Definitions of Globalization, Case Study Example

Impacts of Multinational Corporations (MNCS) On Host Countries: A Case Study of Developed and Developing Nations

Executive Summary

The interaction and interdependence of countries through trade resulted in globalisation. The prevalence of Information Technology in the 21^stCentury immensely influences globalisation. The report primarily focuses on the impact of globalisation and the effect of multinational corporations on developing and developed nations. Since the 1970s, Information Technology and the removal of trade barriers caused an increase in cross-border trade. However, globalisation could cause inequality in trade following the economic imbalance that separates developed and developing nations. Multinational Corporations (MNCs) are a critical aspect in advancing globalisation. The establishment of MNCs in host countries is a globalisation strategy that allows companies to venture into foreign markets.

Introduction

The case study analyzes the effects of MNC entry into developed and developing countries. The analysis focuses on identifying the positive and negative features associated with MNCs and comparing developed and underdeveloped nations. The Multinational Corporation chosen for the case study is Nestlé; the United States and Kenya are the host countries chosen, representing a developed and developing nation, respectively. The findings show that the significant adverse effect of Nestlé in the USA is the exploitation of natural resources while developing nations experience labor exploitation due to low wages compared to western rates (Mosley & Uno, 2007). However, developing countries are further disadvantaged than developed nations, with their presence also having an adverse political effect. The case study findings suggest that even though multinational corporations may negatively impact their host countries through environmental and labor exploitation, the benefits outweigh the negative impact making MNCs an asset for economic expansion across the globe.

Globalisation and Multinational Corporations

Globalisation refers to integrating nations based on international trade facilitates by Information Technology. Globalisation incorporates the increased movement of human beings, services, and goods, enhancing interactions among individuals from different regions in the world (Al-Rodhan & Stoudmann, 2006). Globalisation from an economic perspective is the interrelationship between world economies resulting from cross-border trade amongst nations, leading to flowing international capital and expanding technologies. Globalisation offers both positive and negative effects to nations; some positive developments include growth of industries and increased job opportunities in developing countries (Ferdausy and Rahman, 2009). However, some critics believe globalisation creates inequality by placing developing nations in a disadvantageous position.

Since the 1970s, the world economy experienced a revolution that led to increased international trade and Foreign Direct Investment (FDI); additionally, information technology developments influenced new economic integration strategies. For example, inward and outward FDI stocks experienced a 20% increase between 1980 and 2006. In 2004, FDI inflows hit 648 billion dollars from 59 billion dollars in 1982. The Gross Domestic Product (GDP) of prices tripled between 1980 and 2006. Trade liberalization initiated by the World Trade Organization (WTO) caused the elimination of trade obstacles, increasing international trade. Countries can easily access global markets and benefit from subsidized transportation costs. The spread of the internet and other advanced technologies led to better coordination and communication. For example, the introduction of Autonomous Vehicles (AV) for freight transportation is recent technology developed for long-distance drivers (Csiszár and Földes, 2018). Autonomous vehicles are currently undergoing advancement in some countries.

In 2004, goods exportation peaked by a 20% growth; from 1986 to 200, annual export growth rate surpassed annual global output increase. However, the year 2001 is an exception; the 9/11 attacks in the United States negatively affected the global economy. The adverse effect on America’s economy caused a descent in stock markets. Countries like India and China have revolutionized their economies in the 21^st Century. The large populations impacted globalisation by lifting a large percentage of its population to the middle class, creating a large market for economic opportunities. China’s rise in the global scope resulted in increased economic growth in other countries and decreased poverty levels in developing countries.

A Multinational Corporation (MNC) refers to organizations that operate in their home countries and other nations. MNCs often have offices in other countries; however, overall management takes place in the home country’s main office. Multinational companies play a vital role in the progression of economic globalisation (Andreff and Andreff, 2017). MNC increase income in their host country through Foreign Direct Investment; additionally, they also increase exportation and reduce importation in host countries (The Good that Multinationals Can Do – Philanthropists in Africa, 2017). Since MNCs have several branches in other nations, they influence global price rates and trade wars. MNCs often launch manufacturing industries in countries that offer cheap labor, low production, and transportation costs to ship to the global market. For example, companies such as Toyota and Nestlé have multiple establishments in foreign countries. MNCs connect host countries to their home countries through their business operations.

Case Study

The Multinational Company selected for this case study is Nestlé. Nestlé is a Switzerland-based company created in 1905. In 1866, the brothers George and Charles formed the Anglo-Swiss Milk Company. In 1897, Henri Nestlé innovated infant food leading to a merger and establishing the Nestlé Group. The company grew during World War 1 and expanded its operations and list of products during the Second World War. Initially, the company focused on infant formula and milk commodities. Nestlé’s products include; coffee, baby food, tea, snacks, and dairy products. The company’s operations run in 189 nations; it has over 400 manufacturing plants and an employee count of about 400,000. In 2017, the company was listed in the Fortune 500 and listed number 64.Nestlé is currently the largest food company globally.

Nestlé operates in developed nations such as Canada, the United States, and the United Kingdom. Nestlé expanded its business operations to developing countries in Africa that include; Kenya, South Africa, and Tanzania. The company sells its products to 186 nations globally. The largest market for Nestlé is the United States; in 2020, the United States market accounted for sales worth 26 billion Swiss Francs. Other global markets include Europe and North Africa. The case study consists of comparing Nestlé USA and Nestlé Kenya; the USA represents the developed nation while Kenya represents a developing nation. The case study will analyze the positive and negative impacts of Nestlé in the two host countries.

Nestlé USA

Nestlé in the United States consists of seven companies; Nestlé USA, Nestlé Purina, Nespresso, Nestlé Waters North America, Nestlé Health Science, Nestlé Professional and Gerber. The company conducts its operations in 31 American States and over 100 locations in the country; Nestlé USA contributed to the global success and growth of the company. The Swiss company employs more than 50,000 workers overall in America (About Us, n.d.).One positive impact of the company on the USA is its economic contributions to individual states. For example, in Michigan, Nestlé contributed over 400 million dollars to the State’s economy and created job opportunities for over 200 individuals (Thorp, 2017). The company’s economic activity generates 5 million dollars contributing to taxes and funding for police departments and local schools. The company offers employees opportunities for career growth and Employee Assistance Programs (EAP)(Real Rewards at Nestlé USA, n.d.).

Findings

However, the establishment of Nestlé in the USA has negative impacts on the country. The company experiences backlash for plastic pollution leading to environmental damage. Additionally, another negative impact resulting from Nestlé in the USA is complaints resulting from the company obtaining America’s water from Strawberry Creek in California and packaging it in plastic bottles for sale (Perkins, 2019). Some critics view Nestlé as a predatory company that preys on disadvantaged communities promising employment, and uses strategies such as donations that deceive town officials controlling the springs. Environmentalists worry about Nestlé’s impact and domination in the United States. Water bottle sales in the United States currently exceed soda sales in America. In 2018, Nestlé Waters’ sales amounted to 4.5 billion dollars.

Nestlé Kenya

In 1967, Nestlé established its operations in Kenya to create Nestlé Kenya Limited operating under the Nestlé East and South African Region (ESAR) Limited. Nestlé Kenya Nairobi factory contributes to products for the local market and exports some of its products to the East African Community, European markets, and COMESA. Nestlé provides employment opportunities to the locals and assists in closing the unemployment gap in the country. Nestlé’s investment in Kenya through establishing a factory in the country resulted in capital inflow and economic development (Opata, 2020). Additionally, Nestlé diversified the Kenyan economy from solely relying on agricultural products as primary exports. A significant disadvantage of Nestlé’s investment in Kenya is that multinational companies may hire skilled labor from a developed economy; outsourcing means that local workers do not receive the best and top-ranking jobs.

Comparison

Based on the information provided on the operations of Nestlé in the United States and Kenya, the operations of a Multinational Corporation can have negative impacts on host countries. However, the benefits provided to the host countries outweigh negative consequences; MNCs are not detrimental and are an essential aspect in progressing globalisation. In developed countries such as the United States, criticism occurs based on social and environmental factors. For example, Nestlé Waters collects water from federal land to bottle and make profits. Profits acquired by the company contribute to boosting America’s GDP through re-investing back to the host country’s economy.

Additionally, the United States reduces importation costs since the MNC manufactures and supplies products domestically. The MNC also increases productivity in the country while creating jobs. The only disadvantage of Nestlé’s presence in USA resource exploitation.

Multinational companies gain from the economies of scale that allow low operating costs and reduced prices for consumers(Pettinger, 2019).Nestlé Kenya provides a channel for Kenya to export its cash crop, coffee, to international markets(Miriri, 2018). Nestle’s coffee project in Kenya benefits over 35,000 farmers in the country (Over 40,000 farmers to benefit from Nestlé’s coffee project in Kenya, 2015). The company also provides jobs for the locals, reducing the unemployment gap in the country. A significant disadvantage to the developing host country is the wage difference in developed and underdeveloped countries. MNCs offer low wages to local employees in developing countries based on western standards. Comparing wages in the two host countries reveals that Nestlé employees in the United States earn significantly higher salaries than those in Kenya. However, some argue that the alternative of low wages offered by MNCs in developing countries is no job making it acceptable for MNCs to exploit laborers in developing countries.

Emerging issues and policy implications

Host governments often intervene in the operations of multinational corporations and usually set conditions for MNCs. In the United States, Nestlé’s presence in the country causes the emerging issue of exploitation of natural resources. In Kenya, the emerging problem is the exploitation of workers through cheap labor. A broad perspective of the impact of MNC is that the positive outcomes outweigh the negative impact to host countries. MNC is not detrimental to host countries, though their robust command in the global market puts them in an advantageous position to reap benefits than their host countries (Ruggie, 2018). Developing nations may experience worse adverse effects of MNCs than developed nations. In the case of Nestlé, the United States stands a better chance of gaining enormous profits than Kenya.

Multinational Corporations can at times have significant political influence in their host countries. Developing nations often fall victims to MNC political control in their governments due to the global economic supremacy of these companies. The case study did not find any evidence of Nestlé’s involvement in Kenyan politics. However, the town council’s involvement in Nestlé’s water acquisition shows political involvement to some degree. Multinational companies can also politically influence their host countries into receiving subsidies for their operations. The case study does not show active Nestlé involvement in the politics of its host countries.

Multinational Companies often target developing nations due to the untapped resources in these countries. A significant number of developing nations in Africa rely on MNCs for the growth and development of their manufacturing industries. Additionally, MNCs invest in developing nations because Foreign Direct Investment grows at a higher speed than in developed nations.

Conclusion and Recommendations

Information Technology in recent years contributed to increased globalisation. The elimination of trade barriers created opportunities for countries to establish interdependent trade relationships. Globalisation allows countries to access global markets and supply their products to other nations. The negative impact of globalisation is the inequity caused by the economic differences of different nations. Developed countries often experience massive growth in their economies compared to developing nations. Multinational Corporations extensively influence globalisation. The MNC Nestlé is an excellent example of MNC effects in its host countries. A comparison of the impact of Nestlé on the United States and in Kenya shows that both host countries experience an adverse effect from Nestlé’s operations. Nestlé threatens resource exploitation in the United States while Kenya experiences labor exploitation through low wages. However, even with the adverse effect, the USA’s GDP benefits immensely from the massive profits gathered from the company’s sales. Even though Kenya’s economy benefits from foreign investment, the developed nation experiences significant economic growth. Despite the adverse effects of MNCs, the case study on Nestlé shows that MNCs are beneficial and not detrimental. Countries should encourage their domestic companies to expand to other nations to enhance globalisation and explore foreign markets.

References

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Andreff, W. and Andreff, M., 2017. Multinational companies from transition economies and their outward foreign direct investment. Russian Journal of Economics, 3(4), pp.445-474.

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n.d. Real Rewards at Nestlé USA. [ebook] pp.1-9. Available at: <https://tbcdn.talentbrew.com/company/1823/v1_0/docs/42555-Real-Rewards-brochure4.pdf> [Accessed 23 April 2021].

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Perkins, T., 2019. The fight to stop Nestlé from taking America’s water to sell in plastic bottles. [online] the Guardian. Available at: <https://www.theguardian.com/environment/2019/oct/29/the-fight-over-water-how-nestle-dries-up-us-creeks-to-sell-water-in-plastic-bottles> [Accessed 23 April 2021].

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Thorp, B., 2017. Nestle releases new report on company’s economic impact in Michigan. [online] Radio.wcmu.org. Available at: <https://radio.wcmu.org/post/nestle-releases-new-report-company-s-economic-impact-michigan#stream/0> [Accessed 23 April 2021].