Multinational Enterprises Conflicts with Host Nations
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A multi national enterprise (MNEs) is defined as a business, which owns or controls foreign subsidiaries in more than one country (Host nation). These are also called transnational corporations (TCs). Multi national enterprises cover the entire spectrum of businesses, including manufacturing, agriculture, service provision and finance. These can be vast, well known companies or smaller specialist firms.
There are three different types of MNEs which all have different primary motives. Horizontally integrated multinationals produce the same product in each country of operation. The only differentiation is the marketing and promotion of the product to suit the consumers of that particular area. The prime reason for this approach is expansion of the business into new areas. Vertically integrated multinationals operates by having different stages of operations in numerous geographic areas. Primarily the reason for this is control over variable costs, and to reduce the risks of the business environment. This type of company includes oil companies such as shell and car manufacturing plants such as Vauxhall. Other types of MNEs are categorised as conglomerate. These are diverse businesses that produce a wide range of different products in numerous countries. The reason for such practise is to utilise different sources of production in different areas. Companies who adopt this approach include Heinz, Organics, Calvin Klein and Birds Eye. As this type of MNE often uses the same product in different countries, research and marketing has to be particularly extensive because what entices some cultures may offend others.
MNEs adopt different forms of operation, but the reason for them becoming multinational is primarily profit maximisation. The utilisation of resources in different geographic locations it enables them to provide better products and services with lower costs and ultimately greater profit margin. Different countries have different advantages for multinational enterprises. Companies which rely on labour intensive workforces often move to host nations which have relatively low labour costs. The sports giant Nike is an MNE with operations in south East Asia. This enables the company to take advantage and utilise the relaxed labour laws, by paying low wages for unskilled labour, as there is no minimum wage or working hour legislation. Quality is also a factor of which companies set up away from the point of origin. Countries often have a large proportion of well-trained individuals, so out put can be more efficient for MNEs. In 2003 Norwich union opened British call centres through out India. Although initial language barriers were an initial problem, the cost of trained employees in India were more cost effective than the service provision in England.
The advantages for host nations allowing MNEs to set up operations are mainly of economic value. The host nation receiving foreign direct investment (FDI), creates jobs, providing wages for employees to spend. This causes the multiplier effect to occur, allowing an increase in the countries economic wealth as more spending can occur. The technological advancements which MNEs bring to host nations enables emulation of the practices which ultimately can be transferred to other areas of production within the country.
The Harold – Domar model insights a simple equation in which extra capital gained, that enables an extra unit of production is directly linked to the proportion of national income saved. G = S/K. As countries try to gain stability by economic growth often a savings gap can occur. This is where a country cannot save enough income because economic growth is not at a higher enough level to keep up with population growth. FDI from MNEs can help combat this problem by directly financing the required investment.
Although MNEs obviously have benefits for the host nations, FDI can also have negative affects. This can cause conflict between the two separate entities. One major argument against multinational enterprises is the dispute of protectionism against free trade. Protectionism is enforced to give protection to domestic industries against foreign investment. This can allow countries to protect jobs with in the nations infrastructure. MNEs use their power in host nation countries to drive domestic producers out of business. This can cause a decline in the nations profits and therefore a decline in the investment opportunities of the host nation.
Protectionism can cause conflict between MNEs and host nations because countries of greater economic power are able to raise tariffs and barriers more readily than the weaker counterparts. When protectionist policies are enacted, certain domestic industries are protected at the expense of others. Leaving some industries unprotected. If an MNE then moves into a nation and competes with an unprotected industry, disturbance could occur.
It is often argued that protectionism is often used to prevent exploitation. In 1993 Jagdish Bhagwati came to the conclusion that ” trade can never be mutually advantageous as one trading partner must always reap gain at another countries expense.” If this is the case then the nation, which has weaker trading powers, should try to protect itself by restricting trade. Increasing trade barriers and tariffs doing this discourages MNEs to operate in that particular nation. Another argument for protectionism is the belief that exports raise living standards due to future government spending whereas imports cause capital to be taken out of the host nation, and back to the MNEs home nation.
The introduction of the general agreement to tariffs and trade (GATT) was set up in 1948 and later recreated as the World Trade Organisation (WTO). The objectives of this are to reduce the international trade barriers, reduce protectionism and encourage free trade. Also the WTO introduced guidelines and restrictions for trade. In March 2002 the US imposed tariffs of up to 30% on steel imports from MNEs. These were classified as illegal by the WTO.
Free trade enables countries to use their comparative advantage in trading with other nations. This can cause a conflict of interests between the host nations and MNEs. If the host nation subsidises its domestic industries, MNEs will be at a major disadvantage over its competitors causing rifts to occur. Host governments primary interests lie with protecting national interests and security. During the later stages of industry competition, host nations have been known to discriminate against MNEs. This discrimination