Conflicts Between Multinational Corporations and Host Countries

Although the Multinational Corporations (MNCs) has no power over the host government, if may have  considerable power under that government. By being able to influence certain  factors, the MNC has the opportunity to help or harm national economics; in this  sense, it may be said to have power against host governments. Critics of the  MNC perceive these powers as potential perils to host societies.  The strategic aspects of a host country’s national policy that are subject to the  influence of the MNC include:

1. Planning and Direction of Industrial Growth

Host nations have viewed with concern the tendencies of many MNCs to  centralize strategic decisions in their headquarters. For the host governments this  signifies loss of control over industrial strategy to the foreign-based MNC. The  MNCs allegiances are geocentric; their overall objectives are growth and profits  globally rather than in the host economy. These objectives require efficiency in  the functional areas of management – production, marketing, finance, and so on.  Many MNCs have sought greater efficiency through centralization, with  headquarters domination of affiliates as the unavoidable result.

  1. Risks of Excessive Centralization: Empirical evidence indicates that a high  degree of centralization tends to lead to inflexibility of parent company polices.  Decisions are made in headquarters regarding the product mix for each affiliate,  extent of  inter-affiliate  sales of semi finished and finished products, export  pricing,  inter-affiliate  sales, input procurement, packaging, long-rang planning,  research and development, and particularly, financial management. When the  authority over these vital business decisions is located beyond their jurisdictions,  local authorities counter with restrictions on affiliate activities. Clearly,  centralization extracts a price from the MNC. A satisfactory method of  calculating it is yet to be devised. When things are sorted out the price of  centralization many well turn out to be far greater for many firms than the  operational simplifications gained by it.
  2. Government Goals: Governments of all nations, particularly those of the less  developed countries, are assuming more responsibility for the achievement of  economic growth and social goals than formerly. To be successful they need a  fairly high degree of certainty in the business sector. The presence of affiliates  managed from foreign-based headquarters introduces uncontrollable factors that  interfere with the government’s planning and policies of economic development.  With substantial segments of industry owned and directed from abroad and with  home country governments bent on perceiving the affiliates as foreign  extremities of their economies, the host governments see a serous challenge to  their ability to affect the desired goals.  The more responsibility for economic growth and stability the government  accepts, the greater its direct involvement in business regulation and direction,  and the greater the possibility that the MNC will be perceived as a potential  agitator of the national plants.

2. National Control of Key Sectors

The MNCs technological power and their tendency to cluster in key industrial  sectors has given rise to another fear in the host countries. By permitting  foreign investors to control key industries, nations are in the precarious position  of losing control over strategic sectors. The fear of industrial domination is no  chauvinistic fiction but in many instances an obvious truth.

  1. Technology Gap: The ability of the headquarters company to determine  whether, when, and how the newest techniques are employed by affiliates has  aroused fears in host nations of an increasing dependence on the MNC for  technological progress. It has been argued that this dependence is attributable to  a technology gap between the United States and other countries. A lesser  commitment of European and other non-U.S. based companies to research and  development is given as the cause of the gap. Researchers who have attempted  to go beyond the expenditure figures discredit the technology gap theory by  showing that technological inventions and innovations have come no less  frequently from Europe than from the United States. Furthermore, the European  inventions have tended to be major breakthroughs. The issue is by no means  clear as far as Europe or Japan are concerned; however, there is no room for  argument on this point in reference to the developing nations.  The necessity of relying on the home country’s technology, in turn, leads to the  fear of foreign control and ownership of industry. As a given industry sector  becomes dominate by MNCs, the host country becomes dependent on the  technological in-transfers of the foreign-headquartered MNC for its growth and  product development. Once achieved, the dominant position of the MNC is  believed to be self-perpetuating. Dominance itself provides the affiliate with  resources to help perpetuate its role as the major innovator.  National policies aimed at greater independence in technology are a mixture of  the desire for local research and development facilities and their ownership as  well as the desire for technically advanced items produced locally. However, it  appears that many countries have no feasible alternative to relying on foreign  technology. They need MNCs in order to avoid stagnation of the economy and  bring about indigenous development.
  2. Foreign Takeovers: The strategy of some MNCs has been to place their direct  investments in the host country into acquisitions of pre-existing indigenous  firms. To the host country this strategy conjures visions of takeover by  foreigners. In smaller or less industrialized countries the point is quickly  reached when no nationally owned companies may be left in a particular  industry. Thus, a foreign monopoly control is created. Larger nations, too, are  sensitive to foreign  takeovers.  A number of nations are reacted to such fears by restricting acquisitions to  prevent the elimination of local competitors and by channeling foreign  investments into the establishment of new firms that make a larger real  contribution to the host economy and avoid the disturbance in the market that  major acquisitions typically cause.  The possibility of the MNC eliminating indigenous competitors is real. With its  superiority in resources (financial, managerial, and technical), the MNC is often  at an obvious competitive advantage compared to the domestic firm. Oftentimes  the MNC enters a host country in which it already possesses a strong market  position built on imports. This makes it a much more formidable threat to local  competitors.

3. Financial Policy

As a matter of financial policy the MNC can choose to invest its profits either in  the host country or elsewhere. The host country government naturally prefers  domestic investment, but the power lies with the MNC to determine where the  profits will be allocated.

  1. Balance of Payments: The MNC may help relieve a deficit in the host country  balance of payments. No conflict arises in this situation. The firm may also  contribute to the worsening of the host country balance of payments.  The MNC has been indicted for causing capital flows to fluctuate and even  reverse. In addition, increased investment in the host economy very likely  increases the market share held by the affiliate, which can conflict with host  country interests. This makes the allocation of profits a very sensitive area. If  the aren’t decides to transfer the profits outside the borders of the host country,  the latter gains no benefits from the investment potential of the firm. If the  dividends to the parent company fluctuate from year to year, the balance of  payments  position of the host country may be destabilized.
  2. Borrowing Power: The source of borrowed funds can also create conflict.  This enables the MNC to import much larger sums than a uninational company  could. The potential threat to the balance of payments position of the host  country is similarly greater.  Also, host government domestic monetary policy may be easily undermined by  the countering efforts of the MNC. A typical example involves the MNCs  extension of credit to a foreign subsidiary at a time when the host nation is  attempting to dampen domestic purchasing power through import restrictions  and exchange controls. Thus, the foreign-owned affiliate has the power, cash,  and credit to avoid efforts by the state to constrain credit and investment.  Even though the magnitudes involved are not large in comparison to major  elements in the balance of payments, and many countries have substantial  earnings from overseas investments, these points are overlooked when attitudes  toward foreign investment are formed within the host country. The exact impact  of an inward foreign investment on a country’s balance of payments is usually  too complex to be easily explained.

4. Export-Import Policy

The export-import activities of the MNC can also affect the host county balance  of payments. Exports from affiliates may be subject to decisions made in the  head office that seek to fit the affiliate’s trade into the international marketing  scheme of the MNC as a whole. This means the affiliate’s exports could go to  the parent or other affiliates instead of to customers desired by the host  government.  Another host country criticism of the MNC is that it may allocate export markets  among its affiliates, thereby preventing them from exporting as they might  otherwise and damaging the prospects for expansion of exports of the host  country.

Importing policies may be similarly dictated by the home office. Affiliates may  be directed to import from the parent itself or from other affiliates instead of  using resources from the host country, thus further contributing to a trade deficit  on the part of the host.

However much the MNC may contribute to economic growth and stability in the  host country, the fact that the parent has the ability to alter the activities of the  affiliates increases the uncertainty facing the host government. The fact that the  MNC’s decision center is outside the jurisdiction of the host government further  compounds the uncertainty.

5. Pricing Policy

The controversial aspects of MNC pricing relate in part to intracompany pricing  or transfer pricing and in part to pricing policies for customers outside the  company itself.

  1. Leakages Through Transfer Pricing: Transfer prices can be calculated so as to  shift assets among the entities of the MNC through intracompany (inter-affiliate)  sales, royalties, technical assistance fees, and the allocation of headquarters  expenses. The potential significance of these flows to the host country balance  of payments is indicated by the fact that remittances by foreign affiliates to the  headquarters of MNCs have been consistently far greater than the flow of funds  from headquarters to the affiliates.  Transfer pricing is capable of serving various other objectives unless it is  prevented from doing so by effective government regulations. If the host  countries employ foreign exchange restrictions, the transfer price may be  designed to circumvent the restrictions. If a particular host country has high  profit taxes, the transfer price may be used to reallocate the profits to a low tax  country. When economic or political instability plagues a host country, transfer  prices can be used to keep to a minimum the company’s cash reserves in that  country. Transfer prices can also be used to strengthen the competitive position  of a company or to neutralize the competitive advantage of others. If used for  these or similar purposes the transfer price becomes an obviously objectionable  device.
  2. Power to Undercut Local Competitors: In market pricing, local industry  often fears the ability of the MNC affiliate to cut prices to any level necessary to  achieve either a foothold or to increase its market share. It is possible for a large  MNC to absorb sizable per unit losses on its sales in a small host country  without sacrificing its overall profitability. Thus, there is reason for the local  people in such countries to be on guard.  Some MNCs have established a global single price policy; that is, the same price  applies all over the world. By doing so the MNC denies itself the ability to  respond to the demands of individual country markets or to utilize to its  maximum advantage the oligopolistic market structure of most host countries.  The problem becomes further complicated when trade barriers and government  regulations create inducements for differentiating prices among host country  markets.

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