Reading: Multinational Corporations in the Third World (James C. W. Ahiakpor)

Predators or Allies in Economic Development?

Multinational corporations (MNCs) engage in very useful and morally defensible activities in Third World countries for which they frequently have received little credit. Significant among these activities are their extension of opportunities for earning higher incomes as well as the consumption of improved quality goods and services to people in poorer regions of the world. Instead, these firms have been misrepresented by ugly or fearful images by Marxists and “dependency theory” advocates. Because many of these firms originate in the industrialized countries, including the U.S., the U.K., Canada, Germany, France, and Italy, they have been viewed as instruments for the imposition of Western cultural values on Third World countries, rather than allies in their economic development. Thus, some proponents of these views urge the expulsion of these firms, while others less hostile have argued for their close supervision or regulation by Third World governments.

Incidents such as the improper use in the Third World of baby milk formula manufactured by Nestle, the gas leak from a Union Carbide plant in Bhopal, India, and the alleged involvement of foreign firms in the overthrow of President Allende of Chile have been used to perpetuate the ugly image of MNCs. The fact that some MNCs command assets worth more than the national income of their host countries also reinforces their fearful image. And indeed, there is evidence that some MNCs have paid bribes to government officials in order to get around obstacles erected against profitable operations of their enterprises.

Several governments, especially in Latin America and Africa, have been receptive to the negative images and have adopted hostile policies towards MNCs. However, a careful examination of the nature of MNCs and their operations in the Third World reveals a positive image of them, especially as the allies in the development process of these countries. For the greater well-being of the majority of the world’s poor who live in the Third World, it is important that the positive contributions of these firms to their economies become more widely known. Even as MNCs may be motivated primarily by profits to invest in the Third World, the morality of their activities in improving the material lives of many in these countries should not be obscured through misperceptions.

The first point to recognize about MNCs is that, besides operating under more than one sovereign jurisdiction, they are in nature very similar to local or non-multinational firms producing in more than one state or plant. We may call such multi-plant firms uninational corporations (UNCs). Thus, a UNC with branch plants in Alaska as well as some other parts of the U. S. would have been known as an MNC had Alaska continued to be a non-U.S. territory. Indeed, the experience of European countries soon to become more unified economically or the former Soviet Union now breaking up into several sovereign or quasi-sovereign states should impress us of the fact that the United States or Canada easily could have been several independent countries, and some present UNCs would have been MNCs.

Like UNCs, MNCs are owned by shareholders who expect annual returns or dividends in compensation for funds they make available for the firm’s production and sales activities. It is to enable MNCs to pay such dividends that their managers seek out the most efficient workers for the wages they pay, buy materials at the cheapest costs possible, seek to produce in countries levying the lowest profit taxes, and sell in markets where they can earn the highest revenues after costs. (This is no different from anyone seeking employment at the highest wage for the least amount of tedium, the most congenial work environment and location, and the highest employment benefits.) Perhaps the main difference between uninational and multinational corporations is that the latter have been more successful than the former, and as a result have expanded their activities to many more regions and sovereign states.

Many do recognize UNCs or local firms as helpful agents in the development of the communities in which they operate. Primary in this recognition is the employment they create and the (higher) incomes earned because of their having established in the region. These firms also rent buildings and land, or sometimes buy them, thus generating higher incomes for their owners. For example, in the absence of the present Japanese owners having bid for the Rockefeller Center in New York, the price its American owners would have gotten for it would have been lower. The same applies to the income prospects of owners of the Seattle Mariners should the sale of this club to the Japanese buyers go through. It is precisely in similar ways that MNCs enrich labor and other resource owners in the Third World. In their absence, the people would have had fewer or much lower paying jobs, and the demand for land and other local resources would have been lower. Without the operators of such hotels as the Holiday Inn, the Sheraton, the Hyatt, Four Seasons, and the Hilton having leased or bought beach-front properties in several of the popular tourist resorts in the Third World, their owners (individuals or government) might have received much less for their sale. Such purchases also release the capital of resource owners for investment in other enterprises.

Some of those who recognize little positive contributions from MNCs to the economics development of the Third World countries might, however, acknowledge that these firms pay higher wages to local employees than they typically would receive elsewhere, and higher rents for land and buildings. But they often argue that the wages in Third World countries are lower than those paid by MNCs in the more developed countries, and the working conditions are not of the same standard. However, the comparison misses several key points. For example, the skill or educational levels of workers in the Third World and those of the more developed countries are not the same. The amount of machinery and equipment handled by workers in the two locations are also different. In short, the amount of output generated by a worker in the Third World is typically smaller than that produced in the more developed world. Indeed, if MNCs could hire enough of higher skilled workers in the more developed countries at the wages workers are paid in the Third World, they would gladly do so. They would thus earn higher profits while selling their goods and services at lower prices. But the fact is that the voluntary exchange system in which MNCs operate would not permit them. Besides those working for charity, few others would for long accept wages they consider to be less than their contribution to an enterprise.

The same explanation applies to wages paid by MNCs in the Third World. Unless workers find it most profitable to work for MNCs at the wages they offer, they would choose employment elsewhere. Similarly, unless MNCs can make as much profit as they can at home, as well as compensation for the additional risks taken to invest in the Third World, including the risk of asset confiscation by a hostile future government, they would not venture into those parts of the world. Thus, there have to be net benefits for both parties in a transaction (here workers and multinational corporations) for the transaction to take place, and on a continuous basis.

It may also be worthwhile to point out that research has not confirmed the frequent assertion that foreign firms, including MNCs, make excessive or higher profits per dollar invested than their local counterparts. On the contrary, private local firms on average earn higher rates of profits before taxes than foreign firms (as revealed by research in India, Brazil, Columbia, Guatemala, Ghana, and Kenya). And the simple explanation is that many Third World governments tax the profits of their local firms at a higher rate than they do those of foreign firms. Thus, the after-tax rates of profit are similar for foreign and private local firms in the Third World. Furthermore, new wealth created by any firm has to cover the wages, interest, equipment, and the rental costs of land and buildings incurred in production before profits are paid. And much of such payments stay within the host Third World economy.

It may also be worthwhile to point out that research has not confirmed the frequent assertion that foreign firms, including MNCs, make excessive or higher profits per dollar invested than their local counterparts. On the contrary, private local firms on average earn higher rates of profits before taxes than foreign firms (as revealed by research in India, Brazil, Columbia, Guatemala, Ghana, and Kenya). And the simple explanation is that many Third World governments tax the profits of their local firms than they do those of foreign firms. Thus, the after-tax rates of profit are similar for foreign and private local firms in the Third World. Furthermore, new wealth created by any firm has to cover the wages, interest, equipment, and the rental costs of land and buildings incurred in production before profits are paid. And much of such payments stay within the host Third World economy.

If we withhold our paternalistic instincts towards poorer people in the Third World, we would also respect their judgement to purchase products manufactured there by MNCs rather than accuse the firms of selling inappropriate products to them. Being poor does not make one’s choice of products less defensible or moral than the choices of the rich. And without sufficient demand for the products, MNCs would not make profits from selling them in the Third World. In a free trading regime, the same products might have been imported had they not been produced by MNCs. There is thus no valid reason why Third World governments should require that MNCs manufacture and sell only second- or third-rate quality products in those countries, as some analysts from the more developed countries have suggested. Is there anything legitimate that Third World governments can do about the activities of multinational corporations in their countries? Yes; but nothing more than they legitimately and reasonably would do about local firms, bearing in mind that excessive taxation of profits or environmental regulations reduce total investments by both types of firms. Perhaps, MNCs may be able to offer bigger bribes than local firms to escape restrictions imposed on them by Third World governments. If so, such restrictions mainly work against the development of local firms. The solution ought to be a loosening of restrictions on businesses so they may create more wealth and in the process facilitate the development of local enterprise and lessen the incidence of corruption in government.

Adam Smith, who was also a moral philosopher, long observed that an individual “by directing . . . industry in such a manner as its produce may be of the greatest value, . . . intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” These observations apply with equal force to the investment activities of multinational corporations in Third World countries. And it is no accident that people in those Third World countries whose governments have been more open to the presence of multinational corporations have experienced significant improvements in their standard of living (e.g., Bermuda, the Bahamas, Hong Kong, South Korea, Singapore, and Taiwan) while many in countries hostile to these firms continue to be mired in poverty. It may not be the intent of Third World governments, but perpetuating poverty in the name of protecting their people from alleged exploitation by MNCs has little moral justification.