ADVANTAGES/ STRENGTHS OF TNC TOWARD HOST COUNTRIES Based on the research found by Economist Newspaper Group, Incorporate, TNCs are big, rich and have a larger budget than nation’s GDP. Hence, it has power influence on global economy by enrich a country economy. It can be shown by the example of how the ownership of American manufacturing plants affects their chances of closing.
2.1 Economic impact
According to the research found by Andrew Bernard of Dartmouth College’s Tuck School of Business and Bradford Jensen of the Institute for International Economics, they found that between 1987 and 1997 American factories owned by multinationals not only less likely to close down but last longer than local firms. It because TNC richer, larger size and have greater production which assist them achieve greater economic of scale and much more efficient in access cheaper finance. Possess with these strengths, exporters are able to survive within global economy compare to factories which only produce for domestic market, while multinational firms are able to stand apart from their competitors from low wage countries.
2.2 Increase employment rate
The benefits of multinational provided are much more than local firms. As a multinational firm enters into a developing country or low wage country, it can provide job opportunities to local workers. For example, Nike enters into low wage countries such as Malaysia, Singapore and Indonesia in order to seek low labor cost which indirect increase the employment rate of the countries. In addition, the multinational firm’s labors are better beneficial than local firms’ labors with higher paid and compensation from losing jobs. This may create workers’ loyalty toward company and contribute more to the firm.
2.3 Technology contribution
TNC play an important role in developing countries in terms of technology contribution. For example, development of deep-water oil extraction may require mature technical skills and capabilities. For those in West Asia tend to remain State-owned oil companies in hand may require high technology and skillful technical from TNC which are not locally available like knowledge of long-distance horizontal drilling expertise used to exploit huge oil. Not only that, for certain countries which with sufficient expertise sometimes may cooperate with TNC in the development of oilfield like Kuwait. By relying on TNC’s advance technology and managerial expertise, it can assist them expand globally.
2.4 Enhancement of export
One of the advantages that TNC provided is enhancement of export. This could be seen through mineral industry that TNC helped to boost its exportation by expand it production facilities, value added to minerals and use of transfer pricing within global market. According to the world investment report, involvement of TNC in trading has led the exportation of country increase especially in the field of mineral industry and resulted mineral become main export sources in most of the developing countries such as in Chile, percentage of the exportation of copper in total exports goods rose from 38% to 61% in the period of 2003- 2006.
Another industry that has been affected by the Involvement of TNC in trading is oil and gas field. Participant of TNC helps increase production and exportation of some countries like Argentina, Indonesia, Ecuador and etc. In Ecuador, TNC help increase their exportation of crude oil by adding transport capacity for 400.000 barrels per day (ECLAC,2004).
2.5 Generation revenue to developing countries
Participant of TNC in trading not only increase the exportation of countries but also help to generate revenue. Firms from developing countries may gain a lot from TNC in terms of learn their experience in export market which skill may not found available in local and skills in add value to the raw material before export. Increasing revenue from exportation of countries may help them have the ability to import inputs they needed from foreign countries and the foreign countries may also generate revenue from it.
2.6 Generation of government revenue
A tax system has been designed by government in order to generate revenue from companies by encourage firms finance their investment through intra-company loan. Through this way, government can generate revenue from firms when firms make installment for the loan in which the repayment may reduce firms’ revenue for several years (sources from UNRISD, 2005). As mention in the case of Peru (sources: World Investment Report 2007), the net profit has rose from $4billion to $67 billion between 2002 and 2006 due to the growth of exportation. At the same time, tax income the firm paid has been increase as well from $2 billion to $27 billion and it may increase government revenue.
2.7 infrastructure development
Involvement of TNC may increase the infrastructure development in the countries due to the activities of TNC may require public utilities such as water supply, electricity supply, transportation infrastructures like road, railway, and airports for them transfer and export the goods. As an example, involvement of TNC in the development of Lake Victoria Goldfields in United Republic of Tanzania contributed to development of infrastructure like roads, hotels and airport facilities which affected to an increase in tourism in the countries. Following by this may increase income of people in local country, increase economic growth and government revenue as well.
2.8 Environmental impact
Government has been worked hard to minimize negative impact on environment which resulting by firms’ activities especially extractive activities. Types of mineral extracted, technology the firm used to extract and scale of extraction may impose an impact on environment. According to the World Investment Report 2007, it stated that domestic firms were unable to minimize the impact on environment when undertake extractive activities due to they were lack of standard environmentally management, advance technology and resources as TNC possess. With the involvement of TNC in metal mining industry may help to reduce the impact on environment with their environment-friendly production technique, advance technique extraction, and standard environmentally management ability.
DISADVANTAGES OF TNC Participant of TNC in trading not only provide advantages but disadvantages as well.
3.1 Labour exploitation
One of the disadvantage that TNC involve in trading include exploiting cheap labour . Most of the TNC decided to move production into low wage countries or developing countries intend to exploit cheap labour as well as Nike. In order to enter low wage countries, Nike makes agreement with local producers like India and Vietnam to manufacture their products because of the low labour cost and low production cost.. Through the low paid to labour force with few dollars a day and this may reduce their production cost as well, the firm can generate high profit and have a large budget to promote their brand.
3.2 Removal of capital
TNC can bring jobs, technology and inject capital to low wage countries easily as well as it could be leave easily. All capital of TNC does not stay in host country for a long time but it can be removed anytime by TNC. This can be seen through the example of Sony Corporation left West Java, Indonesia due to the poor business climate. When there is an opportunity for TNC injects capital in this low wage country, it could allocate their factory and office in this country as they like at any time. On the contrary, Sony could remove all their capital away from this country when they faced unfavorable climate like making lose.
3.3 Economic recession
Emergence of TNC could increase economic growth or contrary. As mention above, involvement of high technology and skillful technical from TNC which are not locally available like knowledge of long-distance horizontal drilling expertise may assist in extend exportation and increase economic growth. On the other hand, when TNC taking all their capital injected to the countries away may result economic recession as well due to most of the local workers lost their income and has no expend ability. Hence, they may reduce their expenses and save all their money. Finally, it resulted economic recession.
3.4 Outflow of wealth
Outflow of wealth is another disadvantage of involving TNC in trading. Most of the TNC allocate their manufacturing plant is low weight countries like Indonesia, Vietnam and Cambodia because of the low wage of local labour and cheaper land to set up factories. Hence, the production cost may reduce and much more profit the firm can generate. Most of the profits generated are returned to shareholders and most of them will export it to their home country and will not stay in the host countries. Hence, the developing countries are not get wealth even there have participant of TNC in trading.
3.5 Outside decision making
Even there have participant of TNC in developing countries, but there is no authority for the countries to make any decision and the decisions are made by headquarter of the TNC. In addition, all decision will be made based on the benefit on their home country not the host countries itself. If they found they dislike the economic condition they will leave the countries and take all the capital they injected away while the profit they generated will not stay long within host countries also but will be exported to their home countries as well.
3.6 Widening gap between developed and developing countries
Due to most of the profit generated within developing countries may not stay for a long and will be exported to their home countries for development. Most of the TNC allocate their factories in developing countries because of the low wage of labour force and cheaper land for set up factories which may help to reduce production cost and generate higher profit. The profit they gain will be exported to their home country for development purpose. The more profit they gain the more development they can conduct toward their home country and it may widen the gap between developed and developing countries. For example, Nike makes agreement with local producers who from developing countries like India and Vietnam to manufacture their products because of the low labour cost and low production cost. The profit generated will not be used for investment in developing countries but export to their home country for development like innovate high technology products, foster more skillful technical and so on. This outflow of wealth is widening the gap between developed and developing countries.
WHY DRIVE TO MNC/ TNC
As we know that TNC is a type of profit-generated organization and powerful in dominant of global economic. Why firms transnationalize? There are some driving forces affecting firms’ transnationalize but the most consequence is generating profits.
4.1 Avoid trade barriers
One of the reasons for the growth of TNC is avoid trade barrier by different governments such as quota restriction on import goods, taxes, government’s policies and so on. Due to TNCs are able to coordinate and control operations of activities in different countries, hence, they allocate some of their offices and factories in developing countries and take this advantage to distribute their production around the countries. Through this way, TNCs are able to control terms to be traded, product distribution and avoid trade barriers which set by governments.
4.2 Cost advantage
Requirement of low wage labour cost would be another factor affect firms to transnationalise. Firms intend to seek for low wage labour cost in order to decrease their production cost and generate higher profit. Their ability in allocate factories and offices in different countries especially in low wage countries may help them achieve this objective. For example, Nike makes agreement with local producers who from developing countries like India and Vietnam to manufacture their products because of the low labour cost and low production cost. The profit generated will not be used for investment in developing countries but export to their home country for development.
On the other hand, increasing international transportation cost as an indicator induce firm intend to transnationalise in low wage countrie because it may help to meet cost advantage in terms of transportation and distribution cost as well. Their geographical flexibility and ability shift the production in different countries especially developing countries provide an opportunity for them to take advantage to reduce transportation fees and distribution cost.
Another cost advantage induce transnationlise is the cheaper land for set up factories and office in developing countries compare to developed countries. Even they have office in developing countries, but the authority of decision making is outside the countries and profit generated is on the shareholders’ hands.
4.4 Secure supplies of raw materials
Supply of raw material would be another factor affect firm transnationalise in some countries. Even TNC is an organization which has power influence on global economy, huge financial resources, possess high technology and capabilities that not available in developing countries but it has weakness like lack of raw material supply such as mineral, gold and so on. In order to secure supplies of raw material to their home countries, TNC make agreements with the supply countries that they will inject capital in their countries as an exchange transaction and it may benefit both side.
FACTOR AFFECT TNC FOOTLOSE WITHIN GLOBAL ECONOMY 5.1Huge financial
There have some factor agree that TNCs are footloose within global economy. One of the factors would be their huge financial. Available of huge financial for TNC to develop more high technology product that not available in other countries and flexibility in allocate their resources and factories in different countries. Possess with the strong financial, TNCs have the choice to enter any countries they favor and exit as well. Most of the developing countries may need TNC inject their capital into their countries where lack of the huge financial for developing and explore. For example, Coca Cola is one of the manufacturer soft drink in the world and it has a strong financial ability. There have many developing countries encourage Coca cola inject capital and allocate their factories in their country which may help to increase their employment rate and economic condition. In order to attract TNC enter into their country, India’s government offer incentives to Coca Cola to boost them enter into their country. According to this case, TNCs have a strong bargaining power with government and flexible in allocate their factories in worldwide due to they have a strong financial support.
5.2 Access to IT
There are many countries lack of skillful technical and up to date machinery so they encourage TNCs enters into their countries. TNC has the ability to access IT which not all the countries can access because they rich with skillful technical and engineering who are able to monitor the skillful technique in operate high technology machine. Most of the TNCs are rich and possess a huge financial ability hence they can invest more in generate high production machinery and provide skillful technical training to employees. For example, knowledge of long-distance horizontal drilling expertise of TNC is useful for exploit huge oil. For those in West Asia tend to remain State-owned oil companies in hand may require this technology so they are welcome TNC enter into their country. In the aspect of TNC, they have the choice to choose countries they favor due to they have high technology machine and skillful technical which not available in other.
5.3 Brand name
TNSc can be view as footloose within global economy because of their brand name. In current market, most of the consumers will buy one product because of the brand name. They believe that all branded product can guarantee them the quality of products. For example, Microsoft is one of the TNCs. Consumers famous with its brand name because of their excellent operating system and web browser. Posses with the famous brand name, Microsoft can be view as footloose within global economy. It has the ability to enter and exit one country at any time.
FACTOR AFFECT TNC NOT FOOTLOSE WITHIN GLOBAL ECONOMY There only one and the most important factor that against TNCs footloose within global economy which is government regulations. Even though TNCs possess a lot of strengths and bring in a lot positive impacts, but there still arise of government regulations restrict it. The negative impacts as mention above after Involvement of TNCs in trading induce government set some rules to restrict it from enter into their countries to exploit profits. Most of the TNCs are rich, own a strong financial ability, geographical flexibility and available with high technology machine which assist them have the ability to enter or exit countries at any time to exploit benefits. For example, even though Microsoft is famous with their brand name and technology which may enable them enter into countries easily but government come out some regulations to restrict it enter into countries because Microsoft abuse its monopoly power on the pc market by forcing computer makers to include its internet browser as a part of installation of windows software.
Impact Of Doing Business Globally Economics Essay
AMD has decided to establish a new semiconductor fabrication facility in the city of Dresden in Germany. It is an action of doing business globally which brought influence to the AMD and the USA and the Germany. This essay firstly discussed the impact of doing business globally from three perspectives, the enterprises, the home country and the host country. Then the impact on the international financial making will be discussed. Last, the report will discuss the impact on the ethical decision making
2.0 The impact of doing business globally
In general, doing business globally refers to an enterprise directly do business to integrate global resources in order to achieve the business objectives. Doing business globally will have an impact to the business, home country and host country.
2.1 The impact on the enterprises Enterprise is the main international operations with the dynamic of the right to choose international operations. At the same time, company will also be influenced by various positive or negative impacts of international operations. Positive aspects of the enterprise are that it can continue to integrate global resources to help enhance corporate image and competitiveness, thus getting great economic and political gains through doing business globally; negative impact is that the enterprise needs to face more complex environment in which the management of the enterprise face a huge challenge (Deepak Sethi and William Judge, 2009).
In the process of globalization in the business, AMD took advantage of cheap labor resources in Germany. It also found that Dresden was once a technologically advanced place in the history. Setting up production bases in Dresden was able to absorb the local talent, but also it can use advanced technology. It was useful to enhance the core competitiveness of AMD. Second, the local government provided AMD with subsidies, which can help AMD to reduce production costs and improve profits.
2.2 The impact of home country Home country refers the country of origin or region enterprises engaged in international operations in international business activities. Doing business globally has also brought opportunities and challenges to the home country’s economic development: opportunities mainly refer to in international operations to promote the home country’s economic development and industrial restructuring: first, it is conducive to adapt the home country’s economic construction and improving the quality of national life; second, through specific import and export trade or foreign direct investment strategy decisions, is conducive to optimizing the industrial structure of the home country; and third, to enhance the international status of the home country and provide protection the home country’s political and Foreign; Fourth, with today’s increasingly integrated global economy, doing business globally also take the missionâ€‹â€‹to pass the home country’s culture and values (James G. Coon, 2004).
Challenge is the international operation caused a series of economic, political and social issues and brought difficulties to the home country’s foreign trade and diplomatic and political activities.
AMD set up a new fab at Dresden in Germany. This will increase the value of GNP to the U.S., which help to improve the living standards of the United States. In addition, AMD will improve America’s position in the international business and expand the influence of the brand, but also can pass the culture and values ofâ€‹â€‹ the United States to Germany.
2.3 The impact of the host country The host country is the foreign country which the enterprise engages when doing business globally. The host country benefits are also influenced by international businesses. Doing business globally can improve the relationship between the host and home countries, and promote economic development in the host country and improve the quality of its people’s life (Miriam Muethel and Martin Hoegl, 2010). AMD building its factory in Germany has played a significant role to address the problem of employment in Germany. It reduced the unemployment rate in Germany. At the same time, it also brought advanced technology into Germany. Besides, it can also increase the tax revenue in Germany.
2.4 Suggestion to AMD and other enterprises when doing business globally First, the enterprise who wants doing business globally need strategic thinking for long-term development, deal with interests among enterprise, the home country and host country. Second, enterprises should identify their comparative advantage to form an accurate grasp of market positioning, and to take practical measures to change the potential comparative advantage into real competitive advantage. For businesses, the intensity of competition with doing business globally is different from the domestic business. In this case, companies must constantly engage in learning and innovation of international business philosophy and thinking and to get competitive advantage to seek survival and development (Ben L. Kedia and Ananda Mukherji,1999). Third, to accelerate the form change of business organization and build information network are also very important. Doing business globally is a game of interests involved in business, home country and host country. During doing business globally ,for maintaining communication with the home country, host country, and appropriate adjustment of the timing of the operation, the construction of efficient organizational form and adapt to the international information network is an important condition for operation.
3.0 The impact on international financial making 3.1 Impact Analysis The salient feature of financial activities during doing business globally is its complexity. The source of this complexity is due to system and operational activities of multinational companies located in different countries with different financial environments.
As purely financial activities of domestic enterprises within its scope, the proceeds of capital raise, use, settlement and distribution are not cross borders, and generally do not involve foreign currency, which is relatively simple to manage. And multinational corporations operating in the international arena, involving all relevant economic, political, legal, social and cultural factors, and thus during the financial management, the relevant personnel needs not only be familiar with the situation in the home country, but also involve in-depth understanding of the situation related to the State , and always concern about major changes of the international situation and the country’s political, economic and legal aspects, such as the level of national interest rates, exchange rates, foreign exchange control policy, tax policy, etc., which may have a direct and very significant impact of financial position and profit level.
The complexity of financial environment increases the difficulty and risk of management. The contradiction of different regulations in different countries to the coordination and control of multinational companies scattered all over the world. For example, for the same transaction, the tax laws of different countries, the tax consequences of the transaction may be different in different countries. Procedures available in one place, in another place may have to give up. Meanwhile, foreign exchange management as an important area of multinational financial management, which is in the management of domestic enterprises in many ordinary does not exist, even if it exists, its importance is much lower. Factors such as these, the high demands are put forward to multinational financial management capacity (Charles V. Trappey, Tsui-Yii Shih, Amy J.C. Trappey, 2007).. If the financial mismanagement, enterprises will suffer financial risk. If the risk of exchange rate changes, changes in interest rates and inflation risk, leading multinational real value of assets and liabilities of a change, but also increase the multinational subjected to political risk, legal risk, risk exposure, such as capital allocation so that the company improperly subjected to the influence of local nationalism, there double taxation, tax discrimination.
On the other hand, system and business activities of multinational companies located in the different financial environment of different countries create a potential opportunity to avoid disadvantages, access to additional financial benefits. National political and economic situation is different, mixed hard and soft currencies, interest rates ranging, different government intervention, light or weight the tax burden provide wide variety of choices during doing business globally from this unbalanced world environment (Anna Nagurney, Ke Ke, 2006).
On the current situation of AMD, it faces the continuous depreciation of the dollar, other currencies like the Euro continues to rise. On the one hand, changes in exchange rates bring financial risk to AMD, on the other hand it provides a financing opportunity.
3.2 Inspiration to AMD and other enterprises when doing business globally Multinational corporations can rely on their network in the world economy and information sources to achieve rational management and ingenious arrangements of financial flows. First, they can take the use of multi-national operations to reduce financial costs and improve efficiency potential offered, especially from different funding sources in the capital and obtain economies of scale with financing for low-cost. Second, adaptation according to different countries and regional environmental constraints can achieve the international movement of capital and income. Third, enterprises should protect the value of assets and income to make transnational business interests from the erosion of financial risk, which usually caused by national currency devaluation or appreciation or different rates of inflation (José M. Merigó and Anna M. Gil-Lafuente, 2010).
4.0 Impact on ethical decision making 4.1 Impact Analysis And corresponds to the general definition of ethics, corporate ethics refer to the conduct and values the company and its employees should be followed in the business activities. Ethical decision-making has penetrated into all aspects of organizational life (Russell Haines and Lori N.K. Leonard, 2007). For instance, “whether the company should lay off when it fall in profit or loss? These employees who are dismissed can not get new revenue to come in living within a short time.” “Whether the company should produce decorative materials which are harmful to health, although these materials are large market demand?”
Ethics decision making is a special topic when doing business globally faced by multinational companies. As differences in social culture and system, multinational corporations often encounter embarrassing situation caused by ethical differences due to different cultural values â€‹â€‹and social system. It means that people can not always reach a total consul in “should do”. Values â€‹â€‹or standards of conduct applicable in a country may be resisted in another country (Maria L. Roxas and Jane Y. Stoneback, 1997).
AMD was very cautious in the choice of employees when faced cultural differences between the United States and Germany. It just selected the appropriate company staff. In addition, it gave staff a lot of freedom. AMD also launched the concept of cultural education and training for staff to accept and identify corporate culture.
4.2 Recommendations to AMD and other enterprises when doing business globally Multinational corporations need to pay attention to the followed standards and principles in the business process. First, respect for fundamental rights and freedoms. Mainly multinational corporations must respect the basic human right to life, liberty, security, rights and privacy; not introduce discrimination because of race, color, sex, religion, language, occupation, ethnic origin, political beliefs; respect for individual freedom (such as religion, opinion); respect local cultural values â€‹â€‹and standards. Second, multinational corporations avoid the negative impact of local economic policy. This is mainly manifested in the activities they must be consistent with local economic development policies; to avoid adverse effects of currency and balance of payments to the host country; to provide true information when paying taxes (Samuel Knapp and Leon VandeCreek, 2007).
5.0 Conclusion From the case of AMD doing business globally, it can be seen that the process will impact the company and the home and host country. It also impacts the international financial and ethical decision making. It brings both advantages and disadvantages so the company should take measures to utilize the good aspects of doing business globally.