Multinational Corporations: Savior or Saboteur | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

–Suneel Sheoran

On the 25th of July 2018, in a 13-minute read authored by Suneel Sheoran, a significant event from the last week of February 2016 captured headlines across major national newspapers in India. This event involved hepatitis C patients staging protests outside India's patent office in New Delhi. Their grievance centered on the American multinational pharmaceutical giant, Gilead Sciences, and the United States government, which they accused of pressuring the Indian government to hastily grant patents for Gilead's highly-priced drug, Sovaldi. This drug, whose generic versions were manufactured by Indian pharmaceutical companies, served millions of hepatitis C patients worldwide. This incident raises questions about the influence of multinational corporations (MNCs) on sovereign governments and their profound impact on global populations.

Multinational corporations, often abbreviated as MNCs, encompass companies with operational footprints spanning multiple countries, despite being headquartered in one or a few specific nations. While the term may have modern origins, such MNCs have existed for several centuries. The historical example of the East India Company, the English trading enterprise that exerted significant influence in 17th-century India and laid the groundwork for English colonial rule, is a pertinent illustration. In today's interconnected global landscape, these companies continue to proliferate. The global exchange of goods, services, ideas, and labor is actively encouraged. Specialization is deemed imperative, driving more companies to expand their presence beyond their country of origin. Disparities in resource availability, skills, markets, and historical factors, including imperialism and colonialism, have fueled this globalization trend.

Most major MNCs today originate from industrialized or developed nations. Armed with cutting-edge technology and substantial capital reserves, they primarily seek expansion opportunities in less developed and developing economies. Numerous MNCs are now operating worldwide. In India, corporations like Standard Chartered, HSBC, Colgate-Palmolive, and Castrol have established a presence over several decades. However, these multinational corporations can either be a blessing or a curse, particularly for less developed or developing countries, for a variety of reasons we will explore.

Multinational corporations inject capital into developing countries, offering a lifeline to economies where capital is scarce but opportunities for growth abound. This creates a mutually beneficial scenario where MNCs deploy surplus capital for profitable returns while the receiving country experiences economic growth. However, the rapid and massive repatriation of capital during volatile periods can harm the developing country's economy, as exemplified by the East Asian crisis of 1997, which resulted from the flight of foreign capital from countries like Thailand, South Korea, and Indonesia. Furthermore, the use of tax havens to evade taxes and "transfer pricing" practices contribute to significant financial losses for developing nations. Recent studies have shown that a substantial portion of Foreign Direct Investment (FDI) from developed countries is merely reinvested profits by MNCs and their investors, rather than fresh capital deployment. According to the United Nations Conference on Trade and Development (UNCTAD), reinvested earnings accounted for as much as four-fifths of total outflows for select developed nations in 2014, with significant losses to the exchequer due to FDI routed through tax havens.

Another avenue through which MNCs can benefit developing countries is by introducing state-of-the-art technology that enhances productivity and efficiency while providing cost-effective products to consumers. However, there is a corresponding risk that some companies may introduce obsolete technology, flooding the market with subpar and potentially hazardous goods. In the absence of stringent regulatory standards, poor technology can lead to industrial accidents and environmental degradation, resulting in loss of life and harm to future generations. India experienced such a tragedy with the Bhopal gas leak of 1984, where a pesticide plant operated by Union Carbide, an MNC, released methyl isocyanate, causing significant loss of life and lasting harm to future generations in Bhopal.

MNCs may also seek to exploit weak intellectual property laws in developing countries, leading to the patenting of previously freely available technology or methods. This can drive up the prices of related goods and services. Furthermore, MNCs are often reluctant to transfer technology to local partners in developing countries, perpetuating their reliance on expensive imports of these technologies. Recent conflicts involving pharmaceutical companies in India, who have resisted compulsory licensing norms and attempted to extend licenses even with slight variations in drug properties, illustrate how MNCs prioritize their bottom lines over the lives of millions.

By permitting MNCs to operate within their borders, developing countries can benefit from increased competition in various sectors, which can enhance the efficiency of domestic firms and improve customer service and product choices. However, this can also lead to the demise of domestic companies, resulting in significant job losses within the local labor market. Large MNCs, backed by surplus capital and private equity funds, can withstand losses for extended periods, driving domestic competition out of business. A contemporary example is the impact of e-commerce giants like Amazon and eBay in India, which, backed by significant private equity, have disrupted traditional offline retail businesses by offering substantial online discounts.

Most developing economies have higher unemployment rates compared to the developed world. MNCs can alleviate this by providing employment opportunities, often hiring cheaper labor in emerging economies to produce goods and services at lower prices. However, an unregulated labor market can lead to labor exploitation, with low wages and hazardous working conditions. While increased productivity, efficiency, and employment can boost a developing country's GDP, average per capita income, and living standards, it can also deplete natural resources and exacerbate inequality, concentrating capital in the hands of a privileged few while leaving the underprivileged segments of the population behind.

Multinational Corporations can also potentially undermine the sovereign interests of developing countries by dragging their governments into international arbitration over policies perceived as detrimental to MNCs. In many cases, this involves domestic governments prioritizing the welfare of their citizens over the contractual rights of MNCs. MNCs may also establish lobbying efforts and associations in developed nations, exerting pressure on developing nations to grant concessions. For instance, the pharmaceutical industry in the United States has lobbied India through the United States Trade Representative (USTR) to adopt more lenient intellectual property regulations for foreign pharmaceutical companies.

In summary, multinational corporations bring both advantages and disadvantages to developing nations. On one hand, they bring surplus capital, cutting-edge technology, management expertise, and the potential for increased production, productivity, efficiency, employment, and improved living standards. On the other hand, they can pose risks such as capital flight, obsolete technology, exploitation of weak regulatory environments, and the erosion of indigenous industries. To mitigate these risks, developing countries must establish robust and supportive regulatory frameworks in areas such as finance, intellectual property, competition, and labor laws. Additionally, prompt and equitable dispute resolution mechanisms are essential. India has achieved relative success in its liberalization efforts since 1991 by selectively opening specific sectors to foreign investment on a case-by-case basis and in a phased manner, without allowing full Capital Account Convertibility. This approach has enabled India to harness the dynamism of MNCs while fostering the growth of its domestic companies. As a result, India now boasts its own homegrown MNCs, such as Tata, Infosys, Reliance, and Wipro, which operate not only in emerging countries in Africa and South Asia but also in developed nations in North America and Western Europe.