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Opinions of Sunday, 15 November 2009

Columnist: Baafi, Alex Bossman

Multinational Corporations And The Developing World

By Alex Bossman Baafi

One of the economic hope and aspirations to get out poverty and under development which had plagued the developing world from the time immemorial is to attract foreign direct investments (FDI) into their various economies. It therefore becomes a dream come true when Multinational Corporations (MNCs) decide to invest in developing countries. Currently, there are over 35,000 multinational corporations globally, controlling more than 15,000 foreign subsidiaries and accounting for about one-third of the entire world production. The developing countries that received the most multinational investment are those perceived to have the highest growth potential. They are generally known as the newly industrialized countries and include Asian countries such as China, Singapore, Malaysia, Thailand and Latin American countries such as Mexico, Brazil and Argentina. The ten biggest recipient of foreign direct investment receive nearly 95% of the total, while all the African countries put together receive less than 4%. The poorest 50 countries of the world between them receive less than 2%.

Originally, most MNC investment in developing countries was in mines and plantations. Today mining accounts for only 6% with manufacturing and services accounting for over half and Oil & Gas for about one-third of the total. The value of the total MNC worldwide is estimated to be more than $1.5 trillion of which approximately one-third is in the developing countries.

For simplicity sake, I will like to define MNCs as businesses that either own or control foreign subsidiaries in more than one country. It is this ownership or control of productive assets in other countries which makes the MNCs distinct from enterprises that do overseas business by simply exporting and importing goods or services. I know however that, to define an MNC as a company with overseas subsidiaries fails to reflect the obvious gigantic size and over whelming importance and diversity of MNCs. To be able to appreciate the immense roles and the full impact of MNCs, we need to consider factors such as size, nature of business and many more.

Virtually many of the world largest companies such as Coca cola, Shell, IBM, Guinness Breweries, General motors to mention a few have managed to spread their tentacles in most parts of the world. In terms of turnover, some of them exceed the national incomes of many smaller countries like our country, but I must hasten to add that there are also thousands of very small specialists multinationals which are a mere fractions of the above mentioned ones, that are also operating significantly in the global system. MNCs cover the entire spectrum of business activity from manufacturing to extraction agricultural production, chemical processing, service provision and finance and therefore there is no peculiar line of activity of the multinationals.

MNCs in the developing economies

In as much as MNCs investments can be significantly rewarding in developing economies, it could produce adverse consequences for the host developing countries.

Employment

Governments in the developing countries are always on the look-out to attract Foreign Direct Investment (FDI) and are prepared to put up considerable finance by making considerable concessions because of employment. MNCs investment constitutes a stimulus to economic activity and employment creation. The employment that MNCs create is both direct in the form of people employed in the new production facility and indirect through the impact that the MNC has on the local economy. The Ghanaian economy for example has benefited immensely with the influx of many mining, petroleum, banking and telecommunication companies like MTN, Vodafone, and Zain to mention but a few. This has accounted for an increase in the domestic incomes and expenditure and hence the stimulus in domestic business as lots of jobs had been created. The workers also gain from the technology imported by the MNCs (technology transfer).

Taxation revenues

Taxation is also a plus in the operations of the MNCs for the domestic economy. MNCs and domestic producers are required to pay taxes and therefore contribute to the public finances. Giving the highly profitable nature of many MNCs, the level of tax revenue raised from this source is mostly significant. The host country’s balance of payment position is also likely to improve on a number of counts as a result of MNC investment. Firstly, the investment will represent a direct flow of capital into the country and secondly, in the long term, the MNC investment is likely to result in both import substitution and export promotion, for, goods previously purchased as imports could now be produced locally. Despite the gains, multinational investment may not always be beneficial either in the short or long term with particular reference to the developing world. It is possible that jobs created in one region of a host country by a new MNC with its superior technology and working practices may cause businesses to fold else where and thus increase in the level of unemployment in those region. Profits repatriation which constitutes capital flight might effectively undermine many or all of the potential gains from multinational investment. In addition to these concerns, there are also the following problems;

Uncertainty

There is much uncertainties associated with the operations of MNC. They are highly dynamic and therefore can simply close down their businesses in the foreign countries and move. This is especially likely with older plants which would need upgrading if the MNC were to remain or with plants that can be easily sold without much loss. If a country has a large foreign multinational sector within the economy, it will become very vulnerable and face great uncertainty in the long term. It may thus be force to offer the multinational perks in the form of grants, special tax relief and other concessions in order to persuade them to remain all of which are costly to the tax payers in the developing countries.

Control

The fact that MNC can shift production locations not only gives them production advantages or economic flexibility, but it enables them to exert control over their host nations. This is particularly the case in many of the developing nations where MNCs are not only major employers but in many cases the principal wealth creators. Thus attempts by the host state, for example to improve workers safety and welfare or impose pollution controls may go against the interest of the MNCs. MNC might thus oppose such measures or even threaten to withdraw from the country if such measures are not modified or dropped, rendering those developing economies vulnerable to serious economic fluctuations and shocks.

Transfer pricing

Like domestic producers, MNCs are always finding ways to reduce their tax liabilities. One unique way that an MNC can do this is through the process know as transfer pricing. This enables the MNC to reduce its profits in countries with high rate of profit tax, and increase them in countries with low rates of profit tax. This can be achieved by simply manipulating its internal pricing structure. For example, take a MNC where subsidiary A in one country supplies materials to subsidiary B in another country. The price at which the materials are transferred between the two subsidiaries will ultimately determine the costs and hence the level of profit made in each country. Assume that in the country where subsidiary A is located, the level of corporate tax is half of that of the country where subsidiary B is located. If materials are transferred from A to B at very high prices, the B’s costs will rise and its profitability will fall. On the other hand, A’s profitability will rise. The MNC clearly benefits as more profits is taxed at a lower rather than higher rate. Had it been the other way around, with subsidiary B facing the lower rate of tax, then the materials would be transferred at a low price. This would increase subsidiary B’s profits and reduce A’s.

Environment

Many MNCs are accused of simply investing in countries to gain access to natural resources, which are subsequently extracted in a way that is not sensitive to the environment. In the developing nations where there is the dire need for foreign direct investments, they are frequently prepared to allow MNCs to do this. We often put premium on the short run gains from the MNCs presence than on the long run depletion of precious natural resources or damage to the environment. Perhaps, we are a victim of this circumstance as a nation as far as the mining sector of the country is concerned. Governments in the developing world often have a very short run focus. They are concerned more with their political survival through the ballot box rather than the long term interest of their people.

Many of the benefits and costs of MNC investment that we have considered so far are most acutely felt in developing countries. The poorest countries in the world are most in need of investment and yet are most vulnerable to exploitation by multinationals and have the least power to resist it. There tend therefore to be a love-hate relationship between the peoples of the developing world and the giant corporations that are seen to be increasingly dominating their lives, from the spread of agro-business into the hinterlands through the ownership and control of plantations to international mining corporations, despoiling vast tracts of land from industrial giant manufacturing to international banks controlling the flow of finance, from international tour operators and hotels bringing the socially disruptive effects of affluent tourists from America, Europe etc, to the products of the rich industrialized countries fashioning consumer tastes and eroding traditional culture.

Although MNCs employ only a small proportion of the total labor force in the developing countries, they have a powerful effect on these countries’ economies. They also often exert considerable power and influence over political leaders and their policies and are frequently accused of meddling in politics in certain developing countries. It is easy to see the harmful social, environmental and economic effects of multinationals on developing countries and yet governments in these countries are so eager to attract overseas investment and to turn a blind eye on many of their excesses.

Whether investment by multinationals in developing countries is seen to be a net benefit or net costs to these countries depend on what are perceived to be their developmental objectives. In my opinion, if maximizing growth in national incomes is the goal, then MNC investment has probably a positive contribution. If however, the objectives of development are seen as more wide reaching and include goals such as greater quality, the relief of poverty, a growth in the provision of basic needs such as food, healthcare, housing and sanitation and a general growth in the freedom and sense of well-being of the mass of the population, then the net effect of multinational investment could be argued to be anti-developmental. What then do we do in order to benefit from this seemingly necessary evil situation? Perhaps in order to prevent virtually the most critical abuse practices including culture invasion by diluting our way of life, governments of developing countries must be firm, divide and tightly control selective sectors with highly lucrative profitable potential to make sure that the MNC investments could be restricted to at least 50-50 joint ventures with the governments or the private partnership in the domestic economy.

With particular reference to Ghana, our motherland, it is the sincere view of the writer that lessons from this will spur on the government to be on the guard to prevent cultural invasion and environmental abuse that are likely to surface in the course of producing Oil & Gas in the Western Region of the country. In negotiating and awarding oil and gas contracts, provision must be made to benefit more indigenous companies otherwise known as local content as this would be where most of our native workers will butter their bread either directly or indirectly. The government will be irresponsible to rush into concluding agreements with short term focus for the sake of political survival through the ballot box or certain individuals or group considerations rather than considering the long term interests of the nation.

Email: abkbossman@yahoo.co.uk