Impact of Mnc and Globalisation on Developed and Developing World

In this essay I seek to define and analyse the components of economic globalisation and assess the outcomes of this in different parts of the world. I have gathered a range of academic sources as a means of investigating and clarifying the effects economic globalisation and the rise of Multinational Corporations (MNC’s) have on different economies – as well as utilising case studies and examples as justifications of the conclusions I come to. For the purpose of this assignment I will be examining the impacts of economic globalisation and the rise of MNC’s on both one ‘developed’ and one ‘developing’ country in order to have a smaller and more accurate range of evidence to examine and draw conclusions from.

The initial question that ought to be asked in regards to this essay title is – what exactly is economic globalisation? As asserted by Shangquan (2000) it reflects the ever-growing development of trade, this trade includes a number of things such as capital, technology, different types of industry and markets as well as the obvious services and regular commodities. Within the same article it is suggested that the reason for economic globalisation is as a result of lowered modern-day costs of global communication and trade. It also highlights that the largest carrier of economic globalisation is Multinational Corporations.

Multinational Corporations (MNCs) are ever growing and prevalent in almost every part of the world, generically speaking they are also key in boosting economic growth. They are huge economic actors and influencers that are privately owned, not state owned. The sector of technology is currently booming and a large majority of the top 10 MNC’s are all heavily technological-based companies. However there is increasing literature and analysis on the impacts of MNC’s and how they affect the developing world in comparison to the already developed, not only this but there has also been a surge in the analysis of the impact of the rise of MNC’s as a whole – and the repercussions of the rising of MNCs.

It is often difficult to define what we understand a ‘developed’ and/or ‘developing’ country to be, and how we can quantify or measure this ‘development’. Currently the Human Development Index (HDI) is the most common tool used in order quantify or monitor development of a country. Not only does the HDI account for economic growth rates but also other variables such as living standards, and life expectancy. Another good tool is to observe a countries economic growth is GDP per capita in order to better decide whether or not the country is developed or developing.

An example of two emerging/developing economies are often Asia – based countries such as China and India who are often host countries for Foreign Direct Investment (FDI) of Multinationals with home countries that already have thriving economies. Scholars seek to examine the repercussions of this globalisation and investment on the developing economies in order to draw comparisons on the state of the economic climate. Despite being the country of investment, there is ever growing evidence to show that emerging third world economies have benefited so greatly from the opportunities that the rise of MNC’s have to offer that they are now becoming the investors. The rise of MNCs with lesser developed home countries is a reflection of the benefits that economic globalisation has on the world as a whole. According to Dunning, Kim and Park (2008, p59) there are four newly industrialised economies that have developed so rapidly due to globalisation that they are generating enough GDP per capita in order to be on par with developed, first world economies such as Australia, and countries within the European Union (EU) – Hong Kong, The Republic of Korea, Singapore, and Taiwan. These four countries are the face and inspiration of what’s labelled the “East Asian Miracle”. This is representative of how overtime economic globalisation and the rise of MNC’s and FDI have allowed poorer countries to flourish and keep growing until they also generate the power and ability to invest in other countries, allowing room for creativity, technological advances and new ideas. It is important to understand how this has been an investment and transfer of knowledge which has in turn allowed these countries to then begin investing globally? A key element that ought to be explored is – what are the effects that in turn create such a huge surge of economic growth in a under developed country?

As a small case study, I will examine and review the emerging economy of China and how globalisation and increasing MNC’s has completely transformed their economic position. As previously mentioned, the investment of western multinationals into such poverty-stricken regions of the world, allow them to break their investment barriers and explore different global markets. However, it is important to understand the process involved in reaching such outstanding levels of economic growth. When an MNC sets up base in a host country it is a means of creating resources and generating wealth. Most would agree with Cohen (2007) explanation in regards to the processes of how MNC’s bring success into developing countries. MNC’s ensure they are utilizing all available resources, meanwhile keeping their output and efficiency at the maximum possible level. To define maximum output, it simply means they are competing and ensuring they are creating produce at the most competitive and highest level. They also compete in terms of price and product by ensuring that price level is kept as low as possible in order to increase disposable incomes as well as utilizing their researching and developmental resources to plan and widen the choice for the consumer. Not only this but MNC’s are becoming increasingly innovative and constantly planning around present and future changes in consumer taste or preference. It is also inevitable that MNC’s give the local people of the given country an abundance of job opportunities which will return in other economic advantages such as increases in consumer expenditure, higher GDP per capita and lower overall unemployment rates if the corporation is operating on a large enough scale. This is statistically exemplified by the extra 17.5 million (Luo, 2001, p6) Chinese individuals that were employed by MNCS in 1997. Not only this but post 1997 MNCs added 17.9% extra to China’s industrial value, as well as supporting China massively in becoming the largest global foreign exchange holder. This is a great source of secondary evidence to support the rapid growth of China and the value it can add to a given region of the world. This is also clear from the rapid economic growth that took place during the experimental years of globalisation, and companies investing beyond their home country – particularly in Asian regions of the world.

However, it is really important to not overlook the alternative variables that are accompanied by the introduction of an MNC into a country. There is a fine line between helping a developing economy grow by seeking out constant new opportunities and research, and exploiting and taking advantages of the incentives offered by governments (i.e. breaks from taxation) and lack of regulation in the third world. Without regulation it is very easy for monopoly behaviour to occur within a corporation, this isn’t an ideal scenario as then there is no control and other firms get unfairly pushed out of the market meanwhile the monopoly is in total control of every aspect of their business, including price – which can result in the consumer being in an ultimately disadvantageous position. By an MNC joining a given market, a risk of domestic and publicly owned firms getting pushed out of this market does often run very high due to the increased level of competition. This then puts every local firm at a disadvantage which isn’t always the fairest scenario.

A number of MNCs have documented not only their interests in China but their concerns surrounding investing in the Chinese economy, which we can in turn analyse to better understand the effects of increasing globalisation of corporations. According to a recent study carried out by KPMG (KPMG, 2012) despite the identification of opportunity for growth, a number of the MNC’s senior executives highlight their concerns in regards to the increasing government regulation and fiscal policies such as inflation/taxation rates, wage rates and the costs of labour. Unfortunately, these all come at increasing costs to MNC’s such as KPMG, Tesco, Bluebell, and others included in the interview materials that are compiled within the study. It was even questioned as to whether or not these issues will result in MNCs looking into what other emerging economies have to offer. It is at this point we could question as to whether or not the rise of MNC’s is a good thing? Or is it just a means of exploiting and abusing the naivety of a lesser developed economy? Is it possible that the rise of MNC’s just drives an economy out of control rather than harbouring and developing it? One could suggest that MNC’s have bought more disadvantages to the Chinese economy than what may be initially perceived when analysing the rise of economic globalisation from a generic perspective.

Another huge concern for the rise of MNC’s and economic globalisation is the impact it has on global warming and pollution, particularly in the developing world. Inevitably when a subsidiary corporation of an MNC is based in a host country it can become very easy for them to become slightly careless and neglect environmental protection laws more than they would if based solely in their home country. An article published by People’s Daily Online (2009) supports such information by documenting how a blacklist against multinational repeat pollution offenders has been issued by the Chinese government. Environmental activists as well as the government are becoming increasingly worried about the damaging levels of both water and air pollution – whereby it’s believed a substantial part of the blame lies with the carelessness of MNC’s located within China. In 2015 environmental regulations were amended (Uematsu, 2018) and as a response to this many MNC’s deemed the updated policing to be too restrictive, encouraging some MNC’s to retire from the Chinese market and presumably seek opportunities elsewhere. Again, this just provides more grounding for us to question the advantageous vs disadvantageous impacts on growing economic globalisation and the rise of MNC’s on lesser developed regions of the world.

Alongside this Luo and Park (2001) argue that more analytical and strategic approaches need to be implemented when we consider the uncertainty and particular lack of regulation in the Chinese markets. This is inevitably due to the empirical evidence available that supports the idea of MNC’s abusing this lack of legal, political and environmental framework.

Another pivotal topic, in relation to my assignment title, is the impact that economic globalisation and increasing MNC’s has on developed countries. Multinationals often steer away from investing into the already developed world as there isn’t necessarily as many opportunities available. From the perspective of the developed world it is possible to analyse the impacts from two perspectives – as a host country and, more importantly, as a home country for an MNC, this way it is possible to evaluate the effects on both ends of the globalisation phenomenon and the rise of MNC’s. However, it is important to note that there is limited literature of the rise of MNC’s in developed economies as it ought to be questioned, in an economy that is already booming, how will a foreign affiliate change this? Davis (2020) suggests that the globalisation and the constant growth of MNC’s is in fact the best-case scenario for both home and host countries – and acknowledges the positive impacts that the growth of MNC’s can have on the developed country from which it originates from. Countries such as the United States (U.S.) can benefit from entering markets that perhaps would’ve been initially inaccessible without being a global corporation, this in turn increase overall exports. The most important point that is exemplified within this article is the fact that a clear positive correlation has been observed worldwide between the increase of MNC’s and FDI and the level of exports/trade from the developed parent countries. Obviously, exports are a factor that contributes towards the GDP level, henceforth this demonstrates that globalisation and increasing FDI is beneficial towards a stronger economic state within developed countries that house the headquarters of MNC’s.

However, in both developed and developing economies employment can often fluctuate alongside the increase of globalisation. When a corporation transitions their production and manufacturing lines from domestic to global it can usher the local people within the parent country out of their jobs. In return this will then cause a decline in the employment level, which did actually occur during the rise of MNC’s out of the United States (U.S.) in the 1970’s. Although Davis (2020) also argues that the lost jobs are then replaced by the emergence of other foreign affiliates entering the U.S. which create opportunities for people.

Greenway, Sousa and Wakelin (2004, p1027 – 1043) evaluate the effect of foreign subsidiaries being based in developed regions of the world such as the United Kingdom, United States and Japan. It is suggested that domestic businesses within developed countries can in fact learn off the fast paced, and high level of international trade and exports. It is thought that when multinationals join a market that the number of exports from domestic firms increase – which is again beneficial for the economy as exports contribute to aggregate demand/GDP. It is understood that the heightened level of competition encourages smaller domestic firms to export more, and by observing and communicating with a corporation that is operating on a global scale it can become easier to pick up and follow the pattern of exports the MNC’s exemplify. It is almost thought that when an MNC enters a developed economy, there is almost an unintended transfer of knowledge which can benefit the market by teaching other firms how to operate at the most efficient and productive level. Ultimately this leads to other chains of effects such as an increase in consumer choice, which in turn results in more expenditure, benefiting the economic state of the country as a whole – as these are all components of GDP.

In an assessment that was carried out on the home country effects of Swedish MNC’s (Blomstrom and Kokko, 2020) it’s also suggested that perhaps the home – country could get slightly neglected with valuable and limited resources being prioritised and exported to the corporations foreign counterparts, which is replacing any investments that could’ve instead been made into the home country itself. Although, this could be contradicted by the inevitable suggestion that the headquarters of MNC’s often export their profits out of the foreign country, back to the parent country, in order to reinvest and strengthen their own position. It could be perceived that this is in fact more beneficial to the already developed economy, in comparison to the developing one, as it means they can grow within their own already thriving economic climate – if they are exporting the profits back home.

In conclusion I think the impacts of economic globalisation and the rise of MNC’s in both the developed and developing world is a very controversial topic. Despite having an inevitable positive impact on economic growth and a state’s economic position, it is also important to question whether or not economic globalisation is always the best thing given the current state of the global economy. Although it must be noted that when analysing and creating case studies, it is difficult to extrapolate and generalise that information – this is not to suggest that MNC’s have the same impact on every developing country as it must be considered that each and every MNC has a different purposes, goals and targets to meet. There are terribly negative, and also extremely positive cases of foreign subsidiaries behaviours’ in their host countries, but it is vital to evaluate every analysis of the impacts of globalisation rather than coming to a single conclusion. MNC’s tend to primarily invest in lesser developed economies rather than developed ones, and its important to understand why it is this way. Is it a means of generating opportunity in the third world, or a means of exploitation? Despite this argument, economic globalisation and MNC’s have helped the global economy and many disadvantaged countries around the world thrive and generate many new ideas as well as revenue. It has been the reason that many economies are in the powerful position they are today.