INTERNATIONAL JOURNAL OF BUSINESS,

INTERNATIONAL JOURNAL OF BUSINESS, 16(1), 2011 ISSN: 10834346


Are Multinational Corporations Problem-Solvers or Problem-Makers in Developing Countries?

Focus on Technology Gap and Arbitrage


M. R. Kumara Swamy

Director, Om Sai Ram Centre for Financial Management Research Mumbai, India
[e-mail]


ABSTRACT

Multinational Corporations (MNCs) through their subsidiaries (in developing countries) with selfish interests like gamblers begin the business game with a small stake (initial investment) and continually plough back their winnings (taking advantage of good political risks) into the game of gambling making their parent companies grow richer through, according to the author‟s research findings, abnormal profit earnings between 400 per cent and 600 per cent. With stringent controls exercised by developing countries over MNCs in recent years and funding gambling a losing game, developing countries have put all hands on deck to move from a state of overdependence on MNCs to techno-economic self-reliance. This, the author has analysed with the help of uniquely-presented diagrams and arbitrage technique.

JEL Classifications: B41, D42, F23, G31, M41, O32

Keywords: Multinational Corporations; Gambling; Self-reliance; Arbitrage




72 Swamy


I. INTRODUCTION

The emergence of the Organization of Petroleum Exporting Countries (O.P.E.C.), with its oil weapon, especially after the Tehran Agreement of 1973, as a strong spokesman of the developing countries and asserting their control over operating MNCs led the world organizations like U.N., O.E. C.D., and MNCs to formulate code of conduct for multinational corporations (MNCs) who are problem-makers, heavy risk-bearers, and who, as a compensation for bearing perceived risks, engage in tricky and speculative business dealings in order to earn abnormal profits through the techniques of transfer pricing, overinvoicing, subcontracting, dumping of sophisticated technology without supporting local technical manpower, etc. leading to temporary upswing in the stock market inducing investors to part with M1 (liquid cash) to buy MNC-induced stocks (M2) and creating temporary boom with every possibility of a surging stagflation.

What is a multinational corporation (MNC)? In simple language a multinational corporation is a company that has registered in different robes in more than one country. It may as well be asked why companies which may have been doing so well in their countries take the trouble to go beyond their territorial boundaries to invest in other countries? The fact is that these companies have not only over-grown in terms of capacity but have over-capitalized such that their earnings are not large enough to yield a fair return on the amount of capital employed. But where the companies concerned are making abnormal profits, the governments normally step in with legislations that either reduce their activities or drastically tax their abnormal profits. In order to avoid the above problems, such companies look for alternative areas where they can invest their excess funds without restrictions. With their yawning desire for industrialization, the developing countries very readily welcome them - often to their own detriment. When the MNCs come in their industrialization guise, they normally come with men, materials, capital and technology they would need. Where they employ the indigenes of the host country, it is either as laborers‟ or they are given such positions that will not expose them to the business tricks.

II. MNCs EARN ABNORMAL PROFITS (400% to 600%)

Research studies have confirmed that multinational corporations (MNCs) parented in developed industrialized countries, through their subsidiaries (in developing countries), with selfish interests like gamblers, begin the game with a small stake (initial investment) and continually plough back their winnings (taking advantage of good political risks) into the game of gambling making the parent MNCs grow richer through abnormal profit earnings of anywhere between 400 per cent and 600 per cent on one hand; and, on the other hand, the developing countries, acting as gambling dens with MNC-supported management consultancy-cum-financed expensive loans (like Euro-dollar), tied project aid, etc. and through transfer of sophisticated and inappropriate technology from the industrialized countries - all in the name of so-called economic development - would continue to remain in a state of volatile-cum-inorganic development path causing techno-economic backwardness from a long-run point of view.

With stringent controls exercised over MNCs in recent years, developing countries have put all hands on deck to move from a state of overdependence on MNCs to techno-economic self-reliance and the MNCs, finding gambling a losing game in developing countries, have engaged in employing techno-management techniques (like transfer of




INTERNATIONAL JOURNAL OF BUSINESS, 16(1), 2011 73


highly priced-cum-most sophisticated and appropriate technology on one hand) and, forcing MNC-controlled developing countries to maintain very high and unrealistic-not functionally related to economic development-exchange values for their currencies which, in the words of Swamy (2003), proves a doom to the developing countries and a boom to the MNCs (for facilitating continual abnormal profit repatriation) to strength their monopoly power as explained below:

“Hi-tech manufacture/production -, may lead to negative cash flows -, induces risk capital and prompts MNCs to -, underutilize productive capacity and -, engage in arbitrage and earn abnormal profits of anywhere between 400 per cent and 600 per cent profits -, proves a boom to MNCs-parented in developed countries and a doom to MNC-controlled developing countries -, leading to development tension via technological backwardness (Swamy, 2003).”

MNCs as problem solvers, by taking advantage of good political risks in developing countries, induce foreign investment by developed countries like the U.S.A. with restrictions imposed on the developing countries regarding the use of patents, trade-related measures, etc. and compel the developing countries to dance to the tune set by the industrialized countries.

III. SUPER 301/PROVISIONS: U.S.A.

According to the U.S. Trade Representative, Americans who engage in international trade are very concerned about the harm to U.S. trading interests that results from the lack of adequate and effective protection of intellectual property rights in many foreign markets. U.S. businesses are losing money but more importantly, the U.S. economy is losing the competitive edge gained from research and development, innovation and creativity. As a nation, the U.S. simply cannot afford it (USTR, 1989; USIS, 1989; Cohen, 1989).

The share of U.S. exports, made up of articles that rely heavily on intellectual property protection (chemicals, pharmaceuticals, computers, software, movies, sound recordings, books, scientific equipment, etc.,) has risen astronomically in the postwar period. For example, U.S. companies experienced worldwide losses estimated to $43,000 million to $61,000 million in 1986 due to inadequate and ineffective intellectual property protection. U.S. trade policy objectives evolved in the first half of the 1980s to expand their negotiating mandate on intellectual property.

An entirely new provision – a watered-down version of the Gephardt Amendment, Super 301 – is a direct result of common belief that U.S. business is not getting a fair deal in many parts of the world : it is not a punitive device, but is a leverage to open markets : Super 301 provides general retaliatory authority in cases where foreign practices burden or discriminate against U.S. commerce and the 1993 trade policy of the U.S. designates Super 301 as an important tool for opening foreign markets.

IV. HOW DO MNCS OPERATIONS IN DEVELOPING COUNTRIES

CREATE FINANCIAL WASTE? CASE STUDY

Swamy‟s (1978) research findings based on his incisive observation of the economic activities of MNCs in developing countries for several years have revealed that, every




74 Swamy


multinational company at one source, say A aims at making about 200 per cent profit, another 200 per cent at, another source, say as its subsidiary, and another 200 per cent, at, yet another source, C as its sub-subsidiary on capital employed. (Swamy, 1978; Okereke, 1982).

If one takes stock of the number of MNCs operating in Nigeria, as an illustration, one will shudder at the amount of money that leaves the country every year in the name of profits. The repatriation of these profits normally puts the host country into perennial balance of payments difficulties. If we take Volkswagen of Nigeria as a practical example of a operating MNC in Nigeria (based on events in the mid-1980s), we will discover that Nigeria does not manufacture Volkswagen cars but only assemble parts imported from Brazil (South America). A little enquiry further will reveal that the Brazilian Volkswagen Corporation is an investment of the parent company based in Germany, viz., Volkswagenwerk (Europe). It is still worthy to note that one of the major distributors of Volkswagen cars in Nigeria is J. Allen - - a British firm - - which does not manufacture cars but only serve as a distributor/sales representative. A look at the world map reveals that Nigeria is nearer to Germany than to the U. K., and Brazil. What then is the rationale behind Nigeria going to Germany via Brazil and with a stopover in U.K. - - all in the name of economic development through the gimmick foreign investment? It is anybody‟s guess!! If Nigeria wants to enter into trade and investment relations with another country for the distribution of Volkswagen cars, it would not only be more economical in distance, but it would be financially prudent to go straight to the home land of Volkswagen, i.e., Germany.

If we then apply Swamy‟s (1978) theorem to this

Hasil (Bahasa Indonesia) 1:

INTERNATIONAL JOURNAL OF BUSINESS, 16(1), 2011 ISSN: 10834346Are Multinational Corporations Problem-Solvers or Problem-Makers in Developing Countries?Focus on Technology Gap and ArbitrageM. R. Kumara SwamyDirector, Om Sai Ram Centre for Financial Management Research Mumbai, [e-mail] Corporations (MNCs) through their subsidiaries (in developing countries) with selfish interests like gamblers begin the business game with a small stake (initial investment) and continually plough back their winnings (taking advantage of good political risks) into the game of gambling making their parent companies grow richer through, according to the author‟s research findings, abnormal profit earnings between 400 per cent and 600 per cent. With stringent controls exercised by developing countries over MNCs in recent years and funding gambling a losing game, developing countries have put all hands on deck to move from a state of overdependence on MNCs to techno-economic self-reliance. This, the author has analysed with the help of uniquely-presented diagrams and arbitrage technique.JEL Classifications: B41, D42, F23, G31, M41, O32Keywords: Multinational Corporations; Gambling; Self-reliance; Arbitrage 72 SwamyI. INTRODUCTION The emergence of the Organization of Petroleum Exporting Countries (O.P.E.C.), with its oil weapon, especially after the Tehran Agreement of 1973, as a strong spokesman of the developing countries and asserting their control over operating MNCs led the world organizations like U.N., O.E. C.D., and MNCs to formulate code of conduct for multinational corporations (MNCs) who are problem-makers, heavy risk-bearers, and who, as a compensation for bearing perceived risks, engage in tricky and speculative business dealings in order to earn abnormal profits through the techniques of transfer pricing, overinvoicing, subcontracting, dumping of sophisticated technology without supporting local technical manpower, etc. leading to temporary upswing in the stock market inducing investors to part with M1 (liquid cash) to buy MNC-induced stocks (M2) and creating temporary boom with every possibility of a surging stagflation.What is a multinational corporation (MNC)? In simple language a multinational corporation is a company that has registered in different robes in more than one country. It may as well be asked why companies which may have been doing so well in their countries take the trouble to go beyond their territorial boundaries to invest in other countries? The fact is that these companies have not only over-grown in terms of capacity but have over-capitalized such that their earnings are not large enough to yield a fair return on the amount of capital employed. But where the companies concerned are making abnormal profits, the governments normally step in with legislations that either reduce their activities or drastically tax their abnormal profits. In order to avoid the above problems, such companies look for alternative areas where they can invest their excess funds without restrictions. With their yawning desire for industrialization, the developing countries very readily welcome them - often to their own detriment. When the MNCs come in their industrialization guise, they normally come with men, materials, capital and technology they would need. Where they employ the indigenes of the host country, it is either as laborers‟ or they are given such positions that will not expose them to the business tricks.II. MNCs EARN ABNORMAL PROFITS (400% to 600%) Research studies have confirmed that multinational corporations (MNCs) parented in developed industrialized countries, through their subsidiaries (in developing countries), with selfish interests like gamblers, begin the game with a small stake (initial investment) and continually plough back their winnings (taking advantage of good political risks) into the game of gambling making the parent MNCs grow richer through abnormal profit earnings of anywhere between 400 per cent and 600 per cent on one hand; and, on the other hand, the developing countries, acting as gambling dens with MNC-supported management consultancy-cum-financed expensive loans (like Euro-dollar), tied project aid, etc. and through transfer of sophisticated and inappropriate technology from the industrialized countries - all in the name of so-called economic development - would continue to remain in a state of volatile-cum-inorganic development path causing techno-economic backwardness from a long-run point of view.With stringent controls exercised over MNCs in recent years, developing countries have put all hands on deck to move from a state of overdependence on MNCs to techno-economic self-reliance and the MNCs, finding gambling a losing game in developing countries, have engaged in employing techno-management techniques (like transfer of INTERNATIONAL JOURNAL OF BUSINESS, 16(1), 2011 73highly priced-cum-most sophisticated and appropriate technology on one hand) and, forcing MNC-controlled developing countries to maintain very high and unrealistic-not functionally related to economic development-exchange values for their currencies which, in the words of Swamy (2003), proves a doom to the developing countries and a boom to the MNCs (for facilitating continual abnormal profit repatriation) to strength their monopoly power as explained below:“Hi-tech manufacture/production -, may lead to negative cash flows -, induces risk capital and prompts MNCs to -, underutilize productive capacity and -, engage in arbitrage and earn abnormal profits of anywhere between 400 per cent and 600 per cent profits -, proves a boom to MNCs-parented in developed countries and a doom to MNC-controlled developing countries -, leading to development tension via technological backwardness (Swamy, 2003).”MNCs as problem solvers, by taking advantage of good political risks in developing countries, induce foreign investment by developed countries like the U.S.A. with restrictions imposed on the developing countries regarding the use of patents, trade-related measures, etc. and compel the developing countries to dance to the tune set by the industrialized countries.III. SUPER 301/PROVISIONS: U.S.A. Menurut Perwakilan Perdagangan AS, Amerika yang terlibat dalam perdagangan internasional sangat prihatin tentang bahaya untuk US perdagangan kepentingan yang hasil dari kurangnya perlindungan yang memadai dan efektif hak kekayaan intelektual di banyak pasar luar negeri. Pelaku usaha di AS yang kehilangan uang, tetapi lebih penting lagi, ekonomi AS kehilangan keunggulan kompetitif yang didapat dari penelitian dan pengembangan, inovasi dan kreativitas. Sebagai bangsa, AS hanya tidak mampu (USTR, 1989; USIS, 1989; Cohen, 1989).Saham AS ekspor, terdiri atas artikel yang sangat mengandalkan perlindungan kekayaan intelektual (bahan kimia, farmasi, komputer, perangkat lunak, film, rekaman suara, buku, peralatan ilmiah, dll,) telah meningkat secara astronomis di masa pasca perang. Sebagai contoh, US perusahaan berpengalaman di seluruh dunia kerugian diperkirakan menjadi $43.000 juta menjadi $61.000 juta pada tahun 1986 karena perlindungan kekayaan intelektual tidak memadai dan tidak efektif. Tujuan kebijakan AS perdagangan berkembang pada paruh pertama pada 1980-an untuk memperluas mandat negosiasi pada kekayaan intelektual.An entirely new provision – a watered-down version of the Gephardt Amendment, Super 301 – is a direct result of common belief that U.S. business is not getting a fair deal in many parts of the world : it is not a punitive device, but is a leverage to open markets : Super 301 provides general retaliatory authority in cases where foreign practices burden or discriminate against U.S. commerce and the 1993 trade policy of the U.S. designates Super 301 as an important tool for opening foreign markets.IV. HOW DO MNCS OPERATIONS IN DEVELOPING COUNTRIESCREATE FINANCIAL WASTE? CASE STUDYSwamy‟s (1978) research findings based on his incisive observation of the economic activities of MNCs in developing countries for several years have revealed that, every 74 Swamymultinational company at one source, say A aims at making about 200 per cent profit, another 200 per cent at, another source, say as its subsidiary, and another 200 per cent, at, yet another source, C as its sub-subsidiary on capital employed. (Swamy, 1978; Okereke, 1982).If one takes stock of the number of MNCs operating in Nigeria, as an illustration, one will shudder at the amount of money that leaves the country every year in the name of profits. The repatriation of these profits normally puts the host country into perennial balance of payments difficulties. If we take Volkswagen of Nigeria as a practical example of a operating MNC in Nigeria (based on events in the mid-1980s), we will discover that Nigeria does not manufacture Volkswagen cars but only assemble parts imported from Brazil (South America). A little enquiry further will reveal that the Brazilian Volkswagen Corporation is an investment of the parent company based in Germany, viz., Volkswagenwerk (Europe). It is still worthy to note that one of the major distributors of Volkswagen cars in Nigeria is J. Allen - - a British firm - - which does not manufacture cars but only serve as a distributor/sales representative. A look at the world map reveals that Nigeria is nearer to Germany than to the U. K., and Brazil. What then is the rationale behind Nigeria going to Germany via Brazil and with a stopover in U.K. - - all in the name of economic development through the gimmick foreign investment? It is anybody‟s guess!! If Nigeria wants to enter into trade and investment relations with another country for the distribution of Volkswagen cars, it would not only be more economical in distance, but it would be financially prudent to go straight to the home land of Volkswagen, i.e., Germany.If we then apply Swamy‟s (1978) theorem to this