenue of many MNCs are larger than the GDPs of a number of states. A Report from the United Nations at the dawn of the twenty first century informs that the top 53 multinational corporations are wealthier than over 120 nation–states. MNCs are seen as a vital form of capital inflows to developing countries along with concessionary loans and grants. Neo-liberal orthodoxy acknowledges that MNCs contribute to economic growth, the transfer of technology, skills, knowledge and management expertise along with expansion in indigenous employment. It is ardently believed that MNCs will deliver efficiency, growth and widespread prosperity in developing countries. The perceived growth and development benefits of MNCs make them desirable for policy makers seeking to improve the economic fortunes of their states. But critics of MNCs contend that MNCs are generally predatory and exploitative in nature. They point out that MNCs aim to maximise profits with little if any amount of technological transfers. A key consideration for policymakers in developing countries, especially in small states, is to assess the extent to which MNCs positively benefit their economy.

The sequence of this discourse is as follows: we commence with a brief overview of the emergence of MNCs, then proceed to assess their impact on small developing state and finally propose initiatives small developing states can adopt to overcome the challenges posed by MNCs and maximise the benefits from these entities.

Early records on western civilisation reveal that international business (trade) was conducted by the Phoenicians and Greek merchants. However, it was not until Columbus’ discovery of the “new world” in the fifteenth century that international business began to gather momentum. Significantly, the emergence of the world’s first multinational companies – the British East India Company in 1600 (establishing foreign branches throughout Asia ) and the Dutch East Indian Company in 1602 (with branches in Asia as well ) truly set the stage for the global expansion of MNCs. In the late 1800s one of the first multinational companies to own foreign production facilities and market its products under a global brand was Singer Sewing Machine.

An important development that catalysed the expansion of MNCs was the emergence of the World Bank and the International Monetary Fund as key financial institutions to manage the flow of resources to stimulate economic growth based on a neo-liberal doctrine. The new international economic order promoted in keeping with the neo-liberal paradigm was rooted in free market and free trade principles. Developing states were thereby expected to adopt the free market blueprint known as the Washington Consensus. The details of the consensus required developing states -“opening their economies up to foreign investment, financial deregulation, reduction in government expenditure and budgetary deficits, the privatization of government owned enterprises, the abolition of protection and subsidies, developing export oriented economies- or risk the withholding of much needed aid and finance” (Burchill 2005). Multinational corporations (MNCs), considered by neo-liberalists as influential actors, became the principal agent in the free market system in the 1990s and beyond. The Washington consensus was instrumental in the internationalisation of MNCs in the global economy by eroding barriers to trade and making import substitution strategies untenable.

Post-Cold War environment has also been pivotal in aiding the emergence and eventual dominance of MNCs. The Cold War era characterized by ideological polarity between capitalist United States and its allies and communist USSR and its allies consequentially led to an international environment that was not supportive of the free movement of capital and goods across ideological polarised regions. The end of the Cold War witnessed the removal of barriers to the free flow goods and capital and the expansion of capital flows in the form of foreign private investments into developing and transition states and allowed MNCs the strategic space to manipulate the economic, political and cultural structures of economies with considerably greater impact on small developing nation-states.

The material capacity of MNCs warrant their consideration as important transnational actors with significant implications for small developing states who depend so heavily on their inflows to catalyse growth, development and prosperity within their borders. Intuitively, we expect their presence will have both positive and negative spin offs in small developing states. Neoliberals will argue that a free market would have a positive impact on the economies of the world, and will recognize multinational corporations as important actors in the process. The positive contributions made by multinational corporations on small developing states rest in the areas of capital formation, transfer of technology and management skills, employment, competition and balance of payments. Liberalism sees these contributions as a path to equality and prosperity.

In contradistinction, dependency theorists and the world system theorists rebut the aforementioned. Dependency theorists assert that MNCs reinforce a state of dependence of the periphery that is strongly encouraged by the core. They stress that multinationals take advantage of the cheap labour and raw materials, while the small developing states remain dependent on the investment from the core. The world systems theory sees this situation as promoting inequality between the core and periphery as well as the exploitation of the periphery. Dependency and the world system theories support the notion that a free market structure (capitalist world economy), will place small developing states (periphery) in a position of industrial subordination, technological dependence, and depletion of natural resources. Here in the Caribbean the large multinational corporations are generally extractive in nature, as in the case of Guyana, Jamaica and Trinidad and Tobago. An early source of much discontent in the region was the view peddled by some academics and policy makers that MNCs contribute to a major drain of the natural resources in host countries while repatriating huge profits from these industries to the source countries in the core. According to these critics, MNCs, as representatives of the elites in the home nations (core) further contribute to underdevelopment in small developing states (periphery) by embracing the elites in these small host nations, since it is believed that they have harmony of interests. As a consequence, exploitation is perpetuated by MNCs in host countries to the benefit of the elites in these host nations and the core (home) nations.

Notwithstanding these structuralist observations, MNCs are not fundamentally exploitative. Correctly put the level exploitation that they inflict on host nations depends on how much the political elites in these nations will tolerate. So the generally assumption that MNCs are unconcerned environmental polluters is not so. Exploitation may indeed be a feature of the business environment, for the casual observer can notice that even small domestic firms are often much more exploitative than multi-nationals companies. Therefore institutions, both democratic and regulatory are essential in curtailing the exploitative instincts of profit driven free market enterprises.

Some other critics also charge that Multinational corporations’ enormous economic power makes it easy for them to be able to influence the corridors of power in small developing states. As in many instances accounting practices, tax rates, social policies, and labour relations among others, are determined by the concerns of the multinationals. With enormous economic power multinationals are also able to make huge contributions to political campaigns gaining even more influence in the political structure. Outright bribery and other high levels of corrupt activities are also perpetuated by multinationals in collusion with those in the upper levels of the political structure. The manipulation of the political structure by multinational corporations creates a situation of dominance to the advantage and benefit MNCs. Admittedly MNCs has the ability to distort the political process in small developing states by supporting the regime or destabilising it. But in the same manner domestic firms can do exactly the same. It all boils down to the potential corruptibility of the elites in host countries and the quality of institutions, including civil society institutions.

The major issue for many small developing states is their ability to foster economic growth and sustain development in a capital scarce and technologically deficient environment. Economists will recall Adam Smith’s view on the wealth of nations as being intrinsically tied to their productive capacity. This means that states ability to engender growth and prosperity is based on their ability to effectively combine natural and human resources with capital. Capital formation on a national basis is generally sourced from domestic savings but small developing states are generally characterised by low saving rates since their population are more concerned about current survival (plantain and eggs issues in the case of Guyana) than saving for the future. This fact points to essential role of external capital in driving growth and development in small developing states.

Having established the essential role of external private capital in fostering growth and sustaining development in small developing states we conclude that MNCs can contribute positively to development by filling the capital and foreign exchange gaps and providing appropriate technology and other expertise. It should be noted that these benefits are spontaneously derived. Host nations will have to be strategic and at times cajole or even coerce more corporate and social responsibility from MNCs. Governments will also need to develop clear labour and environmental policy along with robust supervision framework to eliminate the potential for exploitation of human and natural resources.

We further suggest some additional measures which can be useful in maximising the growth and development benefits of MNCs in small developing states. Policy makers should endeavour to prioritise the gradual improvement of institutional capacity and make public administration participatory and transparent; along with the provision of a favourable investment climate for foreign and domestic investments. Here focus should be placed on political and macroeconomic stability, a sound regulatory framework, efficient institutions and adequate physical and social infrastructure. Additionally, policy makers should seek to strengthen public sector institutional quality through training, and adopting a zero tolerance for corruption and the abuse of executive power for rent-seeking.

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    • Published: 3 years ago on July 22, 2014
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    • Last Modified: March 2, 2015 @ 10:35 pm
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