The growing interdependence of global economies, cultures, and populations is encouraging cross-border trade in different commodities and technologies; as a result, enhancing foreign direct investments. Globalization implies international trade, more wealth, and higher standards of living in various countries. Multinational Corporations (MNCs) are taking advantage of the globalized economies and increased interactions to make their commodities and services more generally available. These organizations are promoting greater economic production and efficiency (Monshipouri, Welch, and Kennedy, 2017). The enhanced movements and exchanges of products, capital, cultural practices, people, and technologies promote the operation of MNCs in their host countries. The companies can influence the socio-economic, political, and cultural systems in their host countries (Fortwengel, 2017). In particular, MNCs can apply any relevant strategy to remain profitable and viable in their international operations. The organizations rely on their ability to hire skilled workforces and to procure capital-intensive equipment. As such, multinational corporations can contribute to promoting global problems or providing a viable solution to such challenges.
Keywords: Multinational Corporations, globalization, the theory of globalization
What are Multinational Corporations?
The subsequent analysis of the definition of MNCs, characteristics, and advantages can increase background knowledge and understanding of the role of the companies in promoting global problems and solutions. Multinational corporations (MNCs) are large companies with facilities and other critical assets in at least one host country, separate from the country of origin. The companies engage in international trade through efficient coordination and management of other administrative branches (Fortwengel, 2017). The main business strategies of MNCs include global profit maximization and increasing the global market share. The companies can engage in direct foreign production using subsidiaries and affiliates located in the host countries. However, they must maintain direct control over such overseas operational bases (Monshipouri, Welch, and Kennedy, 2017). MNCs must design appropriate strategies to facilitate the implementation of such transnational production, marketing, finance, and hiring processes. Some of the common examples of multinational corporations include Wall-Mart, ExxonMobil, BP, Toyota, Chevron, General Motors, Coca Cola, Apple, and Microsoft. These companies avoid high corporate tax and strict trade laws in their host countries because of their massive economies of scale. The common types of MNCs include decentralized corporation (strong presence in the home country), centralized corporation (enjoys cost advantage available in host countries), and a transnational enterprise.
What are the characteristics of Multinational Corporations?
The figure below captures some of the essential characteristics of MNCs.
Figure 1:Features of Multinational Corporations
Most multinationals enjoy huge assets (physical and financial capabilities) and capital turnover. The MNCs relies on such strengths and capabilities to control markets and production processes in their host countries. They also boast of comprehensive networks of branches in various countries through subsidiaries and affiliates (Orts, 2019). Besides, companies have strong control over the management of their international business activities. The entities can rely on subsidiaries and affiliates to execute most of their business objectives in host countries. They can also use their extensive economic potentials to initiate mergers and acquisitions in their host counties with the primary objective of controlling local markets and production processes (Makhlouf, 2017). Another essential feature of MNCs is its ability to apply advanced and sophisticated capital-intensive technologies to facilitate their manufacturing and marketing processes. The professional management of multinational corporations using competent and trained individuals further strengthens their market operations (Monshipouri, Welch, and Kennedy, 2017). MNCs also have an advantage over other companies because of their massive investment in advertisement and marketing and the efficient production of higher quality goods and services.
What are the Benefits of Multinational Corporations?
Large economies of scale: MNCs enjoy market dominance or monopoly. The possibility of such vast economies of scale encourages other firms to go international.
Reduced cost of operation: MNCs can benefit from cheap labor and direct consumer engagement in their host countries, enhancing their ability to maximize profits (Ferraris, Santoro, and Scuotto, 2018). The companies can also save on transportation or shipment and other related costs.
Taxation: The possibility of relatively low corporate tax charges encourages companies to expand their global presence through affiliates and subsidiaries (Popescu, 2016). The companies can also enjoy flexible trade traffics and cheaper import quotas in their host countries.
Unique operational model: The chart below examines the model of change that makes multinational corporations enviable.
Figure 2: The operational framework of MNCs
Source: Delmestri and Brumana (2017)
From the model, MNCs can rely on the value of capitals (exchange rates) in their host countries to influence the rules of the game in their host countries. They can also rely on their substantial capital potentials to engage in mergers, acquisitions, and divestitures (Popescu, 2016). MNCs also rely on multiple national business systems to enhance their market control and sales margins in their international subsidiaries.
The Applicable Theory of Globalization and Multinational Corporations
The theories of globalization can provide accurate explanations of the perceived role of MNCs in promoting global problems and solutions. The concept of globalization refers to the extensive network of various socio-economic, cultural, and political processes and interconnection beyond the confines of national boundaries. In business, globalization can help companies to initiate international engagements through subsidiaries and affiliates. The emergence of multinational corporations is a clear illustration of the perceived impacts of the concept of globalization. The figure below explains the theory of globalization, according to Transformationalists and postmodernists.
Figure 3: Impact of Globalization
Source: Martell (2016)
Transformationalists and postmodernists describe globalization as a multifaceted and complex set of interconnected relationships. The theories suggest that societies can influence and enhance the globalization processes, especially when the impacts are negative (Gupta, 2018). According to the chart, while globalization is supporting the expansion of international capitalism, free markets, and international trade through MNCs, modern societies should understand its perceived dangers (Martell, 2016). The theory of transformationalism further asserts that the set of interconnected relationships between different global institutions can promote a two-way exchange between local and global cultures, political, and socio-economic practices. However, according to transformationalists and postmodernists, globalization can expose citizens to multiple benefits. However, the citizens of the host countries are responsible for selecting the specific aspects of western influences that they can adapt to satisfy their varied needs. Therefore, MNCs risk backlash from the local population if they do not solve their problems. Other theories of globalization can also explain the alleged impacts of MNCs in creating or solving global problems. For example, according to the theory of liberalism, multinationals can use globalization for their market-led expansion programs(Koveshnikov, Ehrnrooth, and Vaara, 2017). In particular, the theory describes globalization as the free movement of commodities and people across national boundaries.
The theory of Marxism, however, exposes some of the common dangers or criticisms associated with globalization. According to Marxism, multinational corporations embracing globalization can promote wealth inequality or disparity in the host countries (Baylis, 2020). MNCs are capitalists whose primary objective is profit maximization at the expense of the working-class population. As such, the Marxism theory encourages caution and control to mitigate the negative impacts of globalization in contemporary societies.
The Role of Multinational Corporations in Creating Global Problems and Solutions
The current multinational organizations are participating in solving various global problems through their corporate social responsibility initiatives. Presently, the world is facing serious problems or issues, such as the spread of contagious diseases, environmental degradation, political instability, unemployment, and economic recession. The chart below examines some of the economic, social, political, and technological forces associated with the emergence of MNCs through globalization.
Figure 4:The Negative and Positive Impacts of MNCs on Host Countries
Source: Author’s compilation
Increased Unemployment and Employment Opportunities
Unemployment is one of the global problems that MNCs can help solve in host countries. Unemployment is a global problem because it can trigger different societal ills, such as immigration and high crime rates. According to Nfam and Mawere (2018), unemployment of human resources can cause an increase in the gap between the rich and the poor because of the uneven distribution of natural resources. MNCs can also enhance the exploitation of the unemployed factors of production or natural resources in the host countries, thus increasing capital formation. The companies can use such resources to expand their production potentials in the host countries, creating more employment opportunities. As such, MNCs can improve the income levels and the purchasing powers of the local populations (Frieden, 2019). For example, a Toyota Company in the rural villages of Kenya will offer employment opportunities to the local population. Higher employment of idle human resources translates into a reduction of societal ills, such as high crime rates in the host countries. The ripple effects of such employment opportunities include the improvement of the general living standards through other related socio-economic developments.
The Toyota Company can also elicit internal competition and entrepreneurship among locals. For example, locals may establish restaurants and residential houses to serve the company’s employees. The company may also initiate other critical infrastructural development programs, such as road expansion and construction, opening up the rural Kenyan village. The company may also facilitate the distribution of electricity to households and local businesses. In certain cases, Toyota may engage in corporate social responsibilities, such as building schools, distributing relief food, and constructing hospitals. Overall, from the above example, most MNCs can help the host countries to reduce the poverty levels through various means.
Such internal competitions created by the multinational companies can cause unemployment in some host countries. In particular, MNCs have large capacities and potential to initiative massive industrial developments. As such, they can limit the ability of local companies and workforces to compete for similar customer bases and professional positions. The consequence of such internal competition is the collapse of local companies and the subsequent loss of employment for their employees (Frieden, 2019). Some MNCs can also replace local employees working in their subsidiaries and affiliate companies with expatriates, further creating the problem of unemployment. In particular, the expatriates can replace high-skilled workers and local professionals occupying different roles within the corporations.
General Economic Development in the Host Countries
Multinational Corporations can help in solving the problem of economic recession or underdevelopment in the host countries. In particular, an MNC can have favorable impacts on a country’s balance of payment and trade through the influx of foreign currency and the increase in exports. MNCs can rejuvenate and strengthen the general economy of a particular nation (Jiboku and Akpan, 2019). They can facilitate technology and management skills transfer to local companies, further enhancing local production potentials. For instance, Apple and technology MNCs rejuvenated the Chinese economy. China is a good example of the impact of knowledge and management skills transfer in a developing economy. The country used such experiences to develop its own high-tech companies capable of rivaling other established MNCs, such as Samsung and Apple. Notably, most American MNCs shifted their production plants to China to benefit from the readily available and cheap human resources. The companies helped China to generate and accumulate foreign exchange reserves. The companies also provided viable avenues for the generation of tax revenues. China directed the generated revenue to other socio-economic development processes, becoming a global economic powerhouse. Therefore, from the above examples, countries should facilitate the entry of multinational corporations to create and sustain a competitive economic environment. The local workforces in the host countries may also benefit from the technology and management skills transfer. MNCs, such as Apple and Samsung, also broke the monopoly of local entities, such as Xiaomi, Meizu, and Lenovo. As such, local consumers in China enjoy lower switching costs because of the presence of alternative quality and cheaper commodities.
MNCs Can Create Political Crisis and Instability in the Host Country
The primary objective of most MNCs is profit maximization. Notably, these companies can employ different legal and illegal strategies to sustain their market dominance and performances. For example, a company like Toyota can bribe local political leaders to establish operational bases in strategic locations within the host countries. Some of the MNCs can also use their financial might to influence favorable government policies (Jiboku and Akpan, 2019). For instance, Toyota can bribe legislators in a particular country to pass fair trade laws and trade tariffs. Notably, such policies can increase the company’s ability to breakeven and gain a larger market share. The policies can also transform MNCs into monopolies, capable of controlling and setting prices of basic commodities. For instance, ExxonMobil can control the price of oil in the host country, especially when it transforms into a monopoly because of favorable government laws. Higher prices of oil can also influence an increase in the price of food products and other commodities, resulting in higher standards of living in the host country. However, the citizens of such countries may protest such foreign influence of the MNCs on their sovereignty. Opposition politics may inspire such oppressed citizens to protest and demand a reduction in the standard of living. In certain cases, the protests may escalate into violence, further creating political instability and uncertainty. For example, the Arab Spring protests in countries, such as Egypt and Algeria, have a close relationship with the increasing prices of oil and food. In extreme cases, MNCs can support armed resistance in the host countries to create chaos and benefit from the confusion. For example, some foreign multinationals such as BP may support terrorist groups in countries such as Iraq and Afghanistan to benefit from cheap oil and gas exploration. Therefore, host countries should vet and ascertain the true intention or business objectives of the foreign MNCs before sanctioning their operations.
MNCs Contribute to Global Environmental Problems and Solutions
Currently, some of the common global environmental problems include pollution, global warming, and poor waste disposal. Other environmental concerns include the rapid depletion of the ozone layer, acid rainfall, the overutilization or depletion of natural resources, deforestation, and the constant loss of biodiversity. Some of the MNCs contribute to the worsening of these environmental challenges in their host countries (Jiboku and Akpan, 2019). Typically, most of the companies engage in capital-intensive industrial production processes that may involve the use of big machines and space. The machines can pollute the air through the burning of carbon fuel and particulate matter from the environment, causing serious air pollution. MNCs also facilitate deforestation processes to harvest wood and expansion of their industrial activities, triggering soil erosion, mudslides, destructive flooding, and global warming (Jiboku and Akpan, 2019). Some companies release untreated industrial discharge into the local water streams, thus affecting aquatic life and reducing access to clean water for domestic consumption. In essence, despite their indiscriminate exploitation of the host countries’ natural resources, some MNCs are not engaging in active social corporate activities that may limit their ability to breakeven or maximize profits.
Some multinationals are making meaningful contributions to environmental management and sustainability. For example, the BAT (British American Tobacco) has sustainable partnerships with local communities in the rural villages of Kenya. Through such partnerships, the company is donating millions of tree seedlings to farmers and other important community stakeholders. The firm’s forestation programs are helping farmers to replenish the materials used in tobacco curing and preserving the natural environment. Moreover, the company also has an integrated energy management system, focusing on attaining zero waste to landfill sites and reducing carbon emission. Overall, more MNCs are starting to engage in different environmental protection and sustainability programs. The companies should invest more resources towards high-efficiency technologies to reduce their carbon footprints. They should also initiate and support environmental awareness training and campaigns in their host countries.
Overall, while the establishment of multinational companies in a particular country attracts multiple benefits, there should be effective control over such entities. For instance, MNCs can create meaningful employment opportunities for the local communities, thus solve the global problem of poverty. The companies may also inspire the local entrepreneurship spirit, further improving the general standard of living in a particular region. Infrastructural developments, such as road networks, electricity, and water, are other significant benefits of MNCs in a place. However, MNCs can trigger environmental problems, such as deforestation in the country. The companies may also influence the internal affairs of such states, encouraging political crisis and instability. Notably, solving most of the problems without a mutually beneficial relationship between MNCs and the host countries can be challenging. The companies should engage in more CSR strategies to strengthen their relationships with the host countries. The effective control of the operations of these MNCs will reduce their participation in environmental degradation and other related issues. Therefore, the host countries should assess the perceived role of multinational corporations in creating different global problems and solutions.
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