Negative effects of MNCs

From the global point of view, MNCs may actually combine leading to an anti-competitive resources allocation and territorial allocation of markets. Their market power may serve as an effective barrier to the entry of competitors. This could lead to growing concentration and monopolization in world markets. So far, however, the evidence, suggests that markets have become less concentrated through time. Given their weight, they are sometimes in a position to wield substantial to wield substantial policy making influence in host as well as home countries.

The role of MNCs in developing countries has been subject to severe criticism. Some points of criticism are cited below:

1. MNCs exploit local labor and resources by paying relatively lower prices and lower taxes than local firms while obtaining high profits that are largely repatriated.
2. MNCs employ transfer prices (artificial prices) in transfers between subsidiaries that minimize total taxes for the MNCs and increase their global profits. By over pricing imports and under invoicing exports that are booked through subsidiaries in tax free ports, MNCs can repatriate more profits than are permitted by host countries.
3. MNCs use scarce local capital to finance their subsidiaries rather than bring needed capital into the host country, thus acting as a drain on host country’s resources.
4. MNCs Involvement often results in the lack of development of local R & D transfer to host countries of technology they do not need, the use of capital intensive technology that reduces jobs, and the increase in psychological dependence on MNCs.
5. Competition from MNCs affects local industry adversely.
6. MNCs produce non-essentials for the host country and usually set up only a part of a productive process, thus affording little opportunity for the creation of linkages in the host countries and only limited increase in employment.
7. The foreign financing needed to cover existing balance of payments deficits and to finance local investment, limits the host country’s ability to import the required inputs for industrialization.
8. Severe restrictions are imposed on the use of technology.
9. MNCs discourage competition among their subsidiaries and prefer some market sharing formula.

The benefits and costs of multinational for the developing countries have been a subject of constant controversy and research. But it is difficult to reach any final conclusion due to problems involved in collection and interpretations of data. However, it is generally agreed that MNCs are a good source of technology not otherwise available. They have also very often provided an element of entrepreneurship and risk taking. Again, if properly regulated private foreign capital has some concrete advantages. Repayment of principle is necessary where the lender is a foreign government or an international institution. But in the case of private foreign investments, the investors usually regard them as permanent. Debt service is limited to interest and dividends. Moreover, profits are likely to be small specially in those years when the balance of payments position is difficult. Substantial part of the profits may also be reinvested. Profit motive would also ensure a sound choice of projects and a continuous interest in development.

Regulation of MNCs:

Over a period of time governments have gained more experience in dealing with multinationals, have worked out more detailed policies for foreign investors and learnt to fear them less. At the same time stiffer competition in international business and the rise of third world multinationals has made it harder for companies to have it all their own way: for example, a developing country pot build a dam or highway can now choose between Brazilian and South Korean as well as French, British and American contractors. According to a study commissioned by the US Committee for Economic Development, third world countries and multinational corporations are learning how to live with each other.