The major issue is the degree of freedom that MNCs should have or the extent of regulating that should be imposed from their present operations and future growth.
Three policy issues are especially visible in the relationships of MNC to its parent and host countries. The policy issues are as follow:
(1) Employment.
(2) Transfer of Technology.
(3) Balance of International Trade and payment.
The perceptions of these issue will vary as seen from the eyes of Labour Union, Trading Countries and Business view.
1. Employment
The expanding volume of foreign investment by business and the emergence of the multinational commerce have heightened interest the effects of foreign trade and investment on domestic employment. This however brought about this question: Do MNCs, export jobs? It is quite evident that in recent years many companies engaged in manufacturing such as electronic companies making television sets and semi conductors have gone abroad to countries where they can use cheap labour in producing components. The nationals (citizens) of these countries making such components are longer employed to make them.
(a) Labour’s Viewpoint
In the view of this, the labour unions assert that foreign trade is now reducing domestic employment. They believe that domestic unemployment is due to the foreign activities of MNCs is, far from clear. The Labour Unions however concluded that the activities of MNCs result in export of jobs.
(b) Other Countries Viewpoints
Today the national pressure all round the world are to have rapid economic growth and to maintain full employment. Unlike merchantilism of time past, the object of the new merchantilism is to hoard jobs rather than gold and other precious metals. In the absence of MNCs foreigners would not have built their own plants but would have imported from the countries manufacturing the needed goods. It is the belief of other countries that companies which are most vigorous abroad are also dynamic at home.
(c) Business Viewpoint
Businesses see it as a positive factor in stimulating employment and economic activity. For example U.S. MNCs produce one fourth of the total U.S. exports with their shipments to overseas affiliates. Nearly one in eight in U.S. production industries depends on export.
The believe of business was that some MNCs often move abroad not because of cheap labour, but rather because of market growth potential in developed countries, or the threat of being denied access to foreign markets through exports.
2. Transfer of Technology
The multinational firm has become one of the principal means for the exporting of capital, technical knowledge and management know-how.
(a) Labour’s Viewpoint
Higher-technology production capacity and jobs are being exported by the MNC either through the construction of subsidiary plants abroad or by the licensing of production and patent rights. These technology transfers by multinational firms are closing the technological gap and eroding competitive advantage.
(b) Host Countries Viewpoints
On the one hand, it is often felt that by bringing technical knowledge and management know-how to host country, the MNC would have acquainted its potential customers with benefits of high-technology products. It would also present a competitive challenge to local firms to strive for new technological products of their own.
In these ways, multinational firm has assisted in narrowing the technological gap between countries that existed in the form of capital shortages and management skills.
(c) Business Viewpoint
Advocates of MNC see the transferring of technology abroad as a means for raising living standards in part through the diffusion of technology and in part through improving he world wide allocation of resources.
Furthermore, although the MNC has been an important means for diffusing technology, the primary cause for reducing the technology gap rests in the independent actions of foreign countries such as increasing their R & D (research and development) expenditures.
3. International Trade and Payments
The balance of trade is the difference between the money value of a nation’s imports and exports of manufactured goods. A country’s balance of payment refers to the difference between the total payments to foreign nations and the total receipts from foreign nations during a given time.
International Instrument For World Trade
In these days of wrangling between nil-producing and oil-consuming nations, often, government do roost talking about new forms of international organisation and co-operation. The fact is that the internationalization of the world community has been at least as much the work of the multinational corporations as of governments. It has beer the work of corporations with access to any credit markets, with a marketing known-how in many countries, and cultures, and above all with management capable of making decisions and pursuing new directions
The truth is that, the multinational corporations have not done it all alone. They could not operate on a worldwide basis without relatively free flows of money and credit, without multilateral tax agreements. or with high tarriffs that interfere with international trade. The two basic instruments of post-war economic policy have helped to facilitate the role of multinational corporation for the past years. These are: the International Monetary Fund (IMF) and the General Agreement on Tariffs and Trade (GATT).
History of International Monetary Fund
In July 1944, experts from 44 countries met for the United Nations Monetary and Financial Conference, or Bretton Woods Conference to make financial arrangements for the post-World War period. Two of the major actions of the Bretton Woods Conference were to establish
(a) International Bank for Reconstruction and Development (IBRD), also known as the World Bank, to make long-term capital available to these urgently needing it.
(b) The International Monetary Fund (IMF) to cover short-term imbalances in payments between member nations.
Role of the IMF.
The IMF was established to:
(1) Secure international co-operation.
(2) Stabilise exchange rates.
(3) Expand international liquidity.
IMF have currency reserves of member nations which ware paid in by cach nation on a quota basis determined by a country’s volume of international trade, national income and International reserve holdings Under the Bretton Woods agreements, each government pledged to keep its currency within a certain range of an agreed dollar value.
All currencies were officially.denominated in terms of gold, although they actually pegged to the dollar. The dollar was fixed to gold and was convertible to gold by official monetary institutions. The IMF provided that moral suasion and money credit that kept the system alive. As of January 1975, the race no longer holds that 25 percent of the quota for each member must be in gold.
Until recently a member nation with a temporary balance or payments problem could borrow a foreign currency from the fund by depositing a certain amount of its own national currency as collateral. The borrowing nation had an obligation to repay its loan within five years.
The IMF and SDRs:
Special drawing rights (SDAs), or “paper gold”, provide an important step toward a now international monetary system in a move way from anchoring the currencies of IMF members to the US. dollar, special drawing rights were created to anchor IMF member-governments’ currencies to the market value of a collection of 16 major world currencies. This permits the pegging, of a currency to a more stable measure or “peg”, than to one currency, such as the dollar, that may vary widely on international money exchanges.
When SDRs were created in 1969, the dollar had a par value of $35 to An ounce of golds so an SDR was defined as equal to one dollar or to an ounce of gold. But subsequent devaluations and the end of gold convertibility eroded the value of the dollar in terms of other currencies. Therefore, In 1974 the IMF began to define the SDR in terms of the composite of 16 currencies. One SDR now amounts to about $1.25.
The importance of this change is found in the world oil prices, which are valued in dollars .If the dollar falls in value in comparison to the SDR, oil-producing countries paid in dollars are able to buy fewer goods for their dollars.
However if the price of oil were measured in terms of SDRs, this would boost the price of oil for those who pay in dollars and the oil producers would be able to buy more goods per barrel of oil sold.
General Agreement on Tarriff and Trade
Tariff refers to taxes on goods passing the borders of a country, This taxation of trade as a source of revenue has its roots in ancient trade practices. According to Root (1973) however, the Merchantilist of the eighteenth century were probably the first to make tariff the Instrument of national control of international trade.
During the depression of the 1930s, industrial nations raised trade barriers to help domestic producers, The United States imposed the Smoot-Bawley Act And the others responded with retaliatory measures, thus effectively blocking world trade.
To prevent a breakdown in the world trade similar to the one that crippled trade during the 1930s and contributed to the build-up of World War II, the General Agreement on Tariffs and Trade (GATT) was established in 1948 by 23 countries. Today, more than 80 countries responsible for more than 80 percent of the World’s trade are members of GATT.
Numerous non-members also apply GATT rules which are designed to encourage mutual tariffs concessions and promote increases in the exports and imports of participating nations. GATT does not rigidly bind its member nations.
Article 19 of GATT provides protective tariff measures that countries can impose when their domestic industries are threatened by imports of specific products. Article 24 paved the way for customs unions or “economic communities”, by providing an exception to the principle of non-discrimination in tariff arrangements.
International Trade Barriers
While organizations such as the IMF and GATT were established to create a viable monetary mechanism and lessen tax and tariff inequalities in the world trade, individual nation States view the proposals and actions taken with in these organizations in terms of what they regard as their national interest. Two examples of national-interest views have resulted in:
(1) economic integration; and
(2) non-tariff barriers.
Economic Integration
Economic integration means the adoption of a common economic policy by a group of nation-states. When one thinks of attempts at economic integration today, European Economic Community (EEC)’or Common Market, or Economic Community of West African States (ECOWAS) naturally come to mind. The major force pushing the Common Market today is the need its members see for a united stand in economic negotiations.
Forms of Economic Integration:
The E.E.C. Is only one of many possible forms that efforts towards, economic integration may take. Economic integration covers a wide
scope of arrangements – from preferential tariffs to full economic integrations which has rarely been achieved.
1. Tariffs
A tariff, or customs duty, is a schedule of taxes levied upon goods transported from one country or political division to another. When the tariff on identical commodities differs according to the source of those commodities, it is referred to as a preferential tariff, An example is the eligibility of British Commonwealth members for special tariff treatment in trading with Great Britain. Another example is that ECOWAS which allow its members trade/customs concessions within its sub-regions.
2. Free Trade Areas or Zones
In a true free trade area or zone, no export or import duties or other regulations designed to reduce traded are established among the members. Today, however, most trade associations reduce duties among members rather than removing them completely.
3. Customs Unions
A customs union goes a step further than free trade areas. The member countries agree not only to abolish trade restrictions among themselves but also to adopt common policies regarding trade outside of the union
4. Economic unions
An economic union refers to an arrangement where member countries agree to coordinate their economic policies in matters of customs duties, fiscal and monetary regulations, and related subjects as well as to permit the movement of capital and labour across their borders.
Major Trading Communities: The three main world trade communities are:
1. The European Economic Community (EEC):
2. The European Free Trade Association (EFTA), and
3. Latin American Free Trade Association (LAFTA). However, we have the Economic Community of West African States (ECOWAS) in West Africa.
1. European Economic Community (EEC) – The first step in European economic integration was taken in 1950 and resulted in the formation of the European Coal and Steel Community as a common market for Coal and Steel. The members of this association were Belgium, France, West Germany, Italy, Luxembourg and The Netherlands.
In 1957, these six members signed the Treaty of Rome in which they agreed to establish the E.E.C. or Common market and to expand the common import duties and economic policies believed to be of benefit to the members. In 1973, the Common Market was enlarged to include Great Britain, Denmark, and Ireland, which moved to the E.E.C. from the EFTA. The EEC members remains a vigorous effort in economic integration.
2. European Free Trade Association (EFTA) – With the formation of the EEC in 1957, Great Britain was in a bind. Britain wanted the benefits of a common market on the European continent, but did not want to yield its sovereignty to the extent anticipated by the E.E.C. as it moved toward the status of an economic Union. So, Britain promoted the European Free Trade Association also known as the ‘OUTER SEVEN’, with Austria, Denmark, Norway, Sweden, Finland and Switzerland.
As a result, the EETA was established by the Stockholm Treaty in January, 1950. In essence, it aimed for free trade among the members without the common economic and political commitments made by E.E.C. members.
However, in 1973 Great Britain joined the Common Market over the continued protests of France and Denmark followed. Today, the EFTA is composed of Finland, Iceland, Norway and Portugal.
3. Central and South American Free Trade Associations – The progress of European efforts at economic integration led republics in Central and South America as well as Mexico, to think along the same lines. The earliest attempt was the Central American Common Market (CACM) formed by Costa Rica, E.I Salvador, Guatemala, Honduras, and Nicaragua.
Patterned after the E.E.C. , it likewise aims for the eventual industrial and economic integration of the trade area. The Latin American Free Trade Association (LAFTA) followed on the heels ofCACM. It was formed in 1960 by Argentina, Brazil, Chile, Mexico, Paraguay, Peru and Uruguay, Colombia, Venezuela and Ecuador followed by 1970.
The LAFTA emphasizes the principle of reciprocity and favoured most-favoured-nation treatment with special treatment provided to least-developed member countries. Since 1965, LAFTA has been followed by the And as Development Corporation, a regional subgroup of LAFTA, and the Caribbean Free Trade Association composed of the former British colonies of Antigua, Barbados, Guyana, Jamaica, and Tobago.
4. Economic Community of West African States (ECOWAS) – The community was established at a time of economic difficulties engendered by the petroleum crises, natural calamities and the world economic recession. ECOWAS aim was to promote cooperation and development in all fields of economic activity, particularly in the fields of industry, transport, telecommunication, energy, agriculture, natural resources, commerce, etc.
ECOWAS is made up of sixteen member states namely: Benin, Burkina Faso, Cape Verde, Gambia, Ghana, Guinea, Guinea Bissau, Cote D’Ivoire, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone and Togo
Non- Tariff Barriers
Recurring monetary crises have given new urgency to the problems of international economic relations. One problem assuming major proportion is that of non-tariff barriers. A non-tariff barrier (NTB) is defined broadly as any measure other than tariff, public or private, that significantly distorts international trade flows.
Types of Non-Tariff Barriers:
Existing NTB regulations are frequently modified to meet new economic and political considerations and new NTBs are arising at increasingly rapid successions
The types of NTB areas follow:
4. Government Participation in Trade.
5. Specific Limitation of Trade.
6. Standards.
7. Charges on imports.
Anti-dumping regulations is a well-known sub area of customs administration that may create distortions in trade, depending on how it is handled. Dumping refers to discriminatory pricing where exporters sell their products to a foreign market at a lower price than in the home market.
Effect of Non- Tariff Barriers:
NTBs generally have effect on interfering and preventing the normal working of competitive forces. They also have effect of directing, more of a country’s income to the protected domestic firm and workers than if these barriers did not exist. From the standpoint of multinational corporation, it is often the uncertainty created by there barriers as well as their effect of restricting access to foreign market, that is important.
Third World Trade
As multi-national business spreads across the world, it is running headlong into economic nationalism in emerging as well as in developed countries. On the other hand, most of the less developed countries (LDCs), often of the non-aligned Third World, are extending liberal inducements to invite foreign investment. Furthermore, the inducements. are planned and controlled by governments that are suspicious and fearful of the giant multinational corporation.
This uneasiness is reinforced in the present period of resource scarcity where foreign investment, regardless of its intended benefits, is seen as exploiting the resources of the host country. The classical doctrine of comparative advantage is suspected by some of holding the LDCs in their impoverished states as providers of natural resources to developed nations. The poor countries subsidize the rich and are left behind in the world’s race for prosperity. This feeling is especially strong in the Third World countries.
Summary
The merits of international business outweigh its demerits. Although international business has been guilty y of many abuses in the pursuit of profit but it has brought blessing to foreign societies, Some of such blessings brought are capital, technology and managerial know-how.
However, these in turn, has had three major impacts. First the per capital income of many countries in which it has operated has risen higher than otherwise. Second, in many cases it has brought skills which people in host country can use to become more industrialized by their own efforts Third, and perhaps the most important of all, it brings change and transition.