The Relationship between Multinational Firms, the State and Socio-Economic Development in the UK - Essay Example

? International Business: The Relationship between Multinational Firms, the and Socio-Economic Development in the UK ) (Tutor) (Date) Introduction Multinational companies have always played a vital role in economies globally. Estimates show that production levels by these multinationals is over one-fourth of the total global output and forms one-third of the overall world trade. Observers are of the view that multinationals or FDIs do have a beneficial impact on the national economic growth, provision of capital, and transfer of technologies, among other issues. Most of the research work conducted did concentrate on the firm-level decisions regarding their FDI strategies but less time and resources have been devoted to the state level. It has been realized that a number of states such as the US have often attracted FDI through various tactics including reduction in taxation levels. The relationship between these multinationals and the State becomes very important in the success of both parties. Even though one would argue that the role of state in international business has been eroded by the development in globalization, this is still not the actual case on the ground. The nation state still has a crucial role to play and this is why its relationship with the multinationals is quite relevant (Henderson et al., 2002, pp.436-464). A number of reasons exist as to why most multinationals are tolerated. One of them is the mutual relationship that could emanate between the state and the multinational which further links it to the home state of the multinational. In this case, a tripartite perspective could be established. The other reason is based on the social and economic developments that multinational companies do promote in the host country. These two reasons seem to underlie the basic intentions of the national governments in welcoming multinationals. This paper looks at the relationship between multinational firms, the state and socio-economic development in the UK as a case study. Analysis Multinational firms and the UK state The relationship between nation states and multinationals is one that has been characterised with juxtaposed needs or interests. Each seems to be pulling towards its side. The state is territorially defined and has well-defined political systems which provide the necessary framework for economic, social, political and cultural activities of those acting domestically and pursuing the interests of the nation (Dunn, 1994, pp.3-8). On the other hand, multinationals are interested in expanding their individual operations irrespective of the boundaries set by the state and have to cope with a number of political, economic, cultural and social conditions that exist in those acquired markets and they are always driven by private interests, which are usually founded on economy of scale, global trends in economy, and effective management of international operations. Existence of negotiated relationships between these two opposing parties merges their needs and ensures a win-win outcome (Kay, 2002, pp.1073-1102). Democratic political institutions have the capacity to establish policies that are market-friendly. The peace that exists in states links these democratic institutions to more credible levels of international systems. These mechanisms provide better playing grounds for multinationals in the long run. On this point, the institutional based checks as well as balances, which could be linked to democratic systems usually, reduce the possibility of reversing the policies made and thus providing the multinational companies with the de facto commitment to the stability of these policies (Iet to-Gillies, 2002, pp.43-54). Stable policies ensure that multinational are given a friendlier environment where they can forecast their needs for budgeting in relation to the upcoming economic scenarios as well as tax schedules, make critical managerial decisions that are able to respond to macro-economic predictions, and also eventually hedge against risks associated with currency. The mutual relationship that exists between the nation state and the multinationals ensures that the state formulates policies that give these multinationals a greater sense of assurances that there will be persistence in the conditions which lured them into the market in the first place (Pitelis, 1990, pp.98-99). In cases where the relationship between the multinational companies and the state have not been cordial due to negative policy changes, these companies have been seen threatening states by rejecting to be involved in any further economic investments in the UK or even pulling out of the country if things do not change (Henderson et al., 2002, pp.436-464). However, given that the UK is democratic, citizens have always been given the chance to elect leaders who they feel will represent their interests well and this has worked positively by not harming multinationals. The state has the enormous task of ensuring that there is mutual relationship with the multinationals. This is done through renegotiating policies that are conducive to the companies such as taxation rates (Dunn, 1994, pp.3-8). The UK firms have been somewhat self-oriented when going multinational. For instance, very few firms from the UK have been able to fully transfer technology to the host countries. This has always led to failure recorded in these companies. The UK carried out a survey to establish why most of their multinationals do not make it well in the international market. This study confirmed the above assertion (Silver & Arrighi, 2011, pp.23-56). Compared to the US-affiliated operations actually were very successful and this success was attributed to their ease of transferring technologies as well as other intangible assets to the UK from their mother country, US. Such a process ensures that the multinational is able to fully adapt to the environment in the UK and this makes it hard for the British rivals to match the same competitiveness that the US-affiliated firms pose. At this juncture, it becomes very important to note that much as the state has a role to play in ensuring that cordial relationships exist between the multinationals and the state, the companies also must be able to put in place friendly strategies that would ensure they both gain (Behrens & Picard, 2007, pp.1118-1122). The state could in this case be seen as a political unit that is relies on contiguous territory. Of interest to many scholars has been the concept of sovereignty of the state. It is argued that there exists jurisdictional asymmetry in territorial control exercised by the UK state and the international network created by the MNCs and their subsidiaries or affiliates. This scenario presents challenges to both the MNCs and the state. For instance, while the MNCs that are actually truly global have nothing in form of global political authority that they could base their hopes on, the UK as a state does not have adequate means through which it can fully comprehend as well as embrace the operations being run by MNCs in its territory (Dunn, 1994, pp.3-8). The political structures in the UK state which promotes sovereignty are even being viewed as archaic while those business models propagated by the MNCs are seen as being modern. This scenario throws the relationship of MNCs and the UK state, like all other states, into serious challenges. In order to ensure that there is continued mutuality in the relationships between MNCs and the UK state, the creation of what is referred to as ‘supranational political structure’ is proposed as being the best solution to solving constant tensions that emerge between MNCs and the UK state. Other pundits argue in favour of denationalization of MNCs as the other alternative solution to the problems (Pitelis, 1990, pp.98-99). As such, the state is often presented with alternative courses of action that it could apply in relating with the multinationals. The current international environment is characterised with constant changes and these have made it hard for states and multinationals to establish stable entities. Following major developments in the UK in the late 1960’s, the state changed the attitude it had towards the multinationals (Jones, 2005, pp.32-38). At this point, the UK managed to meet the satisfaction levels of the basic needs demanded by the state and all its inhabitants and as such the state has achieved sufficient self-faith in stressing out its interests as well as priorities. This could be partly attributed to the Keynesian approach towards the concept of economic development (Silver & Arrighi, 2011, pp.23-56). On the same note, multinational have often reflected new developments in the international environment within their structure and have grown more centralized and controlled in a multi-division way (Inkpen & Ramaswamy, 2007, pp.4-6). The UK state recognises the need to refine and modify as well as extend the coverage of its policies so as to utilize the inward investments brought by the MNCs. The response of MNCS to this call has been to review their attitudes as well as activities propagated in the host states and have also focused more on coming up with codes of conduct, easing the communication burden in national and global operations, and have also engaged more in cross-border alliances which are strategic and also entered into ventures with state-owned corporations in the UK (McInnes, 1993, pp.40-43). Multinational firms and the Socio-Economic Development in the UK United Kingdom is seen as a country that has contributed greatly to multinational growth through its open policies to foreign investments as well as its interest to invest in other foreign countries. This multinational corporation between United Kingdom and other nations has brought both economic and social impacts on the host country as well as the investing companies (McInnes, 1993, pp.40-43). In the western hemisphere alone, it is estimated that 18% is the total stock of foreign direct investment. On the other hand, one third of United Kingdom’s affiliates are investing in the developing countries or continents like in the case of Africa that has consumed 40% of its foreign investments and Asia hold an estimated 32%. The growth in the number of the United Kingdom’s affiliates has also had impacts that have come with it, which include increase in direct investment and the accumulated stock of foreign investment. The United Kingdom’s cumulative stock has increased from $12 to $24 billion between the year 1960 and 1971 and the trend is actually observed as an increasing trend. This accumulated stock increases a nation’s economic development as well as social development by changing the people’s lifestyle. Multinational Corporations have also seen the growth of banks within the United Kingdom. In 1972, there were over 192 foreign banks and the number has been increasing as years go by. This has improved the United Kingdom’s economy since the banks provide a readily available source of funds that could be internationally shifted. On top of that, credit facilities are easily available to the host country as well as other foreign countries and increased the international bank capability rather than national banks capabilities (Miller, 2000, 12-22). Multinationals have also set a stage for acquisition of natural resources for the United Kingdom, both as a host country and as an investing country. With the growing demand for global innovation, many companies have already exhausted their raw materials for the production process. Multinationals have made it possible for companies to acquire raw materials from foreign countries through foreign direct investment for the companies production use and at the same time for their home country companies (Goerzen & Makino, 2007, pp.1149–1169). Technology has been seen as a big incentive in the economic globalization and is generally perceived as a public good since it does not only affect the economy but affects an individual’s capability in the production process as well. Multinational Corporations of different foreign countries have enabled sharing of technologies, which have resulted to the benefits of the host country as well as the investing foreign company depending on the new technology that one acquires from the other (Behrens & Picard, 2007, pp.1118-1122). United Kingdom’s hosting of Chinas car manufacturing companies has seen both countries gain in the technological sector. The new technology may be exchanged through a company hiring employees of the host country that are already equipped with that particular technology. The foreign workers will in turn work with the corporate workers who will end up gaining knowledge of the new technology and using it to perfect their products within the company and the home country. On the social aspect, these employees also gain in terms of technological and knowledge empowerment. This helps build their characters as individuals in the global innovation (Antia, et al., 2007, pp.365-383). Multinational Corporations have brought an impact of creating an international market in the industrial sector for companies that invested in the United Kingdom as well as affiliates of the United Kingdom. Small growing companies that have invested in the United Kingdom and have not yet gained the international recognition find easy market for their products within the United Kingdom’s market or the global market through the influence of the United Kingdom. This can be reflected in computer and electronics industries in the United Kingdom which are gaining the international recognition and growth through the United Kingdom’s market (Inkpen & Ramaswamy, 2007, pp.4-6). In terms of manufacturing, Multinational Corporations have facilitated industrial sourcing which is currently on the rise due to the growing competition in the manufacturing industry. This has witnessed more developed countries collaborating with less developed countries or companies to manufacture products that easily find their way into the global market, hence helping in the global recognition of both countries, most especially the upcoming ones. In this partnership, one country or company produces part of a product then it is transferred to a foreign country for finishing and put on the market as a product for both foreign companies (Dunn, 1994, pp.3-8). Multinational Corporations contribute to placing countries either in interdependent or dependent positions from their governments. This makes the corporation governments difficult to extricate themselves unless if it is at a considerable cost. This is so because in most cases the operations of the multinational corporations are beyond the territory of the host country as well as the home country. Its policies are outside the governments territories but are based on the multinational corporation guidelines hence are dependent on their own (Behrens & Picard, 2007, pp.1118-1122). Employment opportunities have also been cited as resulting from the relationship established by the Multinational Corporations. When a corporation or an organization invests in a foreign country like the UK, this host country mostly insists that the corporation employ certain percentage of its citizens as a condition to be met (Henderson et al., 2002, pp.436-464). This offers the host country the opportunity to facilitate employment opportunities to its citizens through the multinational corporation. Apart from the employment opportunities, the host country may push the foreign company to meeting other social aspects that are of societal interest such as building school, hospital among others (Ratner, 2001, p.435). Multinational Corporations in the United Kingdom have resulted to strategic alliance of several companies. This is where two or more companies come together to form an alliance in the production or manufacturing system by serving each other’s interest either in their markets or given locations (Behrens & Picard, 2007, pp.1118-1122). This alliance is of importance in the production process since through sharing, it reduces the marketing costs, distribution channels costs, reservations, resource location, management and expertise costs, labour costs, and transportation costs. Through reduction in the production costs, the multinational corporations offer economic advantage to the United Kingdom and its affiliates (Inkpen & Ramaswamy, 2007, pp.4-6). Since each country or company is well informed of the environmental issues affecting the environment from its home country, the environmental and operational risks are minimized in the alliance, hence creating a social impact that will evidently be human friendly as well as environmental friendly (Iet to-Gillies, 2002, pp.43-54). Multinational Corporations have also created an impact on customer loyalty. A company might decide to invest in a foreign country to literally follow its customers that are in that particular foreign country or in the international market so as to win the customers loyalty with its products whether locally or abroad. This aspect becomes very much of importance for any organization that wants to attain global innovation since regular client maintenance is of great essence. Multinational Corporations also act as economic hedge. A country or a company that has been through recession or instability may use Multinational Corporation to attain its stability by using the profit generated in one host country as an edge to offset the losses that were incurred in another economic trodden market. Through this way, even after economic instability of a company or an organization, it is easier to stabilize through the international market (Tatum, 2010, pp.2-6). On the other hand, Multinational Corporations facilitate the maximization of profit while at the same time minimizing in the production costs. Every economic entity aims to achieve profit at the highest level possible. Multinational Corporations put their products at an international level hence increasing their market value (Tatum, 2010, pp.2-6). The product to be introduced in the international market must be of good quality hence of high standard as well as pricing. This will result to maximization of profit in the international market rather than into national markets and at the same time reduce costs through implementation of high technology, easy availability of raw material, and less costs in transportation or marketing (Jones, 2005, pp.32-38). Lastly, Multinational Corporations have also brought social impact with it among individuals in the UK. The interaction of people from the home country to the host country has a social impact through sharing culture and beliefs and how each group of people relates to the other. Apart from acquiring new culture and beliefs, individuals who have left their home country to work in a foreign country on return will be more experienced with more foreign skills as well as international experience than that employee who has been working in the home country all along (Sriramesh & Vercic, 2003, pp.34-36. Conclusion The relationship between the state and multinational corporations is often characterized by tension. However, where mutuality prevails, huge benefits are accrued by both parties.in that regard, it is prudent that states provide adequate facilitation to multinationals and come with policies that favour free market. Multinationals also have the role of ensuring that they do not come into friction with the host country. Multinational Corporations have been on the rise in the recent years since most of the countries have liberalized their national economic policies to attract foreign investments (Silver & Arrighi, 2011, pp.23-56). This resent openness to foreign direct investments has been associated with the growing economic and social need for nations to access to foreign markets and the need for raw materials for the corporations within home countries. Other reasons that have influenced multinational include; expectation in raise in employment opportunities, increase in a nations export, increase in tax revenues and technological exchange among other. List of References Antia, M., Lin, J. B., & Pantzalis C., 2007. Cultural distance and valuation of multinational corporations. Journal of Multinational Financial Management, Volume 17, Issue 5, Pages 365-383 Behrens, K. & Picard, P.M., 2007. Welfare, home market effects, and horizontal foreign direct investment. The Canadian Journal of Economics. 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