How multinational corporations (MNCs) shape up the global Economy
What is a multinational corporation?
A multinational corporation (MNC) is a company that operates in its home country, as well as in other countries around the world.
It maintains a central office located in one country, which coordinates the management of all its other offices, such as administrative branches or factories.
The political economy of international relations (Gilpin, R.1987) defines a multinational corporation as “oligopoly(an economic condition in which there are so few suppliers of a product that one supplier’s actions can have a significant impact on prices and its competitors)corporations in which ownership, management, production, and sales activities extend over several national jurisdictions.”
A multinational corporation is an enterprise which possesses at least one unit of production in a foreign country (Meier and Schier 2001: 8).
Multinational corporations (MNCs) play significant roles in shaping the global economy. For example, MNCs in the U.S., which has the world’s largest economy, make disproportionate contributions to the national economy: They represent a very small number of total American firms (less than1%), but a large fraction of GDP, exports, imports, research and development, and private-sector employee compensation; Specifically, U.S. MNC parent companies in 2016 constituted more than24% of private-sector GDP (value-added) and 26% of private-sector employee compensation (Bureau of Economic Analysis 2018a); U.S. MNCs are engaged in more than half of all U.S. exports and more than 40% of U.S. imports (Bureau of Economic Analysis 2018b). Likewise, MNCs throughout the world dominate the global economy as well as their national economies. The OECD (2018) estimates that MNCs account for half of the global exports, nearly a third of world GDP (28%), and about a fourth of global employment. These firms all generate a significant share of their revenue from abroad as well. Importantly, their transnational activities have transformed the nature of international trade, investments, and technology transfers in the era of globalization. The extensive global value chains (GVCs) prevalent in today’s world economy have been driven by how MNCs structure their global operations through outsourcing and offshoring activities.
Role of multinational corporations in globalization
Promotion of foreign investments
In recent years, external assistance to developing countries has been declining. This is because the donor developed countries have not been willing to part with a larger proportion of their GDP as assistance to developing countries. MNCs can bridge the gap between the requirements of foreign capital for increasing foreign investment in developing countries.
The liberalized foreign investment pursued since 1991 allows MNCs to invest in such countries i.e India subject to different ceilings fixed for different industries or projects.
Technology transfer
Another important role of multinational corporations is that they transfer high sophisticated technology to developing countries which are essential for raising the productivity of the working class and enable them to start new productive ventures requiring high technology.
Whenever multinational firms set up their subsidiary production units or joint-venture units, they not only import new equipment and machinery embodying new technology but also skills and technical know-how to use the new equipment and machinery.
For example, the Indian workers and engineers come to know of new superior technology and the way to use it. In India, the corporate sector spends only a few resources on Research and Development (R&D). It is the giant multinational corporate firms (MNCs) that spend a lot on the development of new technologies which can greatly benefit the developing countries by transferring the new technology developed by them. Therefore, MNCs can play an important role in the technological up-gradation of the Indian economy.
Promotion of exports
Extensive links all over the world and producing products efficiently and therefore with lower costs multinationals can play a significant role in promoting exports of a country in which they invest.
For example, the rapid expansion in China’s exports in recent years is due to the large investment made by multinationals in various fields of the Chinese industry.
Historically in India, multinationals made a large investment in plantations whose products they exported. In recent years, Japanese automobile company Suzuki made a large investment in Maruti Udyog with a collaboration with the Government of India. Maruti cars are not only being sold in the Indian domestic market but are exported in a large number to foreign countries.
Investments in infrastructure
With a large command over financial resources and their superior ability to raise resources globally, it is said that multinational corporations could invest in infrastructure such as power projects, modernization of airports and ports, telecommunication.
The investment in infrastructure will give a boost to industrial growth and help in creating income and employment in the global economy.
The external economies generated by investment in infrastructure by MNCs will therefore crowd in investment by the indigenous private sector and will therefore stimulate economic growth.
Non-debts creating capital inflows
As direct foreign investment by multinational corporations represents non-debt creating capital inflows we can avoid the liability of debt-servicing payments.
Moreover, the advantage of investment by MNCs lies in the fact that servicing of non-debt capital begins only when the MNC firm reaches the stage of making profits to repatriate.
Thus, MNCs can play an important role in reducing stress and strains a country’s balance of payments (BOP).
There is no doubt that the relationship between economic globalization and MNCs grows stronger by the day. As Hart and Prakash (1999) rightly pointed out, economic globalization has everything to do with the increasing integration of input, factor, and final product markets, coupled with the increasing salience of MNCs in the world economy as well as their creation of cross-national value-chain networks.
It is, therefore, safe to conclude that MNCs are not only beneficiaries but also agents of globalization. The internationalization strategies of MNCs would not be possible without a fair share of globalization. In other words, globalization is accelerated as MNCs execute their options in pursuit of these strategies.
However, the process of globalization is not complete yet perhaps never will be. It is for this reason that scholars mostly focus on whether there is more or less globalization at any given period, as well as what the limitations of globalization might be.
