“Transnational Corporation (TNCs) have frequently brought disaster to the local communities in whose regions they invest. ” Debate the validity of this claim, with supporting evidence and reasoned arguments. 1. 0Introduction TNC or also known as Multinational Corporation (MNC) is a decentralize-national company which primarily has locus of management controls over its subsidiaries in whose region they invest (Shinsato, 2005); (Stonehouse , 2000).
Although many statements by Daniels, (2004) claimed that TNCs are perceived by host-country as salvation in their economic development, the pitfalls are yet to venture and catastrophe the local community eventually. Although TNC may not always viewed as catastrophes to the local community, this essay will intended to focus upon the occurrence of externalities brought by TNC in the aspect of political, economical, socio-cultural, technological and other aspects as well. 2. 0Clashes of Interest
TNC’s key decision-making over host-country’s economy triggered conflict of interest between TNC and local community as TNC has no real commitment towards local economic interest (Hill 2003, pg. 243) and tends to favour their PCN’s objectives. For instance, local community enforced MNC to provide and maintain job opportunity and at the same time, the local government urged TNC provides training to the local workforce and invest R&D activities in the host-country. On the other hand, MNC demands for reasonable tax revenues and reliefs from its subsidiaries operating in host-country (Bennett 1999, pg. 170).
Inability of both parties compromise to an agreeable point may result conflict of interests between TNC and local community, where host country failed to pursue its policy in securing its local community welfare due to insufficient leverage upon TNC decision-making (Dicken, 2009). 3. 0Practices of Bribery According to Morimoto (2005, pg. 23), TNC engages bribery as medium to obtain favourable treatment from local government in dealing businesses. Bennett (1999, pg. 102) shared similar viewpoints of bribery as more prone to exist in developing countries which the host-country perceived “corruption” as a necessity element in a business world.
As TNC depending bribery as a “bypass” ticket to eliminate red tapes in the host-country regulations and policies, this would result in distorting the market mechanisms and economic incentives. As stated by (Bennett, 1999); (Daniels, 2004); (Morimoto, 2005), bribery activities involving pertaining government procurement contracts and approvals, business opportunities in reducing high competition with the local firms, inefficient allocation of national resources and bargaining power of inflation prices introduced by TNC are the results of host-country practices via receiving unofficial gratuities as part of the business transaction.
Such action severely tarnishes the host-country reputation globally. TNCs appearances tend to frequently cause high possibility of power abuse in business activities, which suffocates not only the government, the local community as well in getting fair allocation of resources. 4. 0Bias towards Local Linkages In terms of suppliers, Dickens (2009) assumed TNC tends to favour on familiarize existing suppliers whom able to supply components or parts consistently. In the viewpoint of local suppliers, gaining business opportunity to become TNC’s supplier is less likely to procure.
Even to the extent where if local firms were given a chance to supply materials for TNC, it only involved “low-level” of inputs. Many reasons held by TNC in constraining the locals from become established suppliers are listed as followed: perceiving locals as unreliable, producing materials lower than the uniformed standards applied, and others. Therefore, TNC tenders partial knowledge in production in constraining local firms from producing high level of inputs to remains its competitive advantage.
For example, car manufacturers allocate task to the local firms in inspection finished-product car and detecting defective car. However, the recipe of producing car engine and technology were discrete from local firms’ knowledge. Thus, local communities are discouraged from participating and learning techniques acquired by TNC simply as they remains to preserve their intended interests. 5. 0Deplete the Sustainability of Local Firms
Although TNC’s advantage resembles certain advantage towards local economic development, their presence tumbles local entrepreneur firms in such competitive industry. (Dickens, 2009) (Hills, 2003) (Daniels and Radebaugh, 2001) concluded that TNC suppressing local firms and eventually collapsed them out of the business field because these “small cottage industries” are incapable of competing with the giant-dominance MNC in the large economic scale. This turned out to be true when local firms faced de-layering of organization and loss of profit earnings due to direct competition with TNC.
For example, France’s hypermarket “Carrefour” entry on China market creates barriers for local Chinese retailers to retain their sales, and also depleting their open-air market concept of business approaches (Griffin and Pustay, 2005). Such introduction caused many of the local Chinese retailers out of the business as TNC manage to produce large-scale commodity locally in one concept store. This is significant true as consumer does not need to search their goods in many different places, but most of their daily commodities are found in such gigantic hyper-market like Carrefour.
Extinction of local firms is given a serious consideration of the host-government to whether perceived TNC as beneficial to the country or just merely monopolizes the local market. Take China for example, Roderick (2000, pg. 44) stated that Dell Inc had penetrated the Chinese IT share market despise the local “Legend Computer” was well-established amongst the Chinese consumers, leaving Legend Computer to deplete away from the industry and over-reigned by its foreign competitors.
In the end, local community suffered due to inability to survive in such competitive business field because TNC dominates. 6. 0Imbalance of resource allocation (Daniels, 2001) (Hill, 2003) (Dickens, 2009) shared the similarity of expressing MNE tends to enjoy beneficiaries of local investment incentives such as tax exemption, subsidy and other attractive form of allowances by host-country in promoting FDI. Such amounting capital transferred overseas affects host-country’s Balance-of-Payment (BOP) records, where foreign operation remits profits and sends to their nationals in form of royalties.
Reversed capital flows incurred instead of inputs from TNC, host-country suffered in raising more capital to promote FDI investment domestically (Dickens, 2009). As a result, host-country take measurement in curbing TNC’s repatriated earnings abroad to their PCN. (UNCTAD, 2009) summarizes TNC involvement in local community leads to imbalance resource allocation in the local community. 7. 0Employment and Salary Issues Undermine as well, TNC brought bias toward the locals in terms of employment policies, wages and salaries rate compared to expatriates workforce.
Most of the job opportunity offered by TNC towards local population is rather relatively lower level of skills vacancy, low-investment in labour training and development and employing workforces especially those in the developing countries where cost of labours are low (Dicken, 2009). For example, TNC may subcontracting other firms; which they segregate workforce’s salary based on criteria such as education and skill levels, economic activities involved and cost of living.
Such practices discriminate and underestimate the potential of local workforce as TNC focuses on employing low-cost labour and ease of dismissal labour contracts. In contrast, expatriate workforces are well-paid and gain better competitive advantage in elevating corporate ladder compared to the locals. Overall, TNC’s involvement brought bias and injustice judgment in employment policy amongst the local communities. 8. 0Socio-cultural Aspect
MNC or TNC had brought changes upon local communities in the ways of business are dealt and also offering product and services, reflecting the evolution of local community culture, lifestyle standards and purchasing behaviour in local community (Czinkota, 1996). Although such development and improvements brought by TNCs through introducing modernize products and services, there are externalities embedded in the local standards of living (Griffin and Pustay 2005, pg. 66, 67).
For instances, the introduction of McDonalds in the early stage at India was not welcomed by the local communities due to the clashes of the local norms and practices. McDonalds offered beef meats in their “Big Mac” burgers were boycott by the locals. Such phenomenon triggered tension and religion conflict between the western culture and the Indian culture, which they believed that “beef” should not be consume because they perceived cow as their sacramental god. However, McDonalds does not only violate the local norms in India, but in many parts of the nation which practices similar culture aspects (Daniels 2004, pg. 2). Daniels and Radebaugh (1998, pg. 778) stated that cross-cultural understanding is not well-exposed amongst the local community, which they perceived foreigners as strangers and maybe to the situation where they would keep a low profile of their cultures from being critized. The presence of different ethnic groups especially the expatriate workforce from the PCN would create tensions amongst the local society in their TNC operations. For example, USA has its own working environment culture, which may not suit to the locals due to such westernize culture exposure. . 0Incapability in Producing High-Technology Local community suffered severely from TNCs limited technological transfer policies, which stifle the growth and development of the local firms regarding to the protection of TNC’s overall interests in knowledge (Dicken, 2009). This can be proved by USA-based TNC’s conducted 91% of R&D activities in their PCN, 8% in developed countries which majority-owned subsidiaries (UNCTAD, pg. 2). Merely less than 1% of their technology knowledge is been transferred to the local in guarding their technology interest.
As a result, local communities will not able to develop a viable R&D if the local firms are too dependent on TNC’s technology. Developing countries such as Malaysia and Thailand clinging upon TNC’s technology by allowing more FDI inflows than those developed countries like Japan and Korea, which they are competent in imitating western technologies (Daniels and Radebaugh, 2001). Not only that, TNC’s technological transfer causes high unemployment amongst the local community. The changes of cost allocation by TNC from labour intensive capital to information intensive capital brought disaster upon the local workforce.
Hyman (1999, pg. 10, 11) stated that the older forms of workforce employment will be replaced by information capital where TNC will no longer need to invest in human capital to overrun their mass production scale. As TNC using cutting-edge technology production method in stimulating their volume productions, labour workforce began to be obsolete and soon replaced by machineries (Jeyaraj, 2006, pg. 8). Sooner or later, human workforce will no longer required in the economic sector, but been replenish by the fast-changing technological robotic machines. 0. 0Environmental Aspect Environmental degradation had been one of the biggest externalities brought by the TNCs. Morimoto (2005, pg. 4) argues that the variances of environmental laws between the PCN and the host-country are the main culprit in destroying the mother earth. TNC are mostly accused by its double standard practices which they adopted lower environmental standards compared than those subsidiaries implement in their PCN. Adversely, developed nations are more stringent and sensitive towards the depleting quality of the nature.
Such empirical evidence found that a trade association for the European Chemical Industry known as CEFIC, obliged in issuing guidance providing their workforce information about the hazards of substances liable at their workplace and take precaution to avoid such accident to be likely occurred (Gleckman 2009, pg. 2). Unlikely those TNC whom invest in the host-country, local community are vulnerable to high risk of hazards due to TNC’s improper conduct in their safety measurement. Take Malaysia for example.
During the 1982, Asian Rare Earth Sdn. Bhd (ARE) is file-suited by the local communities due to their improper disposal of radioactive and toxic waste. Empirical evidence found out that ARE’s operations not only allowed to be operating for four consecutive years without performing environmental impact assessment, but also not possessing valid license in generating, handling and storing radioactive effluents (Morimoto 2005, pg. 6). However, ARE was allowed to operate due to the ineffective government law enforcement.
Such irresponsible acts by both TNC and host-country in lenient environmental law enforcement would suffocate the innocent local community in inhaling disease such as leukemia, infant mortality and others. Thus, this would increase the burden of the locals to get medical attention for vaccination. 11. 0Conclusion In conclusion, host-country suffered severely by the externalities caused by TNC’s operations. TNC, in fact, creates negative impacts upon host-country’s external environment factors such as political, economical, socio-cultural, technological and environmental aspects.
Host-country, therefore, needs to take serious consideration on evaluating TNC’s foreign investment as a blessing or curse to the local community. At least to the extent where local community does not need to deprive and devastated from TNC’s exploitation, but to enjoy the remunerations brought by the TNCs. Word Count: 2, 029 words 8. 0Bibliography Book sources: Bennett, R (1999). International Business 2nd Edition, Harlow: FT Prentice Hall (Date Accessed: 15 October 2009) Czinkota, M et al (1996). International Business 4th Edition, San Diego: The Dryden Press Date Accessed: 17 October 2009) Daniels, J and Radebaugh, L (1998) International Business: Environments and Operations 8th Edition, New Jersey: Prentice Hall (Date Accessed: 30 October 2009) Daniels, J and Radebaugh, L (2001). International Business: Environments and Operations 9th Edition, New Jersey: Prentice Hall (Date Accessed: 18 October 2009) Daniels, J et al (2004). International Business: Environments and Operations 10th Edition, New Jersey: Prentice Hall (Date Accessed: 30 October 2009) Dicken, P (2009).
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