Identify and discuss the reasons why multinational enterprise activity arises? Why are multinational enterprise sometimes criticised for their activities in the developing countries? Are these criticisms justified? Illustrate your essay with specific examples.

In order to sufficiently identify and discuss the reasons why multinational enterprise activity arises, a robust definition of the phrase ‘multinational enterprise activity’ is required. See definition as detailed below.
Definition – In simple terms, a multinational enterprise can be defined simply as a firm which has productive capacity in a number of countries e.g. the Royal Dutch / Shell Group of Companies, British Petroleum (BP), and Cadbury are classical examples of multinational enterprises. Also, the accompanying word ‘activity’ will in this report context encompass action, movement and/or goings-on. It is however, worth noting that there exist, some level of distinction between ‘multinational’ and ‘conglomerate’ enterprise. The latter is defined as an organisation that operates productive capacity in a number of different areas of businesses in different countries. Drawing from the above definition, the next section of this report would focus on discussing the reasons why multinational enterprise activity arises.

Reasons Why Multinational Enterprise Activities Arise?

There are a number of reasons as to why multinational enterprise activities arise; this report will limits its reasons, and discussions, largely to an established economic concept: the Factors of Production – Land, Labour, and Capital. Any profit making organisation or entity involved in the production of goods or rendering of business services, has to, at a point, take decision on issues relating to economic resources. Because, the production of goods and services do requires immense resources, which are indeed very scarce. Consequently, it is imperative to use these scarce resources efficiently in order to maximise output and profit that can be acquired through them. The following paragraphs will aim to discuss the three factors of production; these are arguably the fundamental stimulants responsible for multinational enterprise activities.

1. Land – is a factor of production. It’s a unique natural resource, available for production and other purposes, but because there is a significant variation in its natural distribution amongst nations – variation in size and quality, it has become a very scarce resource. Today, Land have and still remains a stimulating factor for multinational enterprise activities, and investment decision may rest on prospects offered by the perceived enterprise activity and the resulting opportunity cost i.e. the alternative investment decision available to a multinational enterprise. In addition, whilst some nations are endowed with Landed, resources and are able to exploit it, by specialising in the extraction and production of Capital; others that are less endowed (insufficient Land); however, the less endowed may have to continually rely on multinational and/or conglomerate activities for sufficient production of goods and services associated with Land.
2. Labour – in economic terms is a key factor of production, which is defined simply as ‘the human input into the production process’. Every multinational activity requires manpower, and manpower can be classified into two groups: skilled labour and unskilled labour. The former (skilled labourer) are personnel with at least a high-school education, but increasingly with two years of tertiary technical school education, who work either as equipment operator, on the factory floor or in positions in business offices, research and development works, etc. While the latter (unskilled labourer) generally have less than a high-school education, are often semi-literate, and perform basic manual labour with little or no training. The distinction in the classification of manpower is conspicuously mirrored in the Wages to, Demand for, and Supply of, manpower. Wages – without digressing into its legal aspects can be referred to simply, as all earnings of an employee whether determined on the basis of time, task, or other method of calculation, for manpower or services; this is greatly associated with level of skill acquisition. For example the skilled labourer earns higher than the unskilled labourer. This earning irrespective of its classification is greatly influenced in economic market terms by Supply and Demand. When there is disequilibrium in the supply of – and demand for skilled or unskilled labour, wages become very high and vice versa. In turn, manpower arguably influences the activities of a multinational enterprise. Consequently, in order to fully maximise ‘scarce resources’ multinational enterprise activities are bound to arise e.g. China and India are presently, fertile grounds for multinational enterprise activity because labour is readily available and cheap. Thus, it should be safe to argue that China, India, and their likes are stimulants for multinational business activities.
3. Capital – in economic terms refers to the machines, road, factories, schools and office block which human beings have produced in order to produce other goods and services. For example, modern industrialized economy possesses a large amount of capital, and it is continually increasing. Increases to the capital stock of a nation are called investment. Investment is important if the economy is to achieve economic growth in the long run. In addition, Capital can be classified into Fixed Capital, Social Capital, and Working Capital. Where: Fixed Capital includes machinery, plant and equipment, new technology, factories and buildings; Social Capital can be classed as Government investment spending i.e. the building of new schools, universities, hospitals and spending on expanding the national road network; and, Working Capital simply includes stocks of finished and semi-finished goods (components) that will be either consumed in the near or will be made into finished consumer goods. Drawing from the definition and classification of Capital. It should be safe to conclude that Capital is an essential ingredient of multinational enterprise activity.

Summarily, I should like to list some of the other factors, which might stimulate or influence multinational enterprise activities. These include: Economics of Scale – occurs when mass-producing a good results in lower average cost; Integration – occurs when too many firms have located in one area, thus driving up unit cost; and, Market Structure – refers to a number of firms in an industry – competition and monopoly.

Why are Multinational Enterprise Sometimes Times Criticised for their Activities in Developing Country?

Although, the level of criticism associated with multinational enterprises varies globally. The ‘symptom’ of criticised multinational entities is similar and this has in some cases, resulted in death, and immense destruction of Factors of Production. In most developing countries for example the criticism currently been harboured against multinational enterprises can be encapsulated in the following:

1. Unemployment
2. Intuitive Discrimination
3. Environmental Pollution and Degradation
4. Environmental Sustainability
5. Tax Evasion
6. Influence on Host Government
7. Racial Discrimination

Unemployment – Because of the huge disparity in existing pay packages offered by multinational enterprises and non-multinational enterprises; nationals and residents of the host nation strive and wish for job opportunities in a multinational enterprise. But, because few nationals posses the needed skills (skilled labour) in conjunction with the fact that multinational enterprises do have lukewarm approaches towards employment of non-proficient employees. A few are expatriates employed. In doing this, the multinational enterprise ensure that incomes generated are maintained within a relatively small group of people. Where the attraction for the multinational enterprise may have been the large supply of cheap manual labour; this, in turn contributes to widening of the income distribution. It may also lead to non-transfer of management skills – the host nation or community feels deprived.
Intuitive Discrimination – The disparity in income and standard of living between expatriates and citizenry of the host community results to intuitive discrimination. This with time often degenerates into hatred and unquantifiable economic losses.
Environmental Pollution and Degradation – While the activities of some multinationals may be commendable; the growing perception amongst host nations is that of environmental pollution and degradation. The effect of pollution can be catastrophic. The level and management of pollution by multinational enterprises in developing countries, if not properly addressed may result in stereotyping of multinational entities. Although most multinational enterprises would like to argue that they do everything humanly possible to curtail and prevent all forms of pollution. Host nations should begin to channel genuine cases of environmental pollution and degradation to and/or through the Organisation for Economic Cooperation and Development for immediate redress rather than resulting to destruction of Factors of Production.
Environmental Sustainability – It is expected that the relationships between multinational and host nations or communities remains symbiotic i.e. the relationship should be beneficial to both the host nation and the multinational enterprise. By ploughing back some profits earning on investing, into the environment, the multinational enterprise is indirectly guaranteeing current and future environmental sustainability. In the absence of such a vital programme, and other life and environmental friendly programmes, the multinational enterprise is bound to face criticism. Because, prior to the arrival of the multinational entities, the host communities in the host nation fully depend on the environment for their day to day livelihood – fishing, farming, etc. This criticism if not sufficiently managed could degenerate into conflicts and/or catastrophes.
Tax Evasion – Host nations ideally are in a position to benefit from the contribution and/or presence of multinational enterprises – tax revenues. But because most multinationals often engage in transfer pricing, where they shift production between countries so as to benefit from lower tax arrangements in certain countries – criticisms are received i.e. by indulging is such an act, multinational activities can minimize the tax burden and tax revenue of the national governments. Influence on Host Government – quite a few multinationals receive criticism because they use their already acquired Factors of Production to their advantage only; governments are influenced by multinational enterprises primarily to gain preferential tax concessions, subsidised grants, and non-symbiotic policies.
Racial Discrimination – This is entirely different from intuitive discrimination; there are existing ‘laws’ prohibiting racial discrimination. However, this law tends to vary from one nation to the other and in some cases, different multinational enterprises have different laws. What is most intriguing is that by virtue of size and activities, most multinational enterprises are bound to confront plethora of discriminatory laws, and issues, which they must abide by if they are to function effectively. Also, some of the common racially aggravated criticisms currently been levelled against resident multinationals in developing countries include: direct racial discrimination, indirect racial discrimination, race discrimination by victimisation, exceptions, abuse and harassment, incitement to racial hatred, and institutional racism.

Are These Criticisms Justified?

Depending on the context in which it is used, criticism can be either objective or subjective – making a choice on which root to follow should be the sole prerogative of the person or individual involved. However, drawing from the above distinction the focus of this section of the report will be to address the issue of whether criticisms of multinational enterprises are justified or not. This section of the report will address the issue in two folds: from the economist’ view point, and the OECD guidelines for multinational. The economist is a social scientist that deals with the production and distribution, and consumption of goods and services and their management. While OECD stands for Organisation for Economic Cooperation and Development; the OECD is an international agency, which supports programs designed to facilitate trade and development. Thus, from the economic (social scientist) standpoint I should like to feel that some of the criticisms being levelled against multinational enterprises are debatable. This is because, the onus of managing a nations wealth (factors of production) lies with the government of the day in every nation i.e. the citizenry should trust the judgment of their leaders. Consequently, a corrupt government should have a fair share of criticisms levelled against resident multinational enterprises. But from the OECD Guide lines’ perspective a few of the criticism levelled on multinational enterprises in developing countries are justified. The guidelines for multinational enterprises in developing countries are recommendations addressed by 36 (OECD and non-OECD) governments to multinational enterprises operating in and from their countries. They provide voluntary principles and standards for responsible business conduct in areas such as product safety, environment, labour management, supply chain responsibilities, disclosure of major risks and competition. The recommendation express the shared volumes of the nations that are the source of most of the world’s direct investment flows and home to most multinational enterprises.