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.