Trade Liberalisation and Issues for Multinational Corporations - Essay Example

Trade Liberalisation And Issues For Multinational Corporations Summary Trade liberalisation between developed and underdeveloped countries implies the free trade between those countries without being subject to any trade restrictions, laws or policies. The outcomes of free trade are desirable for the developing countries in terms of rapid industrialisation and for the multinational corporations in the context of cheap labour and profit opportunities in the new market The greatest issue for the multinational corporations is to fight against the negative reputation of these corporations concerning the exploitation of trade liberalisation policies The multinationals demand less trade restrictions, no government intervention and monopoly in the market As trade liberalisation perpetuates in a country, the competition ascends in the market due to extensive market entry by foreign as well as local corporations Effective cost management is also needed in order to cope with the rising costs of high wages and technology influx into the host country. Distinct cultural and social environment prevail wherever the multinational corporations operate. These corporations need to pay careful attention to these variations Maintaining a stable rate of profitability in the event of increasing competition, erupted due to trade liberalisation Table Of Contents Introduction ----------- 4 Trade Liberalisation Between Developed And Developing Countries - An Overview ----------- 4-6 Multinational Corporations And Liberalisation Of Trade ----------- 6-8 Trade Liberalisation- Issues For Multinational Corporations ----------- 8-11 Discussion ----------- 11-12 Conclusion ----------- 12 Introduction This report provides an insightful study on the issues encompassing multinational corporations underlying trade liberalisation between developed and underdeveloped countries in the world. The liberalisation of trade or free trade between these two development facets of the world implies exchange of investment and trade activities without any trade restrictions involved. Thus, carries several opportunities as well as issues for the developing countries as well as the multinational corporations from the developed world. This report examines the liberalisation of trade between developed and underdeveloped countries along with the crucial issues for multinationals underlying these free trade policies. Trade Liberalisation Between Developed And Developing Countries - An Overview Trade liberalisation, as the term indicates, is about liberalising or freeing the trade from national restrictions and boundaries. In the modern world spectrum, this term is mostly taken to reflect the system of global free trading, where international trade is allowed freely without any restrictions such as tariffs and trade bans. As Javier (2005, pS05) rightly delineate the term trade liberalisation as "the international trade of goods or services without tariffs or other trade barriers; the free movement of labour and capital between countries; and the absence of trade-distorting policies, such as taxes, subsidies, regulations, or laws, that give domestic firms or goods an advantage over foreign ones". It suggests that the trade liberalisation implies trading activities on a national or international scale, where goods can be imported or exported without restrictions or tariffs and quotas, people (skilled and unskilled) are allowed to move freely nationally or internationally, and removal of any laws on the part of the government that are likely to hinder the trade. Shah (2006) refers to trade liberalisation as a system making it convenient to trade within as well as outside the nation owing to the self-concern of individuals. The increasing debate on the issue has arisen out of the efforts of International Financial Institutions and organisations to support the phenomenon of 'trade liberalisation'. These institutions such as the IMF, and the World Bank etc continue to exert influence on the developing countries to reduce their reluctance on free trade and encourage them to attract foreign trade on liberalised terms. Savitsky and Burki (2000, p25) confirm that the concept of trade liberalisation has been effectively "buttressed by the IMF, World Bank, the GATT and the United Nations". The institutions constantly strive to ignite the issue of trade liberalisation around the world and force the developing world to allow entry of foreign firms through liberalisation of trade policies. As the developing countries continue to finance their operations with the IMF and World Bank loans, these nations need to follow the conditions of these financial institutions to lower trade restrictions and tariff policies so as to facilitate international trade. Hence, the fundamental concept of trade liberalisation lies in freeing the trade system from restrictions and policies of government so that the firms and industries could be able to maximise profits and value to the shareholders. Globalisation is a newly emerged phenomenon that specifically promotes the concept of trade liberalisation and free trade among developing and developed countries. McCann and McCloskey (2003, p2) show that "the political philosophy underpinning globalisation advocates greater trade liberalisation, reduced state intervention in the economy, and the derogation of increasing levels of control over our public services to the private sector". The concept of globalisation is also based on the notion of free trade, as it is mostly through the system and policies of liberal trade that can lead to the moulding of this world into a truly global image. Multinational Corporations And Liberalisation Of Trade Multinational corporations are closely associated with the concept of trade liberalisation, as these are bodies actually involved in trading activities between developed and underdeveloped countries. As the policies and laws concerning trade, business and investment soften in a country, the corporations, mostly from the developed countries endeavour to enter the country's market and expand their operations in the region. Savitsky and Burki (2000, p2) illustrate that as the "liberalisation contributed to the spread of developing country corporations these firms began to operate across national borders, effectively becoming multinationals in their own right". Clearly, as the title indicates, these multinational corporations are engaged in business activities at a global scale across the borders and can maximise their profits as the trade restrictions are lowered in a developing country. The multinational corporations "have expanded across national borders in two ways: trade and foreign direct investment (FDI)" (Savitsky and Burki, 2000, p1). Apparently, there happen to be these two major means through which the multinational corporations enter a country's market. Foreign Direct Investment and trade both require favourable government regulations and policies that could lead the company to profitability rather than losses. The developing countries tend to confront with the issues of insufficient capital and technological capabilities on their way to industrialisation. The multinational corporations come as a bonanza to the developing world comprising huge investment, technological capabilities and infrastructure. The greatest miracle of globalisation is the consistent advancement in technological aspect of multinational corporations and the supremacy of these companies in the business affairs of private sector with minimum interference from government's side. McCann and McCloskey (2003, p2) reflect that, "the contemporary form of globalisation has been characterised by new innovations in telecommunications, increased interdependence amongst states, enhanced cultural awareness and private sector dominated by Transnational Corporations". These corporations enjoy the domination of the private sector in the developing countries the extent that they enjoy monopoly in the business. Understandably, the corporations and industries in the developing nations of the world do not tend to be as competent in terms of capital and technology as compared to the multinational corporations. Once these corporations enter the market, they capture the highest share in the market bringing in new technology from developed countries through free trade. Savitsky and Burki, (2000, p5) point this out as that, "the [multinational] companies demanded free trade and local monopoly rights in the markets in which they operated so as to maximize profits". One of the very significant reasons behind the proliferation of the trade liberalisation and multinational corporations is that this notion is beneficial for both the parties, i.e., the developing countries as well as the multinational corporations. Underdeveloped countries are in need of sophisticated technology and capital in order to boost their industrial growth, while the multinational corporations find their businesses' profit potential enhanced in these countries due to cheap manpower. Savitsky and Burki (2000, p19) propound that owing to the "overwhelming need to turn profits, MNCs are becoming increasingly dependent on developing countries for low-cost labour and new markets, just as developing countries are dependent on MNCs for capital and technology." Hence, fulfilling the needs of both, the developing world and the corporate world, the trade liberalisation has become an essential and inevitable phenomenon of the modern world. Trade Liberalisation- Issues For Multinational Corporations As the trade liberalises between the developing and developed world, various issues emerge in front of the multinational corporations within this context. The first and foremost issue faced by any corporation trading in other countries is the negative perception in the minds of people concerning the activities of multinational corporations in these countries. Audley J. and Anker H. (2004, p18) mention this general behaviour in the report that, "people are more likely to oppose trade if they associate it with multinational corporations". The point that multinationals exist for the sake of profit give rise to the impression that whatever the business conducted by multinationals will lead to economic downturn of the country, the idea that government regulation is required because any loose hand will lead the corporations to become tyrants causing harm to society in their pursuit of wealth. Glass, Kosteas and Saggi (1999, p140) illuminate that, "hostility toward multinationals was based on the perception that the entry of such firms was detrimental to domestic industrialization". As mentioned above, the multinationals are more likely to completely capture the local market and hence, the local industries will fall prey in the hands of these corporations causing them to lose their output potential. Thus the power falls in the hands of foreign companies who are mostly inclined in sending back the profits earned to their host countries. Savitsky and Burki (2000, p14) refers to this point as, "such a concentration of market share and market power, when combined with the profit incentive, distorts the allocation of resources, raises prices, decreases output and reduces aggregate welfare" Competition is another issue that arises out of multinational entry into new foreign markets. As trade policies liberalises and restrictions lowers, more and more corporations become willing to enter and expand into these potential markets. Apart from foreign firms, the already strengthened local companies also take part in business battle. Glass, Kosteas and Saggi (1999, p140) illuminate that "multinationals [are] seen as agents that increase competition in the host economy, transfer modern technology, and help achieve a more efficient allocation of resources". The consequences of competition in the international markets due to liberalisation of trade could also turn out to be detrimental to the business of these multinational corporations by reducing their market share. Oberhnsli and Oscar (2003) point out another issue causing threats to the multinational corporations due to the surging costs of business including high wages, cost of transferring technology from developed nations to under developed ones. This requires serious considerations on the part of the multinational corporations so as to take on cost reduction strategies in order to win in this competitive landscape. They suggest that, "as a consequence of lower barriers to trade, companies must adopt continuous cost reduction strategies as a competitive (and survival) strategy" (p16). Maintaining a stable range of profits happens to be another major issue for the multinational corporations in the presence of huge competition from local and foreign companies. In such a situation, bagging a stable returns of profit on Oberhnsli and Oscar (2003, p31) "Today international - and more and more also local firms- compete for capital, hence the need for a competitive return on capital, but also for knowledge, key personal and other inputs". Thus the author does not only refer to the profit acquired on capital investment, but rather on all the assets including knowledge, and the people etc. Another issue lying in the open or free trade world for the multinational corporations is concerning the individuality of people around the world. The corporations trading across the borders need to be concerned and cautious of the distinct cultures, beliefs, norms and values of different societies they come across with. Almost every region is defined with distinguished cultural ethics, norms and customs. (Oberhnsli and Oscar (2003, p32) mentions the point as, "respect for other cultures; commitment to accept cultural and social diversity and not to discriminate on ethnic, religious, gender or any other basis". These values need to be instigated into the multinational corporations' business approach, as without it, the companies are not likely to win the new markets. Discussion This report investigates into the concept of trade liberalisation and the issues underlying in practice for multinational corporations. As multinational corporations are inclined to enter new markets with less trade restrictions, trade liberalisation in any country is very likely to impact upon a country's ability to attract foreign direct investment and trade. When multinational corporations enter a developing country's market, new opportunities open up for the host country. The reason is that these corporations bring heavy investment and innovative technology to the country and pay huge taxes out of their maximised profits. On the other hand, entering into developing countries through trade liberalisation is also beneficial for these corporations for the sake of cost saving on labour and sometimes raw materials. This makes the phenomenon of trade liberalisation highly desirable for the developing countries as well as the multinational corporations. The issues arising out of multinational entrance into new markets through trade liberalisation are the negative impressions and perceptions concerning the intentions of multinational corporations in entering the host country's weak market, the geographical issues related to differences in culture and custom across the nations, competition and the cost management challenges etc arising out of trade liberalisation. These issues need to be curtailed by these corporations in order to remain competitive in their new markets. Conclusion To close, it can be said that the liberalisation of trade do come with several issues for the multinational corporations along with abounding opportunities for profit maximisation. These issues are related to the new market as well as the reputation of these corporations concerned with the exploitation of trade liberalisation policies in the developing world, questioned in several parts of the world including the developed countries. The reputation of multinational corporations cannot be ameliorated in the new markets unless these issues and allegations against them are fully curbed. Reference List Audley J. and Anker H. (2004), "Reconciling Trade And Poverty Reduction", German Marshall Fund of the United States Report, available at: http://fpc.org.uk/fsblob/272.pdf Glass, A.J., Kosteas, V.D. and Saggi, K. (1999), "Linkages, Multinationals, and Industrial Development", Working Papers, Ohio State University, pp99-16 Javier, P.V. (2005), "Free-trade agreements and Puerto Rico", Caribbean Business, Vol. 33, No.19, pS05 McCann, G. and McCloskey, S. (2003), "From the Local to the Global: Key Issues in Development Studies", (eds.), Pluto Press, London Oberhnsli H. and Oscar, V. (2003), "Globalisation: Concerns and Opportunities for the People in the Developing World", available at: http://humanglobalization.org/facts/pdf/GlobDevConMain0308r.pdf Savitsky, J.J., Burki, S.J. (2000), "Globalisation And The Multinational Corporations", EMP Financial Advisors, The Japan Program's Working Paper Series, No. 3 Shah, A. (2006), "Criticisms of Current Forms of Free Trade", Free Trade and Globalisation, Global Issues, March 31, accessed 29 July 2006 from the World Wide Web: http://www.globalissues.org/TradeRelated/FreeTrade/Criticisms.asp Read More