9.3B: Multinational Corporations (2024)

Learning Objectives

• Reconstruct the debate between critics and proponents of economic globalization

Key Points

• Multinational corporations affect local and national policies by causing governments to compete with each other to be attractive to multinational corporation investment in their country.
• Multinational corporations often hold power over local and national governments through a monopoly on technological and intellectual property. Because of their size, multinationals can also have a significant impact on government policy through the threat of market withdrawal.
• Economic globalization refers to increasing economic interdependence of national economies across the world through a rapid increase in cross-border movement of goods, services, technology and capital. Multinational corporations play a key role in this process.
• Those who view economic globalization positively cite evidence of per capita GDP growth, decrease in poverty, and a narrowing gap between rich and poor nations.
• Those who view economic globalization negatively cite evidence of exploitation of the local labor force, funneling of important resources away from the country itself into foreign exports, and overall dependency of developing countries upon wealthy countries.
• Those who view economic globalization positively cite evidence of per capita GDP growth, decrease in poverty, and a narrowing gap between rich and poor nations.
• Those who view economic globalization negatively cite evidence of exploitation of the local labor force, funneling of important resources away from the country itself into foreign exports, and overall dependency of developing countries upon wealthy countries.

Key Terms

• Economic Imperialism: The geopolitical practice of using capitalism, business globalization, and cultural imperialism to control a country, in lieu of either direct military control or indirect political control.
• Market Withdrawal: The act or threat of removing one’s goods or services from the consumer market, potentially reducing the supply of a product, or of jobs.
• tax break: A deduction in tax that is given in order to encourage a certain economic activity or a social objective.

A multinational corporation (MNC) or multinational enterprise (MNE) is a corporate enterprise that manages production or delivers services in more than one country.

A MNC differs slightly from a transnational corporation (TNC), because while MNC’s are traditionally national companies with foreign subsidiaries, a TNC does not identify itself with one national home. However, these terms are often used interchangeably. Multinational corporations can have a powerful influence in local economies, and even the world economy.

Influence on Local and National Economies

National and local governments often compete with one another to attract MNC facilities, with the expectation of increased tax revenue, employment, and economic activity. To compete, political entities may offer MNCs incentives such as tax breaks, pledges of governmental assistance or subsidized infrastructure, or lax environmental or labor regulations.

Besides holding the promise of economic growth for local and national governments, multinational corporations also exert power over political entities once they are established, through their control over technical and intellectual property. For example, Adidas holds patents on shoe designs, Siemens A.G. holds many patents on equipment and infrastructure and Microsoft benefits from software patents. These patents often allow multinational corporations to exercise a monopoly in the local economy, preventing local enterprises from developing. This also functions to keep labor costs low, sometimes exploitatively so.

Because of their size, multinational corporations can also have a significant impact on government policy through the threat of market withdrawal.

Influence on the World Economy

Multinational corporations play an important role in the world economy through the process of economic globalization; in other words, the increasing economic interdependence of national economies across the world through a rapid increase in cross-border movement of goods, services, technology and capital.

Multinational corporations have played a leading role in this globalization, establishing multiple links between the economies of various countries. Using capital from developed countries, MNCs establish factories and plants in developing countries, where they can access raw materials and labor more cheaply. The finished products are then shipped back to wealthy countries where there is a consumer market.

These multiple links lead to an increasing economic integration between various economies, resulting in the emergence of a global marketplace or a single world market.

A Positive View of Economic Globalization

Those who view this phenomenon positively cite the evidence of per capita GDP growth, decrease in poverty, and a narrowing gap between rich and poor nations. Proponents of economic globalization argue that the economic benefits are widely shared between different parts of society, discounting critics who point to rising inequality between the rich and poor within nations who have joined the global market.

Those in favour of globalization also cite evidence of overall improvement of living standards and poverty reduction in globalizing countries. For example, there has been a 5.4 percent annual growth in income for the poorest fifth of the population of Malaysia. Even in China, where inequality continues to be a problem, the poorest fifth of the population saw a 3.8 percent annual growth in income in 2001. Finally, there is evidence that the gap has narrowed between rich and poor countries, which is often touted as a positive benefit of economic globalization.

Critical Views of Economic Globalization

Not all observers of economic globalization have a positive evaluation. As discussed above, multinational corporations exert powerful influence over local and national governments, often prompting them to enact policies that benefit business, rather than protecting the rights of local people. Thus, economic globalization in the form of MNCs can lead to exploitation of the local labor force, funneling of important resources away from the country itself into foreign exports, and overall dependency of developing countries upon wealthy countries.

In addition to the uneven distribution of benefits that often occurs, critics also point to the ways that resources are diverted from the local population into foreign exports. For example, some of the land in Cape Verde could be planted and harvested to feed people but is planted instead with cash crops for foreign exchange. Fresh produce is regularly sold or changed to a nonperishable type, such as canned tuna for export, rather than consumed by the population. Widespread malnutrition is one of the effects of this foreign dependency.

Finally, economic globalization may result in unequal economic relations of dependency between developing and developed countries. Instead of acting independently on behalf of the people in the country, governments of developing countries may act more in the interests of MNCs and of other nations on whom they rely on for aid. They may feel that without these forms of economic connection, their country cannot survive.

Thus, dependent relations that were formed in the colonial period continue on today in the form of what many scholars call neocolonialism or economic imperialism.