4.0 Impacts of Multinational Corporations on the State.

Generally, multinational corporations (MNCs) are enterprises which operates

their product establishment or shipping services in more than one country. Therefore,
they play a significant role towards the economy of many countries. However, the
question is whether multinational corporations (MNCs) help or harm the development
of the state?
On the positive side, multinationals did give many improvements toward the
State. For example, they contributes to jobs opportunity and wealths, helps in economic
growth of the State and also contributes to technological advances. However, there are
always two sides to everything. Where there is good, there is also bad. Therefore, the
negative impacts of multinationals toward the state are exploitation of workforce, push
local firms out of the business and erode state power.

a) Positive Impacts of Multinationals to the State.

Positive impacts of the multinationals are different for every countries because
certain countries, multinationals are insignificant towards their economy but for other
countries, they are the vital part towards the economy. In developing countries such as
Malaysia, multinationals do play a vital part towards our economies and therefore
contributes to certain positive impacts to our State.

First, multinationals play a role in create jobs opportunity and thus contributes
to employment quality and also the welfare towards the employees. Multinationals have
contributed to the increase numbers of jobs created in the developing States which
amounting to 2% to 3% of the world’s workforce where they represents one-fifth of the
paid employment in the developing countries particularly in non-agriculture sectors and
manufacturing industries.1 In addition, for Malaysia itself, labour productivity has
grown steadily at more than 3.3% per year over the last few years surpassing that of
many developed countries.2 For example, in Klang Valley area and southern Johor there
has been an increasing of labor demand and wage.3 Besides that, MNCs also contributed
towards the welfare of the employees where the foreign-owned and subcontractor

1
United Nations Research Institute for Social Development, 2010.
2
Raman, R. (2008). Impact of Multinational Corporation in Malaysia. Malaysian Trades Union Congress., pp. 4.
3
P.G Beaumont. The Role of Foreign Investment III Malaysia.
 companies tend to pay a higher wage than the domestic firms or companies. Therefore,
the welfare of the employee will be protected because they work at a reasonable price
to cope with their standard of living.

Next, multinationals also increase economic growth because they are one of the
main source of economic growth of a State. Most governments usually have one things
in mind when it comes to the economic growth which they want to either promote or
sustain development within their country. However, in order for the State to sustain
development, they must rely on foreign direct investment from MNCs.4 Therefore, this
is where the MNCs will come into action where they contributes toward the State’s
economic growth with their foreign exchange earnings through their trade effect of
generating exports. Hence, by producing goods for export, this enhance the economic
growth of developing countries where it will becoming an attractive prospect for further
investment as well as contributing to the growing role of developing countries in world
trade.5 Furthermore, this situations helps the developing countries to enter into
international market because the MNCs provide for them an immediate access to
foreign markets and customers which would be a difficult turn for domestic firms
because it takes few years of investment and effort for the domestic firms to acquire
such benefits. This proves that MNCs provide a better and faster platform for the State
to develop their economic growth.

Multinationals also contributes to technological advances. Having a technology

edge means having a control of economic power and market share. MNCs are reservoirs
of technology6 because they have a bigger expenses and having a better development.
Furthermore, developing countries are allowed to profit from the research and
development that was carried out by the multinationals. Therefore, this situation can
accelerate the technological progress of the host state and bring a good impacts on the
State economic growth because when they have reached a certain level of technology
edge, they can survive in the market place and compete with other big countries simply

4
Kapfer, S. (2006). Multinational Corporations and the Erosion of State Sovereignty. Brigham Young University,
pp 2.
5
Ferdausy, Shameema & Rahman, Md. (2009). Impact of Multinational Corporations on Developing Countries,
pp. 24.
6
Ibid
 because technology improvement constitutes to the quality of productions that will be
be produced by the companies.

b) Negative impacts of multinationals to State

Eventhough MNCs have proven that they brings benefit towards the State, but
there are also negative effects caused by the MNCs toward the host countries. First,
MNCs exploits the workforce of the State. This issue has been brought up by claiming
that the MNCs enter into a host country (mostly developing countries) to exploit the
labor and natural resources in that country. This is because, in developing countries, the
workforce are cheaper and there are an abundant of natural resources that can be found.
For example, big brands such as Nike, Puma and Reebok has enter their market into
Indonesia. Therefore, they have exploited the labor in that country where the foreign
investment helps to boom the economy of the Indonesia but the worker for a cheap
7
labour is suffering. In addition, this situation discourage the domestic firms or
entrepreneurs from competing with the MNCs in a local capital markets because they
dominates in hiring only the local skilled workers to work for them.

Besides that, due to the exploitation of workers by the MNCs, this issue can also
lead to another negative impact that faced by the host State which is the multinationals
will push the local firms out of the market play. MNCs hold a superior position in the
market, therefore their competitive natures will stifle the competition because the local
manufacturers are unable to match up with their prices and market position. Therefore,
this situation leads the local manufacturers to leave the market and the MNCs will reach
a point where they will monopolise the market and hike up the prices of their products.
Furthermore, multinationals have the aim to gain profit as much as possible, so once
they monopolise the market, it allows them to control the market at both national and
international level.8 This is because, multinationals stiffens the competitions with the
local firms and entrepeneurs in the most dynamic sectors of the economy where the

7
Ferdausy, Shameema & Rahman, Md. (2009). Impact of Multinational Corporations on Developing Countries,
pp. 24.
8
Ibid.
 multinationals used the local or host state capital instead of bring a new capital from
the oustside and they also contributes to the income inequalities in the host countries.9

Next, multinationals also erodes the state power. The developing countries
economies especially, are so dependant on the MNCs because it is crucial for them to
allow foreign market into their economy to perpetuate competition.10 This is because,
if the developing countries failed to integrate into the international market, they will be
way behind from the other developed countries hence why the entering of the
multinationals are important for their economic growth to compete with other countries.
However, both States and the MNCs have their own different interest. It was believed
that the roles of both parties will change because of the importance of economic
interests.11 The entering of the multinationals into the developing countries contributes
to the exploitation of the economic affairs. This is because the state will no longer in
control due to MNCs capability to handle the domestic economic welfare and organize
effective production of goods on a much more efficient scale than the governments.
Furthermore, MNCs brings so much advantages towards the States economic growth,
so most governments are reluctant to lose the advantages brought by the MNCs.
Therefore, this situation will lead to the erosion of the state power when in some
countries, the subsidiaries are not responding in comply with their own state’s
jurisdiction because they are tend to bind with the MNCs strategies.12 This prove that
MNCs decision are more important for the State rather than their own provision for the
sake of their economic growth. This clearly gives MNCs an important role towards the
State as they have the power to dictate the countries to comply with their wants, and if
the country does not respond accordingly, the MNCs can simply pull out and invest
their market to the other state with the next lowest opportunity cost.13 Therefore, if the
State keep letting the MNCs to control them, this will erodes their power towards their
own state.

9
Bergsten, C. F., Horst, T., & Moran, T. H. (1978). American multinationals and American
interests. Washington, DC.
10
Kapfer, S. (2006). Multinational Corporations and the Erosion of State Sovereignty. Brigham Young
University, pp 2.
11
Ibid.
12
Vernon, R. (1971). Sovereignty at bay: The multinational spread of US enterprises. The International
Executive, 13(4), pp. 1-3.
13
Ibid.
 In conclusion, in order for the States to combat the negative impacts of the
MNCs, especially the developing countries which depends heavily on the MNCs, they
need to develop more local industries that have the capability to compete in a global
scale in a market full of multinationals. However, these multinationals are an important
actors for the forseeable future and brings many advantages towards the economy of a
State, therefore the countries which have been exploited by them need to step up their
game so that they can be at the same par with the MNCs and perpetuate a competition
in markets.