The influence of political and legal challenges facing MNC The Influence of political and legal challenges facing

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The influence of political and legal challenges facing MNC

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The influence of political and legal challenges facing MNC Introduction

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A Multinational Corporation is an enterprise that delivers services or production in more than one country. There are two models of Multinational Corporation. The first model of a multinational corporation is the one with an established headquarter that is based in one nation while some other facilities are based in locations in other countries. This type of a model allows the company to take advantage of benefits of incorporating in a given locality while at the same time they are able to produce goods and services in areas where the cost of production is lower. Multinational Corporations have risen as one source of foreign direct Investment in the major industrialized nations (Spero & Hart, 1997). The second model of a multinational corporation is a case whereby there is a parent company in one nation and subsidiaries in other countries around the world. With this model all the functions of the parent are based in the country of origin the subsidiaries more or less function independently. Multinational corporations have a powerful influence in international relations and local economies they play an important role in globalization. Multinational Corporations have grown in power a visibility but they have also been viewed more differently with both governments and consumers worldwide (Alan & Alain, 2008). In addition, multinational corporations often access new markets by creating joint ventures with existing firms operating in the markets. In joint ventures, the venture partner in the market to be entered remains with a considerable share or even complete autonomy. The establishment of joint ventures has most of the time proved unsuccessful in the long run for multinational corporations, which are likely to find their venture partners have tough competitors when a more direct entrant of the new market is attempted. Multinational corporations are thus able to succeed on new markets in a number of ways which allows existing concerns in the market to be accessed with a varying degree of autonomy and control over operations. Because of the enormous size of MNCs they enjoy massive economic, legal and political power which enables them to dictate the markets (Stopford, 1998). This research paper digs deep into identifying the political and legal challenges that have hit the Multinational Corporation. It also discusses various theories of MNCs and how they have impacted in existing corporations.

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The influence of political and legal challenges facing MNC Politics and power within MNC

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While there are no doubts about the economic success and pervasiveness of multinational corporations, their motives and actions have been called into question by social welfare, environmental protection, labor organizations and government agencies worldwide. Due to these conflicts, there has arose numerous concerns about the influence of politics and legal constrains that should be met. Multinational companies are faced with various challenges most of them surrounding politics and power. In his book, The Economist, Bill Emmott argues that the power of multinationals as well as their predominance cannot be undermined. He further evidenced the extent to which they have powers. Due to interests from developing countries on MNCs, the latter have gained indirect power influence, upon policies that a state may adopt, they have both economic powers and political influence (Emmot, 1993). Multinational Corporations operations are likely to affect political, social environmental and economic factors that diminish the risk of an outbreak of armed conflicts. Although MNCs involved in large scale extractive operations have developed extremely comprehensive methodologies for undertaking stakeholder analysis and impact assessments. Multinational corporations have a number of means in which they can influence corporate decisions. Governments can restrict access to grants, subsidies, tax credits, loans, and investments insurance. Multinational Corporation has effect on employees and labor unions in influencing firm practice and the expected standards of operation. Interference and regulations by governments have played a role in multinational corporations. There have been political interferences with the affairs of multinational corporations especially host governments which demand certain conditions that should be met with the Multinational Corporations. In developed countries, these limitations tend to cluster mostly on industries that are of impact to the economy such as telecommunication equipments industry. Most modern governments have given priority to the goals of public policy of economic efficiency, improvement and growth and betterment of living standards. In analyzing the legal and political influence, one must examine the types of interventions from governments (Geppert, 2003). Host governments have in many instances restricted the freedom of a multinational corporation in deploying resources and limitations to strategic freedom. Governments have moved towards
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The influence of political and legal challenges facing MNC

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regulating the entire industrial sectors. The regulations have primarily affected multinationals in the form of sensitive issues as product choice, level of employment, use of technology and national trade balance (Phil and Anthony , 1998). There are other legal challenges of compensation plans as drawn by different countries. The complexity of developing a systematic compensation programs requires corporate wide solutions. There are significant problems of compensation programs for expatriates, host countries and the third country nationals. The expatriates pay systems are often different from those used for host country. There have been conflicts of expatriate employees paid more than the local employees who have jobs equal or greater importance and complexity. A successful strategy of compensation involves keeping expatriates motivated at the same time meeting the objectives of the MNC. International compensation systems have become more challenging, the international compensation policies can produce intense internal conflicts within an MNC any stage of globalization. Over time there has been an increase on legal challenges whereby a Multinational Corporation requires legal advice with respect to various facets of their operations and organizations (Imber, 1983). In an organization where there are un-equal power relations, identity disclosure and cultural distinction drawing in MNCs political conflicts are norms. Political conflicts in headquarters are subject number of important factors still limiting the effectiveness of MNC in the region. When the government is unable to integrate consultation across all issues related to national planning and development conflicts in the organization are evidenced. In addition a lack of political will to make the process work for example failure to consult and lack of follow-up on agreed matters is a catalyst of political conflicts. According to Macdonald, politics within an organization that involves workers and their managers affects their technical and organizational capacity. Lack of representatives and coordination of views with federations or employers also contributes to increased conflicts within an organization.

In most countries, little emphasis has traditionally been given to building strong bilateral relations between managers and workers. Attempts have been made to institutionalize workerinvolvement in decision-making in several countries a workers for example should be allowed to attend management committees. Many of these institutions have not worked satisfactorily. There
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The influence of political and legal challenges facing MNC

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has been too much emphasis on form, not substance. Globalization has exerted competitive pressure and they are resulting in greater emphasis being given to improved workplace relations and higher level contributions to enterprise performance from workers. There is therefore room for greater optimism about progress being made in this area. A critical issue will be the extent to which trade unions can increase their profile and influence through these pressures (Macdonald, 1997)

Nonetheless, multinational corporations have also suffered a blow on legal challenges. The social organizations concerned about the actions of multinationals have set strict measures that should be met with the corporations. Environmental protection agencies are equally concerned about the activities of multinationals, which often maintain environmental hazardous operations in countries with minimal environmental protection statutes. These are legal issues that must be met with a Multinational Corporation. According to Burton, all these concerns are valid and have undoubtedly occurred, but many forces should also be at work to keep multinational corporations away from power wielding over their operations. International labor unions have expressed concern that multinational corporations in developed countries can avoid negotiations for labor by moving their jobs to developing countries where the costs for are less. Burton came up with various recommendations he suggested that consumer awareness be increased through sensitizing them on the standards of goods from Multinational Corporations. He further

recommended that government run industries be privatized and then develop partnerships with the Corporations in order to improve the efficiency of multinational corporations. Lastly he recommended that Multinational Corporations should operate on the regulations of a country and their activities should be legal and accepted by the state (Thornton Bradshaw, Burton, Daniel F, 2003).

On the other hand also, the power of a Multinational Corporation is judged mainly in terms of economic capabilities. In most cases the state has every right to retain the control that sometimes the Multinationals do not have. No matter how small a state is, it does not impair its ability to control a Multinational Corporation and lay down the conditions under which multinational corporations may establish subsidiaries within its borders to restrict and regulate their operations

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The influence of political and legal challenges facing MNC

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when they are established or to nationalize them. The states still maintain their ability to have direct control and influence over their internal and political affairs (Grigsby, 2011). Theories of MNC and their effects on real life Multinational Corporations allocate many different theories to achieve the status of a multinational entity. Internalization theory, product cycle theory, obsolescing bargain theory, and oligopoly theory along with the tariff-jumping hypothesis, bring light on how the foreign corporations continue their path of vertical integration. However, even with these lucrative investment strategies it is not easy to distinguish benefits or hurt to the host country. These research paper compares who benefits the most Four theories and one hypothesis have been put forward to explain how structural goals are achieved by Multinational Corporations. Internationalization theory Internalization theory explains the existence and functioning of the multinational enterprises. It contributes to understanding the boundaries of the MNCs, its interface with the external environment and its internal organizational design. This theory is based on activities in the presence of market imperfections just as they domestically expand, there are three prerequisites to be met by a Multinational Corporation to compete with local firms firstly it must have market power that is derived from specialized knowledge. Secondly it has to consider the particular foreign location that is hungry for new investments relative to the alternative locations including the home market (Rugman, 1981). The product cycle theory This is an economic theory that was developed to explain the observed pattern of international trade. The theory suggests that a products life-cycle in all the parts in the world markets production gradually move away from the point of origin. In most instances, the product is imported by its original country of invention. Personal computers in the United States mark a perfect example of this theory. This theory is best explained by the five stages of production which firstly include the introduction stage where a new product is introduced to meet local needs and it is then exported to other countries which have similar needs and incomes. An example is the IBM personal computers that were produced in the US and they later on spread to other industrialized countries (Dennis, et al. 2009).
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The influence of political and legal challenges facing MNC

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Growth is the second stage of a product after production. Normally a product is produced elsewhere and introduced in the country of origin and this moves production to other countries. Upon maturity of a product, the industry concentrates on the lowest cost of production. The fourth stage according to this theory is the saturation stage which is at the time when the sales of a product reach the peak and there is little possibility to increase. At the early part of this stage, sales remain stable which then starts falling and the process continues until the substitutes enter the market. The last stage of a product cycle is the decline stage which is mostly evidenced in poor countries which remain the only market for the productions. An example of this stage is the textile industry where goods are exported to developing countries due to lack of market (Hill, 2007). The obsolescing model This theory was first developed by Raymond Vernon and it explains the changing nature of the bargaining relations between a Multinational Corporation and a host country as a function of goals, resources and constrains on both parties. In this model, the initial bargain favors the Multinational Corporation but the relative bargaining power is shifted to the host country from the MNCs. This ranges from higher taxes to complete expropriation of MNCs assets. The obsolescing model theory gives an explanation of a firm that has invested in a host country whereby it starts with a good bargaining position with the host country's government because of the specific firm advantages such as superior technology, access to capital markets, and access to final product markets. After the firm has made an investment, the bargaining advantage may slowly shift to the host country (Vernon, 1977). The oligopoly theory Oligopoly theory contends that firms move abroad to exploit the monopoly power they enjoy through the best market expertise, unique products, managerial skills and control of technology. The theory is characterized by a few suppliers producing a heavily differentiated good through massive advertising and marketing. In this theory, firms set their prices and outputs on the assumption that their rivals would not react at all. Under this scenario, each firm decreases its price and increases the output in order to control a larger share in the market. This theory has a direct relevance to studying the behavior of businesses in oligopolistic markets. There are other
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The influence of political and legal challenges facing MNC

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influences like the legal structures that must be adhered strictly. For example, the decision on how much to invest on projects for research can be contentious because it might pose a risk to any business. If one firm invests on Research and design spending, another competitor might decide not to follow and this leads to loss of competitive edge in the market which may lead to long term decline on market share and profitability (Kreps, 1990). The tariff jumping-off hypothesis This theory dwells mainly on foreign direct investments maintaining that firms normally use foreign direct investments in order to jump over the existing tariff barriers of host countries. The Japanese electronics products and the response of the United States played to let firms receive lower duties is an example of tariff- jumping off. The move was more attractive to foreign and domestic firms because it achieved similar outcomes (Blonigen, 2000). Conclusion In conclusion, the greatest potential threat posed by multinational corporations would be their continued success in a still underdeveloped world market. While the productive capacity of multinationals increases, the buying power of people in much of the world remains relatively unchanged. This could lead to the production of a worldwide excess supply of both goods and services. In turn it can lead to wage and deflation of prices, rapid slow down in phases of economic life and contraction of corporate activities. These possibilities are only hypothetical however the operations of multinational corporations will continue to expand.

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References Blonigen, B. A. (2000). Multinational Corporations. Tarriff Jumping off Antidumping Duties, 17-19. Dennis R. Appleyard,Alfred J. Field Jr,Cobb. Steven L. (2009). International Economics. New York: Irwin Proffesional . Grigsby, E. (2011). Analyzing Politics: An Introduction to Political Science. Cengage Learning. Hill, C. W. (2007). International Business. Canada. Imber, M. F. (1983). Teaching the politics of international organization. london: Macmillan. Kreps, D. M. (1990). A Course in Microeconomic Theory. Princeton : Princetob university press. Macdonald, D. (1997). Challenges for employers. industrial relations and globalization , 7-19. Phil, A and Anthony, F. (1998). American multinationals in EuropeNew York Sensemaking and Politics in Multinational Corporations . (2003). Journal of Management Inquiry 20-30 Stopford, J. (1998). Multinational Corporations Foreign Policy, Winter. The Economist. (1993). London Mccgraw Thornton Bradshaw, Burton, Daniel F. (2003). The challange of newly industrializing countries. London: Harper Collins.
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