A Critique of Multinational Corporations

A Critique of Multinational Corporations:

In recent years foreign direct investment through multinational corporations has vastly increased in India and other developing countries.

This vast increase in investment by multina­tional corporations in recent years is prompted by factors.

(1) The liberalisation of industrial policy giving greater role to the private sector,

(2) Opening up of the economy and liberalisation of foreign trade and capital inflows.

In this economic environment multinational corporations which are in search for global profits are induced to make investment in developing countries. Foreign direct investment by multinational firms bring many benefits to the recipient countries but there are many potential dangers and disadvantages from the viewpoint of economic growth and employment generation. Therefore, role of multinational corporations in India and other developing countries have been criticised on several grounds. We discuss below some of the criticisms levelled against multinational corporations.

Capturing Markets:

1. First, it is alleged that multinational corporations invest their capital and locate their manufacturing units on their own or in collaboration with local firms in order to sell their products and capture the domestic markets of the countries where they invest and operate.

With their vast resources and competitive strength, they can weed out their competitive firms. For example, in India if corporate multinational firms are allowed to sell or produce the products presently produced by small and medium enterprises, the latter would not be able to compete and therefore would be thrown out of business. This will lead to reduction in employment opportunities in the country.

2. Use of Capital-intensive Techniques:

It has been seen that increasing capital intensity in modern manufacturing sector is responsible for slow growth of employment opportunities in India’s industrial sector. These capital-intensive techniques may be imported by large domestic firms but presently they are being increasingly used by multinational corporations which bring their technology when they invest in India.

Emphasizing this factor, Thirwall rightly writes, “In this case the technology may be inappropriate not because there is not a spectrum of technology or inappropriate selection is made but because the technology available is circumscribed by the global profit maximising motives of multinational companies investing in the less-developed country concerned”.

3. Encouragement to Inessential Consumption:

The investment by multinational compa­nies leads to overall increase in investment in India but it is alleged that they encourage conspicuous consumption in the economy. These companies cater to the wants of the already well- to-do people. For example, in India very expensive cars (such as City Honda, Hyundai’s Accent, Mercedes, Opal Astra, etc.) the air conditioners, costly laptops, washing machines, expensive fridges, 29″ and Plasma TVs are being produced/sold by multinational companies. Such goods are quite inappropriate for a poor country like India. Besides, their consumption has a demonstration effect on the consumption of others. This tends to raise the propensity to consume and adversely affects the increase in savings of the country.

4. Import of Obsolete Technology:

Another criticism of MNCs is based on the ground that they import obsolete machines and technology. Some of the imported technologies are inappropriate to the conditions of Indian economy. It is alleged that India has been made a dumping ground for obsolete technology. Moreover, the multinational corporations do not undertake Research and Development (R&D) in India to promote local technologies suited to the Indian factor-endowment conditions. Instead, they concentrate R&D activity at their head quarters.

5. Setting up Environment-Polluting Industries:

It has been found that investment by multinational corporations in developing countries such as India is usually made for capturing domestic markets rather than for export promotion. Moreover, in order to evade strict environment control measures in their home countries they set up polluting industrial units in India.

A classic example of this is a highly polluting chemical plant set up in Bhopal resulting in gas tragedy when thousands of people were either killed or made handicapped due to severe ailments. “With the tightening of environmental measures in the such countries, there is a tendency among the MNCs to locate the polluting industries in the poor countries, where environmental legislation is non­existent or is not properly implemented, as exemplified in the Bhopal gas tragedy”.

6. Volatility in Exchange Rate:

Another major consequence of liberalized foreign invest­ment by multinational corporations is its impact on the foreign exchange rate of the host country. Foreign capital inflows affect the foreign exchange rate of the Indian rupee. A large capital inflows through foreign investment brings about increase in the supply of foreign exchange say of US dollars.

With demand for foreign exchange being given, increase in supply of foreign exchange will lead to the appreciation of exchange rate of rupee. This appreciation of the Indian rupee will discourage exports and encourage imports causing deficit in balance of trade. For example, in India in the fiscal years 2004-05 and 2005-06, there was large capital inflows by FII (giant financial multinationals) in the Indian economy to take advantage of higher interest rates here and also booming of the Indian capital market.

On the other hand, when interest rates rise in the parent countries of these multinationals or rates of return from capital markets go up or when there is loss of confidence in the host country about its capacity to make payments of its debt as happened in case of South-East Asia in the late nineties there is large outflow of capital by multinational companies resulting in the crisis and huge depreciation of their exchange rate. Thus, capital inflows and outflows by multinationals have been responsible for large volatility of exchange rate.

Then there is the question of repatriation of profits by the multinationals. Though a part of profit is reinvested by the multinational companies in the host country, a large amount of profits are remitted to their own parent countries. This has a potential disadvantage for the developing countries, especially when they are facing foreign exchange problem. Commenting on this Thirwall writes “FDI has the potential disadvantage even when compared with loan finance, that there may be outflow of profits that lasts much longer”.

Transfer Pricing and Evasion of Local Taxes:

Multinational corporations are usually vertically integrated. The production of a commodity by multinational firm comprises various phases in its production the components used in the production of a final commodity may be produced in its parent country or in its affiliates in other countries. Transfer pricing refers to the prices a vertically integrated multinational firm charges for its components or parts used for the production of the final commodity, say in India.

These prices of components or parts are not real prices as determined by demand for and supply of them. They are arbitrarily fixed by the companies so that they have to pay less taxes’ in India. They artificially inflate the transfer prices for intermediate products (i.e., components) produced in their parent country or their overseas affiliates so as to show lower profits earned in India. As a result, they succeed in evading corporate income tax.