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Posted on May 2nd, 2014, by

5) Provide an argument for why there is an unfair competition of Multinational Corporations (MNC) versus local firms in Less Developed Countries (LDCs). Do MNCs exploit LDCs? Provide an argument for and against this view. According to De George, what are the Ethical Guidelines for Multinational Operations? Do you think, then, that there can be an ethical globalization?


Multinational corporations (MNCs) are understood as big companies (annual sales of at least $1 billion, from one fifth to one third of total turnover is accounted for overseas operations, the share of foreign assets makes at least 25%, and the subsidiaries are placed in at least 6 countries), which have a significant impact on the world market for goods and factors of production. Currently, MNCs have reached an enormous scale. Thus, inter-corporate trade between their divisions makes now about one third of the whole world trade. Approximately 70% of all international payments associated with loans and licenses are payments between parent companies and their foreign affiliates. TNCs control up to a half of world industrial production, about 60% of foreign trade, and about 80% of patents and licenses for new equipment, technologies and know-how (De George 164-166).

The motives of the appearance of multinational corporations are the expansion sales markets, access to cheap resources, and purchasing property abroad (De George 144). The key to achieving these goals has always been foreign investment, and therefore, the main qualitative feature of multinational corporations is the process of foreign direct investment. In this perspective countries, developing are especially attractive to multinational corporations. Among countries that are less developed economically, MNCs are now mostly interested in those who possess cheap labor force, can offer low taxation, proximity to sources of raw materials, have weak government regulation and generally stable political environment, and can permit the import of polluting industries (De George 494). Beside these factors, investment plans of large TNCs include investment in those countries that also have good prospects for economic growth, and in recent years it is mostly China and India. At the same time, the norm of return on foreign direct investment in developing countries is on average 2 times higher than in industrialized countries.

In developing countries, MNCs tend to occupy key positions in leading industries. They involve into the sphere of their activities a number of local companies, including small and medium-sized businesses, however, in many cases this competition can’t be called fair, as it often leads to greater dependence of domestic enterprises on international corporations, which is increasingly formed on the basis of specialization, cooperation, organization of sales, the transfer of know-how, etc. Thus, negative effects of TNC activities in developing countries may include the following aspects of unfair competition (De George 165-167):

                Displacement of local capital from the most profitable sectors;

                Suppression of local companies by the influence of MNCs;

                Establishment of monopoly prices, monopolization of the national market;

                Dictate of conditions that affect the developing countries;

                Concentration of R&D in the home country with the transfer of backward technology to the host country;

as well as such exploitation effects as:

                Destabilization of national currency;

                Concealment of incomes from taxation through the policies of transfer prices;

                Ability to influence economic policies of the LDCs’ government.

                Opposition to the implementation of economic policies of less developed countries MNCs operate in and latent violation of the laws of host countries;

                Intrusion into the sphere of state interests of the host countries;

                Pollution of the environment in these countries;

                Possible predatory attitude towards the exploitation of natural resources in LDCs, etc.

On the other hand, there is also a row of positive effects of MNC activities in LDCs:

                Introduction of new technologies and modern management into the economy of the countries found in the periphery of the global economy;

                Creation of new jobs and increase of local employment;

                Learning effect, i.e., training of workers, technical and engineering personnel, administrative personnel, improving their skills;

                Upgrading of local industries and services, inclusion of domestic enterprises into the innovative processes;

                Establishment of higher wages and social welfare standards for employees working in the branches of multinational corporations.

On a whole, globalization of business seems to be inevitable, as developing countries have already appreciated highly the opportunity to solve many problems of economic development through the cooperation with international companies due to the significant role of transnational business in the world economy. If in the period of TNC’s emergency the policy’s major direction in their relation were the measures of limitations and control, now the main task of almost all governments is to attract foreign capital into the national economy. All countries seek to improve the investment climate for foreign investment, abolish the existing restrictions, and establish state guarantees against expropriation and nationalization (De George 162).

To make globalization ethical, currently the regulation of TNCs’ activities relates to issues like dispute resolution, employment guarantee and compliance with national labor legislation, incentives for investment, competition policy, consumer protection, etc. At the moment, the most important are the agreements within the World Trade Organization (WTO): General Agreement on Trade in Services (GATS) and a series of the so-called TRIPS agreements (Trade Related Intellectual Property Rights) and TRIM agreements (Trade Related Investment Measures) (De George 176-181).

Trying to mitigate the negative impacts of their activities, many international companies try to comply with environmental standards, refuse from the strategy of transferring dirty industries to the developing countries, help in creation of countries’ infrastructure, improve education, and contribute to the development of science and technology. They become active investors in the achievements of scientific and technical progress, train national engineering and technical personnel, and enter into partnerships with local firms.

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