The actions of multinational enterprises (MNEs) may affect a wide range of economic, social and political objectives of a given country. They control a large portion of the world’s capital, and also account for most of the world’s exports of goods and services, thus creating access to foreign exchange for the purchase of imports (Daniels and Radebaugh, 1998). Despite the contributions and advantages, the growth and employment effects of MNEs do not necessarily benefit one country at the expense of another. Many of these effects are due to the relative employment of resources with and/or without the MNEs’ activities.
In the context of globalization, Africa requires investment by multinational enterprises (MNEs) to improve its competitiveness and to facilitate micro-level structural changes required for reducing its level of risks for investment. The process of economic development is to a large extent contingent upon the cumulative effects of appropriation and development of technological advancement in which MNEs play a central role (Gilroy, 1993).
Many of the arguments found are based upon the insight that both home and host countries may gain from FDI when resources are not inevitably fully employed which leads to an industry-specific and complementary nature of capital and technology.
FDI often carries with it a technology that may not have been previously available in the host country. That, as well as the additional possibility that such technology may spread to workers and firms outside the foreign-owned establishment. According to Zeile (2002), foreign direct investment (FDI) and trade have long been suspected to be major conduits of international technology transfer. For example, both have grown faster than GDP recently, and foreign-owned companies account now for almost one-sixth of U.S. manufacturing GDP. Through this process, the MNEs may contribute to growth and employment in their respective host countries by enabling idle resources such as oil, gas, coal, aluminum, labor and inflexible manufacturing facilities to be used more effectively and efficiently.
Economic Impact of the MNE
MNEs may affect a country’s balance-of-payments, growth, and employment objectives. Under different scenarios, these effects may be positive or negative for either host or home countries. They control a large portion of the world’s capital which can be used to increase production. Through utilizing capital inflows, it allows a country to also increase their imports.
Effects of Technology Flows
Production is useless without markets and transportation facilities, which an international investor may be able to supply. It was during the Second World War that created another set of forces that resulted in the emergence and expansion of large multinational corporations. Using the United States as example, the country needed new markets and cheap natural and human resources for its new industrial ventures. The reconstruction needs of many war-ravaged countries, as well as other developing nations were suitable for the Americans in terms of development and expansion (Ronen, 1986). American MNEs could provide the managerial and technological knowledge necessary to build or rebuild these countries, in exchange for cheap labor, natural resources and new markets.
With regards to the relationship between technology and wages, Graham (2000) has argued that an improvement in technology must raise wages and in spite of everything, technology raises productivity, and workers are paid their marginal product, which will be larger as a result of the improved technology. Taking into consideration the effects of technology transfer (i.e. if FDI brings with it improved technology), it will cause an even further increase in the skilled wage and a further fall in the unskilled wage.
MNEs are the major producers and organizers of technology, which are increasingly important in determining national competitiveness and in solving environmental problems. For example, foreign MNEs played an important role in the development of the Korean electronics industry (Das, 1992). Only very limited technical know-how was diffused to Korean companies, although some spin-off effects took place as a result of the presence of foreign engineers and production managers who ‘exposed’ their technical expertise (Hong, 1993). Similarly, MNEs played an important role in initiating the PC industry in Taiwan (van Hoesel, 1996).
Although difficult to measure, it appears that in the long run, the presence of foreign MNEs did bring spillover effects. Advanced managerial and production technology knowledge, for instance, were diffused to local enterprises mainly through labour mobility (van Hoesel, 1999). Another kind of spillover occurs if the entry of MNEs lead to more severe competition in the host economy, so that local firms are forced to use existing technology and resources more efficiently while a third type of spillover effect takes place if the competition forces local firms to search for new and more efficient technologies (Blomstrom and Kokko, 1997). This additional competition may force existing companies to become more efficient, thereby placing emphasis on the fact that MNEs do contribute to the growth and employment in host countries. Also, the entry of MNEs may provide access to other technologies from the global market that a host country would not have able to access to if not for the MNEs.
MNEs are also the major sponsors of scientific research. It is through these technologies that the idle resources of a country are used more effectively and efficiently. Such transfers of technology allows developing countries to raise their economies form a stage of small, inefficient companies catering solely to the local economy to one in which larger industries manufacture products for international markets (Mason, 1974). A country’s relative technological status is therefore of supreme importance i.e. speeding up the transfer of technology becomes an important criterion for measuring economic progress.
Wages and Working Conditions
The MNE’s upgrading of resources may be brought about through educating local personnel to utilize equipment, technology and modern production methods. While the transfer of technology enables utilization of idle resources and promotes productivity, the effects of FDI on developed and developing countries is further distinguished through the issue of wages and working conditions. MNEs will tend to locate plants of production in which the home country is relatively less efficient to foreign countries. Such relocation of production may not have negative effects on average wages and employment levels in the home country but it may have important distributional effect among home country workers, as it affects demand and factor price via allocation of type of production within the firm.
For instance, most studies concluded that foreign-owned firms pay higher wages than their domestically-owned counterparts. Reducing worker turnover and attracting better workers are worldwide explanations of such features. However, compensating for home biased preferences seems to be a consideration more specifically adapted to inward FDI in a developed country. In developing countries, other explanations may lead to this wage differential, e.g., closing wage gaps between the multinational entities. Similarly, there is strong evidence that foreign-owned plants have higher productivity than domestically-owned ones. The higher efficiency of foreign-owned firms in developing countries is predictable, as foreign-owned plants are likely to use more capital and/or more advanced production and managerial organization techniques.
The argument that the home and host countries may gain from FDI assumes that resources are not fully employed and that capital and technology cannot be easily transferred from use in one industry to another. By establishing a foreign production facility, the company may be able to develop foreign sales without decreasing resource employment in the home country.
According to Feenstra and Hanson (1996), in their model of labour/employment, when capital moves from North to South, it expands the range of goods that can be produced in South and contracts it in North. The goods whose production location moves are the least skill-intensive previously produced in North, and they become the most skill-intensive now produced in South. As a result, the relative demand for skilled labour rises in both countries, causing the skilled wage to rise in both places and the unskilled wage to fall.
This is the first sign that appears, in theory, of FDI causing a fall in any wage in the host country. It does so because, rather than moving into producing the goods that use the cheapest factor there – unskilled labour – FDI instead expands production of relatively skill-intensive products. The outcomes are fairly varied, in that there are several cases where wages do not change and even one where a particular wage – that of unskilled labor – falls. However, most of the cases show labor earning a higher wage as a result of an inflow of FDI. Despite the accusations, Head and Ries (2002) find that affiliate employment does not affect the share of unskilled workers wage in the total wage bill in the home country.
The evidence presented above supports the view that MNEs are improving the lives of at least some workers by raising overall labor demand, especially in developing countries, where market wages may be insufficient to sustain workers’ health. Firms may therefore pay higher than the market wage in order to improve the health of their workers and thus their productivity. Additionally, Aitken, Harrison and Lipsey (1996), drew conclusions supporting the view that foreign-owned firms pay premium wages.
Further supporting evidence is found by Feenstra and Hanson (1997) in their study of the impact of foreign owned capital on the skilled-labour wage premium in Mexico for the period 1975-1988. They found in particular that foreign capital impacts the demand for skilled labour disproportionately. FDI constitutes a significant and growing portion of the capital stock in Mexico which is a count of 13.7% of total fixed investment in Mexico – a level sufficient to affect the demand for labour.
Based on these findings, it is therefore evident that foreign-owned firms pay higher wages even after controlling for scale, worker quality, industry, age of facility, inputs and industry and regional characteristics. Furthermore, foreign-owned firms are more likely to conform with laws regulating minimum wages, overtime pay, and benefits.
Prior to the issue of imperfect competition, there is the possibility that labor markets may depart from perfect competition in terms of supply and demand. That is, labor markets may be unionized, or they might have the potential for being unionized if multinational firms were not present. It is perhaps the clearest case that is obvious for FDI and MNEs to reduce wages, since any market power that workers may be able to acquire by organizing is bound to be diminished if the firms that they bargain with have the option, as multinationals, of producing elsewhere. Unions are in fact notoriously weak in developing countries, and they were already weak, in most cases, before the arrival of MNEs. But as these countries’ incomes rise, it is plausible that unions would gain in strength, and that they would gain faster, if MNEs were not present. Thereby, it indicates that without FDI, the growth of income that permits the growth of unions might not occur.
Using the country Hungary as a case study, enterprises with dominant foreign ownership play a key role in the Hungarian economy. They provide 40-45% of GDP, by contributing to the majority of exports and private investments. The most important feature of the development of the Hungarian corporate governance culture was the high influence of Western patterns. It was the greatest achievement of the Hungarian privatization that resulted in transparent ownership relations with clearly identifiable owners, who in most of the cases were foreigners. Foreign capital involvement was thus not only an important factor of structural change and technological renewal, but played an outstanding role in the knowledge transfer of management practices and corporate governance. It was characterized until the early 90’s that Hungarian managers were primarily technically oriented, while marketing and financial skills were weak. It was the influence of foreign management patterns and also the appearance of a growing number of new graduates with financial and marketing specialization that gradually changed the attitudes of company management. The transference of work skills increases efficiency, thereby freeing time for other activities.
Concisely, multinationals generally have a positive impact on enterprise culture in Hungary, because they bring in technology, management skill, renew work organization and develop work culture.
As there are positive effects, there are also negative effects the MNE might have on its host country. Host countries have accused MNEs of raising levels of inflation. The Canadians, for instance, claim that the fluctuation in inflow of capital that MNEs provoke has seriously affected the country’s economic planning: namely, it has complicated the problem of attaining stable economic growth without inflation (Jacoby, 1984). In terms of the country’s macro-economy, similarly as mentioned above, by increasing the local employees’ income, MNEs tend to increase demand for imported consumer goods, therefore as a result, the developing countries’ already unfavorable trade balance is destabilized further. There are also accusations of MNEs invading the fastest growing industrial sectors in developing countries. Such accusations often claim that MNEs discourage local entrepreneurs and stifle innovation and initiative (Gabriel, 1977).
Although technology may induce an increase in wages, conflict arising from the MNEs capital-labor ratio occurs primarily in developing countries, particularly during the early years of MNE expansion whereby these countries were exploited principally for their natural resources. Extracting these resources were highly capital intensive and the developing nations found themselves in the position of having their natural resources depleted whilst large segments of their population remained unemployed (Mason, 1974). The transfer of technology also reveals the fear of the developing countries in being relegated to the role of merely supplying raw materials.
Economic theory recognises that MNEs can benefit economic growth in developing countries through generating positive externalities (so-called spill-over effects). These spill-over effects occur predominantly through the R&D and innovation of MNEs, their outsourcing to local firms, their training of local labor and the payment of higher wages by MNEs to retain good laborers. All of these benefits can be important for countries such as Africa, the world’s poorest continent, in order to accelerate growth.
Although MNEs sometimes shift jobs from high-wage to low-wage countries, it may still be the case that total employment in the nations losing these jobs will expand in consequence of increased international trade between richer and poorer countries. Efficient allocation of the world’s resources benefits everyone in the long run (Bennett, 1999).
The factors affecting growth and employment include the location in which MNEs operate, product sophistication, competitiveness of local companies, governmental policies, and degree of product differentiation. As there are various factors affecting the levels of productivity e.g. working conditions, Hall and Jones (1999) stated that much of the variation in living standards across countries can ultimately be traced back to differences in productivity – these of which are generally affected by the MNEs leading to an improvement in the host countries’ economic wealth. Therefore, based on the above findings, it is inevitable that despite several conflicts, the entry of multinational enterprises (MNEs) does contribute to growth and employment in host countries by enabling idle resources such as oil, labour and inflexible manufacturing facilities to be utilized more effective and efficiently.