The Impact of Multinationals on Economic Growth and Prosperity in Developing Countries - Essay Example

The impact of multinationals on economic growth and prosperity in developing countries 0 Introduction Globalisation has led multinational companies to cross international borders to enhance their market share, and at the same time contribute to that country’s economic development. The governments of the once reclusive economies of Asia, China and India, have encouraged an open economy policy to attract multinational companies, and foreign direct investments for infrastructural development, and a stronger, vibrant economy. The multinational companies enjoy the benefit of healthy profits and government subsidies. These two giants, along with Vietnam, have integrated into the global economy and achieved economic growth. Political stability and highly educated workforce have supported their ideology of benefiting from globalization. They are among the fastest growing economies in the world today. In contrast, the same cannot be said about Africa, where increased political instability, poverty, and environmental degradation have played havoc. A poor state of affairs, Africa has suffered from their involvement in international trade. So, how does globalisation help developing countries? With the arrival of multinational conglomerates, many countries, Asian ones in particular, have gained through import of technology, free flow of capital, free markets for trade and services, and employment. With the advent of computers, businesses have become more competitive and better. Understanding different cultures and business environment is now within ones reach through the internet. This enhances business opportunities and makes on-the-spot decision making easy. Globalisation leads to liberalisation. In economic terminology, governments use the term liberalisation to indicate an open economy system. Governments attract FDI through attractive incentives and subsidies. Multinationals are encouraged to invest and produce goods and services for local and external consumption. There is an unimpeded flow of goods and services between economic jurisdictions. The multinational company enjoys good benefits through low production costs and competitive pricing, and the country receives revenue, and employment opportunities for its labour force. Consumers also benefit from quality international products at affordable costs. Liberalisation allowed the conglomerates the liberty to target the local market as well as export without facing the pressure of protective tariffs and trade1. 2.0 An Overview The topic of globalisation became intense towards the end of 1990s, when major players began to debate on the benefits developing countries could have from it. Most third world countries were under pressure to clear debts, intense illiteracy, unemployment, poverty and infrastructural development. Most experts were unanimous in their findings that most developing countries required foreign direct investment to bail them out of their financial debts. But this could be done only if the countries were willing to share the fruits of investment and provide equal leverage. Equal leverage meant the freedom to produce and compete in the local market. Multinational companies needed the wholehearted support of the ruling government and sought stability at the centre. Only a stable government could implement policies that were favourable for foreign investment.. "Before trade and foreign capital can translate into sustainable growth, governments first must deliver political stability, sound economic management, and educated workers," wrote Business Week. Globalization has created millions of jobs from Malaysia to Mexico, brought phone service to some 300 million households, and transferred close to $2 trillion through equity, bond investments, and commercial loans, it continued2. With globalisation, trade has expanded beyond boundaries bringing growth and prosperity. Liberalisation has led to higher market competitiveness and productivity, improving living standards, and sustained economic growth. However, change precedes benefits; a change that witnesses the power shifting from traditional companies to the more innovative ones that are more productive and competitive in international markets. 3.0 Impact: An Economic Perspective Asia is among the most favoured destinations for foreign investors today. China and India have benefited immensely. The pace of technological change, combined with the emergence of rapidly industrialising economies in Asia, China and India, presents new challenges as well as opportunities, both for businesses and for policymakers. Chinas open-door policy has become the means of absorbing foreign technology and know-how. It has made rapid progress as a producer. Motorola, Nokia, Texas Instruments, GE, AT&T, Samsung, and Intel, apart from the software giants, Microsoft, Oracle, and SAP have established R&D bases in India. India has joined China as a key player in production of high-precision automotive parts and automobiles. The names of Suzuki, Mitsubishi Motors, Hyundai, Ford, and Volvo come to mind3. Ever since the governments of some of the developing economies opened their borders to trade, foreign investors have found tremendous opportunities for economic advances. These countries benefit from Foreign Direct Investments (FDI), global export markets; a result of foreign participation in their country, and advance technology brought by the investor. This enhances the local market buoyancy, leading to better quality and competitive pricing for, both the consumer and producer. An important aspect of the transfer of technology is greater innovative power. Countries such as China and India today are more of followers of technology. However with exposure to latest technology, they could one day be leaders in the field of innovation. With more and more foreign participation, employment opportunities rise, giving way to employment and removal of poverty. In order to take advantage of such opportunities, the government needs to encourage skills development. The skills profile must be responsive to the changing needs of the economy for individuals to adapt to new opportunities offered by multinational companies. Top priority is a must to tackle, both basic and intermediate skills of the existing workforce, at the same time raising ambitions for higher level skills. China, and India are playing an increasingly important role in global markets says IMF. A report compiled by this agency reveals that China accounted for 13 per cent of world output in Purchasing Power Parity (PPP) terms in 2004, contributed to 31% of the global growth, while India contributed 7% of the world’s growth 2001-04. Both these countries are dynamic, and growing. They have abundance of low-cost skilled and semi-skilled labour, and a rapidly growing entrepreneurial culture. With their emergence, there will be a growing premium on innovation and productivity. The advanced economies will be challenged in knowledge-intensive areas such as software and hardware4. They are moving in the right direction. They have invested in skills to enable them to compete in new areas. It is estimated that China produced around 2 million graduates and 200,000 postgraduate students in 2005. India on the other hand, produces 260,000 engineers a year and its number of engineering colleges will double by 2010. The Indian Institutes of Technology is among the world’s best universities. These two countries are not intent on being classified as labour-intensive, low value-added industries destination. They are emerging as innovative giants. Even though the Chinese pharmaceutical industries concentrate on low-end generic technological products, the government is encouraging R&D for Chinese domination in the sphere of biotechnology. The presence of multinational companies in China today will help their investment plans in R&D indirectly, and the technology spillover will encourage the industry to develop. The emergence of India as a favoured destination for outsourcing and business services industry is pretty much evident. India earned in excess of $17 billion in revenue for services alone during 2004/05. This makes up for 44% of the world total revenue earned in services, according to Nasscom, India’s software services trade association. This is growing at an astonishing rate of 30% a year. It is believed that India stands to gain in excess of $50 billion a year by 2008. Thanks to its strong educational foundation to go with English speaking, the Indian market has become highly competitive, with strong competition on price, and significant wage competition for graduate employees5. India is also a major contributor as a software solution provider. Major projects are undertaken by its software engineers in U.S.A, U.K, Europe, Canada, and elsewhere. Borrowings are normal for the developing world. The World Bank, the International Monitory Fund (IMF), and The Asian Development Bank are forerunners in financing infrastructural developments in developing countries. Many developing countries face huge debt levels, leading to sustained poverty. The biggest problem with these countries is that because of debts, they have scarce resources needed for eradication of poverty. This is one area that multinational companies can help plug. With the free flow of foreign direct investment in infrastructure, the governments can avoid loans for developments and enjoy returns on production and sales. A win-win situation. 4.0 Evidence of the Effects of Globalisation in the Developing World - India This chapter reveals the true effects of globalisation in a developing world. The inputs are from National newspapers reporting on business. In order to understand the dissertation topic on the impact of multinational companies on economic growth and prosperity in developing countries, the following four reports identifies the importance and qualities of collaboration and FDI. IT exports to touch $60bn: Karnik India’s software exports is expected to jump to $60 billion by 2010, boosted by an increase in outsourcing by large MNCs, Mr Kiran Karnik, the President of the National Association of Software and Services Companies (Nasscom) said here on Tuesday. Speaking to media persons on the sidelines of the ongoing “Second Global Forum on Business Incubation” organized by FICCI along with World Bank, InfoDev and Department of Science and Technology. Currently, software exports are growing at 30 percent per annum and the”country is well poised to achieve the target by 2010”, he added. The software and service export revenues were expected to rise to $30 billion in the current fiscal, Mr. Karnik said. On the severe shortage of talent in the IT industry, a scenario that could lead to a shortage of five lakh professional by 2010, Mr.Karnik said that efforts were already on for collaboration, with universities to improve academic quality by equipping students who lacked soft skills. In an effort to strengthen security against data theft, Nasscom has launched the National Skills Registry for IT and BPO staffers. The online registry provides potential employers with information on employees, ensuring authenticity of data through independent verification and biometric identification of employees (Business, Deccan Chronicle, Wednesday 8 Nov 2006). Ritz-Carlton Boston now a Taj brand for $170m Taj Hotels Resorts and Palaces on Friday announced that it has entered into an agreement to purchase The Ritz-Carlton, Boston Hotel from its current owners, and Millennium Partners for $170 million. The hotel will be renamed as Taj Boston and the deal is expected to close on January 11, 2007. “The addition of this hotel to the Taj Hotels’ growing international portfolio reiterates our commitment to establishing a significant presence for the Taj Hotels Resorts and Palaces brand in key destinations across the globe’ said Mr. Raymond Bickson, managing director and chief executive officer, Indian Hotels Company Limited, which operate Taj Hotels. The hotel, which has 273 rooms, is located next to the Boston Public Garden in the city’s premiere retail district. According to Mr.Bickson, “The Taj Boston will become the company’s second hotel property in the US. In 2005, Taj Hotels entered into a lease agreement to operate and manage The Pierre, the luxurious, landmark hotel on New York’s Fifth Avenue.” David M.Gibbons has been named as the new general manager of the Taj Boston. “This is an extraordinary opportunity to bring the Taj brand of luxury and service to a building that already has a sterling reputation for refinement and taste. I think Taj Boston is going to be a very nice fit for this city and region.” Taj Hotels operates 75 high-end hotels in India and other locations around the world. Over the past year, Taj Hotels has announced the launch of four luxury projects that include The Taj Exotica Resort (opening 2008) in Doha, Qatar with an investment of QR 220 million, the Taj Exotica Resort and Spa (opening 2008) on the Palm Jumeirah in Dubai with an investment of $330 million, the Taj Exotica (opening 2009) in Phuket, Thailand and Taj Luxury (opening 2008) in Cape Town, South Africa. (Business Chronicle, 11 November 2006) Raymond forms joint venture with Italian co. To launch Grotto’s GAS brand in India Raymond has announced a 50-50 joint venture with Grotto S.p.A of Italy to launch the latter’s GAS brand in India. The GAS brand will retail a lifestyle collection that will feature its core business in premium denim clothing offering Indian consumers the latest in international fashion, according to a company release. With a total investment of about Rs.50 crore, the joint venture will bring together Grotto’s proven expertise in design and managing a successful brand and Raymond’s expertise in apparel brand building and retailing and its vast distribution network. The market for jeans wear in India is estimated at 90 million pairs annually, of which 30 per cent has been captured by the branded segment, according to the company. PTI reports: The new joint venture would distribute the brand through 600 retail outlets. Commenting on the tie-up, Raymond Group President Pradeep Bhandari told reporters here on Friday that the joint venture company was aiming a touch a turnover of Rs.125 crore in the next three years. Speaking on the occasion, Grotto Vice Chairman Aldo Palmeri said: “We plan to distribute the GAS brand in the Indian market through flagship stores and other retail outlets over three years”. Thereafter, Grotto plans to utilize the manufacturing capabilities of Raymond to export to other markets. (Business, The Hindu November 11 2006). French SMEs to increase presence With large French firms enhancing their presence in India, France on Friday said that it would focus on small and medium enterprises (SMEs) to provide impetus to the sector to tap the growing Indian market. “While 300 French companies are active in India, employing nearly 40,000 people, French SMEs are still lacking in number,” French Ambassador, Dominique Girard said while addressing the media here on Friday. He said France had more than two million SMEs representing 64 per cent of that country’s total employment. At preset, only 1,400 these SMEs were exporting their products to India. “The commercial action plan launched in February by French Minister of Foreign Trade, Christine Lagarde, aims to bring 500 SMEs to India over 2006-08’ Mr. Girard said. The main objective of the meet was to increase the number of French SMEs in India. This would throw up opportunities for Indian businessmen for collaboration with a large number of French SMEs, Mr. Girard said. Bilateral trade between India and France has grown by an average 26 per cent a year, representing an annual figure of four billion euro and it will not be difficult for the two nations to double bilateral trade in the next five years, given the mega deals that are being signed between Indian and French companies. (Business, The Hindu November 11 2006). India has been a success story. Ever since it opened its borders to foreign investments and collaboration, the country’s economy became buoyant. A strong democratic political system, supported by a professional work environment, makes India a strong investment destination. The availability of a highly educated workforce at low wages is an investors dream. With the government offering subsidies and attractive incentives to investors, multinational companies stand to benefit immensely. The country benefits from flow of foreign exchange, equity shares, and employment opportunities. With low cost raw material availability and international ports for imports and exports, multinationals have the advantage of producing international standard products at low costs. The consumer too benefits through arrangements. 5.0 Conclusion Despite setbacks to a few countries for obvious reasons, most developing countries have only benefited from the emergence of multinational companies in their back yard. Multinational companies look for political stability, a strong skilled workforce, and profits, as prerogatives for investment. Countries that attract such investors look at capital investment flow, equity participation, and employment benefits for its workforce. The above scenario fits the two giants of Asia, China and India. India is a super power in the field of information technology and outsourcing. China with its strong infrastructure has the capability to vie with the developed world in hardware. They are true representatives of the economies that have profited from the impact of multinational companies and FDI. 6.0 Reference 1. Globalization, http://www.answers.com/topic/globalization 2. Manoj Singh, Expert Roundtable 5, Can China and India Innovate? Business Week, http://www.businessweek.com/magazine/content/05_34/b3948425.htm 3. Globalisation and the UK, http://www.hm-treasury.gov.uk/media/E7A/10/ent_globaluk021205.pdf 1.9, Emerging markets will increasingly challenge advanced economies Page 9 Read More