Impact of Multinational

Enterprise
Favorable Impact of MNE

• Increasing international competition.

• Global consumer awareness.
• Technological advancement.
• Reduction in friction among nations.
• World Business Community coming together.
• Growing role of private sector inn developing countries.
• Regional economic Integration.
• Increase in the number of bilateral treaties that promote FDI has
increased considerably.
• Privatization programmes.
 Impact on World Economy
• Multinational corporations play an important role in the world economy
through the process of economic globalization; in other words, the
increasing economic interdependence of national economies across the
world through a rapid increase in cross-border movement of goods, services,
technology and capital.
• e.g. - India is an example of a country that, economically, has benefitted
from globalization — it has seen rapid GDP growth and has a growing
middle class with a rising standard of living.
 MNE affects on local and National policies
• Multinational corporations affect local and national
policies by causing governments to compete with each
other to be attractive to multinational corporation
investment in their country.
• e.g. - Walmart is an example of a large multinational
corporation that often exerts influence on political
processes through lobbying, contributions to campaigns,
and threats of market withdrawal.
 Favor Impacts on Developing Countries
Increase Investment
• The primary argument in favor of MNC (or MNE) is that they enable
investment into less developed countries which is essential for their
growth. According to this argument, there exists a huge gap between the
optimal investment levels and the levels of savings in a country. This gap
can be minimized via foreign direct investments, i.e. transfer of resources
from a foreign source in the form of economic injections.

Technological Transfers
• Another important aspect is the issue of technological transfer. Any MNC
operating in a certain country needs to have an agreement with the host
country about its operating guidelines. This can be both beneficial or
harmful, depending upon the negotiations. If done right, the MNC would
agree to a transfer of technology which would turn out to be very
beneficial for the host country, since technological advancements require
huge research and development funds that the developing countries just
do not have. So it makes sense for them to open up their markets in
exchange for a technology that could make them self reliant and self
sustaining.
 Favor Impacts on Developing Countries
Transfer of skills
• Like a transfer of technology, MNCs also bring with them a wealth of knowledge
and experience. Their staff is amongst the best in the world and employees from
the less developed countries learn plethora of skills from them, enabling them to
train others and have a trickledown effect. Foreign firms pay for and provide
world class training to its employees and stimulates intellectual as well as capital
growth.

Trickle down effects

• MNCs, via their broad investments enable linkages backward, forward and
horizontally. Not only does the MNC provide a FDI, but it also benefits companies
that it collaborates with, such as industries that produce complementary goods.
The service industry also benefits via the increase in investment. It creates
additional demand and improves infrastructure abilities.

Increase in Tax revenue

• An increase in tax revenue is also an added benefit, since the host country
gets to tax them and includes it in their public revenue. This can be used to
finance projects that lead to development of infrastructure, causing
economic development.
 Conti…
Reduces gap between capital and labor
• Less developed countries are also highly labor sensitive. As in the ratio of
capital to labor is very low. MNCs employee vast numbers of the local
population reducing this gap, creating jobs and employment and revenue
means for the populace. There are two effects, direct and indirect. Job
creation is direct, while the increased stimulus in demand and supply is
the indirect employment effect.

Encourages competition
• This investment encourages entrepreneurship and breeds a culture of
competition, increasing competitiveness amongst local companies, causing
them to improve their own goods and services by increasing their
efficiency and ultimately quality in order to better compete.

Improves Balance of Payments

• An added benefit of foreign direct investment is that it helps the Balance
of Payments of both, the capital and current accounts, of the host country.
 Negative impact of Multinational Enterprises
Colonialism
• MNC's are seen as a offshoot of western colonialism, albeit in a more
subtle manner. Far from improving the balance of payments on both
the current and capital accounts, critics argue that MNC's worsen it.
This they argue happens when the profits are repatriated to their own
countries. Though the local governments may come to an agreement
that a certain portion of their inputs be bought in the local market, this
however may come at a cost with negative impacts upon the less
developed countries current accounts.

Unmatchable influence
• The power, influence and reach of these MNCs have enabled them to
have considerable and highly influential affect on the political
dynamics of numerous governments and their countries. The MNCs
have been known to use this influence to pressurize governments into
letting them become more competitive via the implementation of
national policies that is conductive to their end goals, which is
ultimately a hefty profit. One major drawback of such reforms is a
vast decline in any socio-economic reforms.
 Negative impact of Multinational Enterprises
Technological fraud
• Technological transfer agreements are not always kept, and when kept
they are usually skewed in favor of the MNC. Even though most do not
agree to a full transparent technological transfer, even if that comes to
pass, the technology passed onto the country is usually obsolete in nature
or is patented so it would be of little use to the host country on a global
scale.

Little or No accountability
• MNCs comprise of international bodies which function beyond the state
authorities, in terms of decision making power and the power they hold
over monetary assets. Though this legitimate challenge has been out there
for thirty years now, yet only slight developments have been noted in
terms of accountability. The old-fashioned regulatory body and the
MNCs’ significant economic and political power have resulted in a clash
which makes the regulation of states turn into a major problem. The
MNC has surpassed the national legal structures and disregarded the
delicate international bodies, increasing the already existing burden of
fulfilling the basic norms of human rights.
 Negative impact of Multinational Enterprises
Stifles Competition
• The superiority of MNC's shines through their competitive nature as the stifle
competition by getting subsidized inputs, lowering their costs and then competes with
local manufacturers who cannot realistically match up to their prices. This results in a
lot of them leaving the field, leaving the MNC's to monopolies the economy and then
once in power, to jack up prices.
• Although FDI is supposed to foster growth, with the inclusion of MNCs it might lead
to a loss of jobs as more businesses are put out of work. Although host countries
require foreign investors to have a fix percent of local workers, this requirement is on
the decline due to WTO's agreement on Trade Related measures on investment.

Undermine Social and Economic Rights

The MNCs’ dominant and significant position within the international forum increases
its opposing competencies. MNCs’ can easily promote or undermine economic and
social rights, which can in turn affect the international community, positively or
negatively, depending on the local market of an economy. Though the State still holds
much power over the laws and regulations on an international level, MNCs’ have a
considerable impact over the decision making process of nation-states.
Negative impact of Multinational Enterprises
Unmatched budgets
• An offshoot of their influence on the government, the MNCs also have a huge
advertising budget, which enables them to portray a much better image in the
eyes of the local populace. With budgets that run in the millions, MNCs almost
always succeed in gaining mass market shares of their products since the local
companies cannot produce/hire production companies to do the same. This
again alienates the local entrepreneurs and makes it harder for the majority of
the population.
Human Right abuses
• The Multinational Corporation is an adaptable and established entity that profits
from the principles of neo-liberal economics, as well as the predicament of the
"home and host" state, the combination of which with restricted levels of
liability and a decentralized decision-making hierarchy allows for abuses of
human rights to take place internationally, by having doubt standards. Moreover,
polices of MNCs such as the WTO, OECD, IMF and the World Bank, have
enabled MNCs to gain a position of considerable influence on agendas of social
and economic nature.
Negative impact of Multinational Enterprises

Environmental impacts
• Economic globalization has had quite a destructive impact on state
regulation. People have been affected negatively and gradually the
impact is increasing and becoming more obvious. The more
competitive a nation, the lesser the regulations. Though this tactic is
almost perfect in attracting multinational corporations, it is quite
destructive in nature. In order to compete with such nations, other
states are also forced to decrease their regulatory measures if they
wish to get foreigners to invest in their country. No nation wishes to
reduce its competitiveness or power. Foreign investors are now
consuming the money that should have been legally invested in
maintains the rights of the public socially, economically and
culturally. Hence, MNCs are free from any legal obligations which
may bind them and put a stop to the activities which are prone to
destruct the communities that are subjected to the MNCs treatment.
Further Study

• MNEs in India and its Impact on Indian Economy