Multinational Corporations: Myths and Facts

Many religious leaders are increasingly troubled by the growing presence of multinational corporations around the world, especially in poor and developing nations. In truth, such concern is warranted, but only if the allegations against multinational corporations are true. Such allegations include the charge that profit-motivated multinational corporations are engaging in destructive competition and insidious plots to economically and politically manipulate entire economies. Further, multinational corporations are perceived to be methodically eliminating domestic firms in order to exploit their monopoly powers, exporting high-wage jobs to low-wage countries, undermining the world’s environment, augmenting the external debt problems of developing countries, perpetuating world poverty, and exploiting child labor. But are such allegations, in fact, true? Religious leaders should examine the data so that they can draw reasonable conclusions about the impact of multinational corporations. Such an examination reveals that multinational corporations, in fact, have actualized numerous moral goals: the advancement of human rights, the improvement in the world environment, and, most importantly, the reduction of world poverty rates.

Critics of multinational corporations often profess to have a higher moral vision and to be pursuing a world with laudable goals of just wages and a clean environment. On the other hand, the extreme left conveniently ignores the socially destructive behavior of those economies that rely heavily on governmental regulations and state-operated monopolistic enterprises. These economies have incurred extreme rates of poverty, repressed human rights, and excessive environmental damage. For reasons mentioned below, the problem countries have almost no multinational corporations and are concentrated in sub-Saharan Africa, South Asia, North Africa, and the Middle East.

Paradoxically, the extreme left is hindering the momentum to decrease world poverty rates and is deaf to the continued suffering of the extreme poor. The left is quick to offer welfare to developing countries but, unfortunately, this hinders poor nations from becoming self-supporting. The extreme right, on the other hand, offers no charity and joins the left in denouncing trade.

To be open minded, we must also consider the views of the developing countries, which almost in unison believe that the movement against multinational corporations will not only hinder their economic progress but will also most likely reverse it. As Nobel Peace Prize Laureate and former president of Costa Rica, Oskar Arias, exclaimed at an August 2000 lecture to United Nations delegates and heads of state, “We [the developing countries] don’t want your [the developed countries] handouts; we want the right to sell our products in world markets!” President Arias is referring to a right possessed by all developed countries and purposely denied to almost all developing countries for more than five decades.

Now let’s address some of the myths that critics of multinational corporations claim to be facts. This article does not, however, deny that there are specific cases that reflect badly on all multinational corporations (Nike’s past problems with child labor and other media evidence of the wanton disregard of environmental responsibilities are but two examples). Such cases, however, are rare, given that there are over 60,000 multinational corporations.

Monolithic Monopoly Power?

Competition is not destructive; it has compelled multinational corporations to provide the world with an immense diversity of high-quality and low-priced products. Competition, given free trade, delivers mutually beneficial gains from exchange and sparks the collaborative effort of all nations to produce commodities efficiently. As a consequence, competition improves world welfare while dampening the spirit of nationalism and, thus, promoting world peace.

Has the monopoly power of multinational corporations grown? Granted, some multinational corporations are very large: As of 1998, they produced 25 percent of global output, and, in 1997, the top one hundred firms controlled 16 percent of the world’s productive assets, and the top three hundred controlled 25 percent. Firm size and market power, however, are dynamic. The Wall Street Journal annually surveys the world’s one hundred largest public companies ranked by market value. Comparing the rankings in 1999 to that of 1990, there were five new firms (Microsoft, Wal-Mart, Cisco Systems, Lucent Technologies, and Intel) in the top ten, and four of these firms were not in the top one hundred in 1990. More remarkably, there were sixty-six new members in the 1999 list. Similarly, the United Nations tracks the one hundred largest nonfinancial multinational corporations ranked by foreign assets. Although not as dramatic as the change in the Wall Street Journal rankings, the United Nations reported a 25 percent change in the composition of its top one hundred from 1990 to 1997. According to the conventional wisdom, an increase in monopoly power should also lead to fewer and larger multinational corporations, but, as reported by the United Nations, the number of multinational corporations tripled from 1988 to 1997.

Has the increase in foreign direct investment by multinational corporations harmed domestic investment? (Foreign direct investment occurs whenever a firm locates a factory abroad or purchases more than ten percent of an existing domestic firm.) The United Nations’ World Investment Report 1999 cited two recent studies. The first, by Eduardo Borensztein, José de Gregorio, and Jong-Wha Lee, found that an additional dollar of foreign direct investment increases domestic investment in a sample of sixty-nine developing countries by a factor of 1.5 to 2.3. The second study, conducted by the United Nations, reached the same conclusion as the first for countries in Asia, but it offered some disputable evidence of a possible negative impact on Latin America.

Notably, coordinated international manipulations of markets are rarely conducted by large multinational corporations but are almost always government supported and directed (for example, opec , the Association of Coffee Producing Countries, and the Cocoa Producers Alliance). Further, government-sponsored cartels are not concerned about the poor. In the 1970s, opec’s price distortions were a major source not only of world recession but also of the increased external debt and poverty of developing countries. Free markets protect the poor from the prolonged abuses of cartels.

Rapacious Economic Exploitation?

Concerns about multinational corporation infringements on national sovereignty lack substance. Multinational corporations do not operate with immunity; they are heavily monitored both in the United States and abroad. From 1991 to 1998, according to the United Nations, there were 895 new foreign direct investment regulations enacted by more than sixty countries.

Further, multinationals are not siphoning jobs from high- to low-wage countries; in fact, they tend to preserve high-wage jobs in developed countries; in 1998, 75 percent of foreign direct investment went to developed countries. Besides, labor costs alone do not determine where multinational corporations base their affiliates; other variables–such as political stability, infrastructure, education levels, future market potential, taxes, and governmental regulations–are more decisive. In 1998, multinational corporations had eighty-six million employees–nineteen million in developing countries– and were also responsible, indirectly, for another 100 million jobs. The jobs created abroad also tend to pay far more than the domestic employers do. Based on an August 4 2000, discussion with both the general manager of Chesterton Petty and the senior manager of Price Waterhouse Coopers in Beijing, their Chinese employees average approximately $10,000 per year–a small fortune in China, where an upper-middle-class full professor or medical doctor brings home slightly more than $200 per month in the city of Jinan.

Evidence supplied by the World Bank and United Nations strongly suggests that multinational corporations are a key factor in the large improvement in welfare that has occurred in developing countries over the last forty years. In sub-Saharan Africa and South Asia, where the presence of multinational corporations is negligible, severe poverty rates persist and show little sign of improvement.

For example, from 1980 to 1998, world child labor rates (the percentage of children working between the ages of ten and fourteen) tumbled from 20 to 13 percent. Child labor rates dropped from 27 to 10 percent in East Asia and the Pacific, from 13 to 9 percent in Latin America and the Caribbean, and from 14 to 5 percent in the Middle East and North Africa. Interestingly, regions lacking multinational corporations had the worst child labor rates and the smallest reductions: Sub-Saharan Africa’s and South Asia’s child labor rates dropped from 35 to 30 percent and from 23 to 16 percent, respectively. This reduction in rates was attributable to increased family income, which has permitted families to improve their diets, to have better homes, and to provide their children with more educational opportunities. School enrollment rates for ages six to twenty-three rose for all developing countries from 46 percent in 1960 to 57 percent in 1995. Only sub-Saharan Africa had an enrollment ratio below 50 percent in 1995.

Moreover, multinational corporations are not committed to the destruction of the world’s environment but instead have been the driving force in the spread of “green” technologies and in creating markets for “green products.” Market incentives such as threat of liability, consumer boycotts, and the negative impact on reputation have forced firms to police their foreign affiliates and to maintain high environmental standards. The United Nations’ World Investment Report 1999 notes several studies that confirm foreign affiliates having higher environmental standards than their domestic counterparts across all manufacturing sectors. The United Nations also positively reflected on the efforts initiated by multinational corporations to assist domestic suppliers (“regardless of ownership”) to qualify for eco-labeling and to meet environmental standards currently supported by more than five thousand multinational corporations.

Multinational corporations have also advanced several programs (the Global Environmental Management Initiative and the Global Sullivan Principles, among others) to establish industry codes dedicated to achieving high levels of social responsibility. A United Nations survey of multinational corporations revealed that the primary reason multinational corporations do not invest in certain countries is the presence of extortion and bribery; not surprisingly, the main source of the corruption is governmental officials. Both the International Chamber of Commerce and the International Organization of Employers have established social codes and standards that attempt to establish principles for responsible environmental management.

The Crucial Role of Peace and Freedom

When multinational corporations make profits, this does not mean that developing countries are being exploited. Both the multinational corporations and domestic country are better off–the developing country receives jobs, an expanded tax base, and new technologies. If the investment does not do well, the multinational corporations may lose their investment and the developing country does not receive the aforementioned benefits, but the developing country owes no restitution. As a result, multinational corporation investments do not contribute to the external debt problems of developing countries.

According to the United Nations, in 1998, $166 billion, or 25.8 percent of the world foreign direct investment went to developing countries. Only $2.9 billion of foreign direct investment was obtained by the least developed countries, which are primarily composed of the sub-Saharan African countries. Given risk conditions, capital flows to where it can earn the highest rate of return. The required risk premium is much higher when a developing country is experiencing civil wars, suffers from over-regulation, has a weak infrastructure, is politically unstable, keeps its markets closed to foreign competition, has inflexible labor markets, and imposes high taxes.

The Heritage Freedom Index measures the degree of economic and political repression present in developing countries. As predicted, foreign direct investment is smaller in developing countries that are repressed. Based on the 2000 Heritage Freedom Index, of the eighteen economies in the Middle East and North Africa, ten are either mostly unfree or repressed, and only Bahrain is free. The results are more dismal for sub-Saharan Africa; thirty-five (make that thirty-six, given Robert Mugabe’s policy of land-grab terrorism) of the forty-two economies in the region are mostly unfree or repressed.

Developing countries must be allowed to further themselves economically through free markets and the expansion of multinational corporations. Such countries want jobs, not welfare. Furthermore, what is comforting but not easily understood is that the promotion of trade increases the welfare not only of developing countries but also of developed ones; free trade is a positive-sum game.