Wiig, A & Kolstad,I. (2010). “Multinational corporations and host country institutions: A case study of CSR activities in Angola”, International Business Review vol. 19 no. 2 pp. 178-190

CHAPTER TWO

LITERATURE REVIEW

2.1 INTRODUCTION

This chapter gives an insight into various studies conducted by outstanding researchers, as well as explained terminologies with regards to the role of Multinational Corporations towards economic growth in NIgeria. The chapter also gives a resume of the history and present status of the problem delineated by a concise review of previous studies into closely related problems.

2.2 THE CONCEPT OF MULTINATIONAL COMPANY

A multinational corporation is a company that has subsidiaries in several countries.  Their decentralized structure as well as their sheers size, often allow them to work without government constraints which small regional or national companies must companies must observe.

Developing nations attract multinational subsidiary operations due to a number of actors such as cheap labour, low taxation and less vigilance concerning workers rights and environmental protection.  They are made to contribute to the social security net (i.e welfare, unemployment insurance, e.t.c.)  other fact, including low pay for woman workers, child labour and the absence of labour unions, also combine to make the developing nations ripe for prospect the presence of multinational in these countries improves overall standards of living.  The benefits of the relationship may be one-sided, but the economic problems facing these nations makes it difficult for them to be picky about their investors.

Firms become multinational corporation when they perceive advantages to establishing product and other activities in foreign locations.  Firm globalize their activities both o supply their home-country market more cheaply and to serve foreign markets more directly-keeping foreign activities with corporate structure lets firm avoid the costs inherent in arms length dealings with separate entities while utilizing their own firm specific knowledge such as advanced production techniques.  By internalizing what would otherwise be cross-boarder transactions, multinationals can bridge the information obstacles that often hinder trade.

For example, they may be able to move carefully monitor product quality or worker conditions in factories they own than in those of contractors, or adapt the composition of output more quickly to the changes in market conditions.  Improvements information technology have reduced the impediments to exerting corporate control across boarder.  These advances have combined in recent years with an increased openness on the part of government to foreign multinational as the economic benefits of foreign presence to the host country have become more widely recognized.  These benefits include the increased investment and the associated jobs and income that the multinational firms brings, as well as technological transfer and improved productivity. The role of multinationals in spreading industry best practice is likely to be especially important in services, many of which are not easily traded across national boundaries.

Evidence of the heightened role of multinationals can be seen in the quickened pace of foreign direct investment (FBI) in recent years.  In 1999 FDI flow both in and out of OECD countries reached record levels.  Over 2.5 percent of their combined GDP for inflows and 3.0 percent for outflows.  Most FDI is between developed countries.  Since 1982, 75 percent of FDI outflows from OECD countries have gone to other members.

2.3 HISTORY OF THE MULTINATIONAL CORPORATION

The opening of world trade 700Ad – 1600.  The most basic foundation of multinational corporation is trade between tribes, among regions, or across established  political boundaries.  Although accounts of the barter of goods or services among different people can be traced back almost as far as the record of human history, the opening of major global economic connections can be considered; the first prerequisite for modern globalization multinational corporation.

By about 100AD, it was possible, if sometimes dangerous and difficult, for merchant and travelers to traverse the “known” world from England to China and Japan.  These trade route were the first global links by which raw materials, food and luxury goods became available for their original by the 1600, the Portuguese and Spanish had opened sea route which spanned the globe.  Below I will like to briefly and partially select some major trading routes and system.

THE ROMAN TRADE ROUTES

From around 50BC to 500AD the Roman empire controlled the are surrounding the Mediterranean.   A single currency, the famous network of Roman Road and dozens of naval harbor i.e. the connected with the navy protection enabled transport and trade on a large scale within empire.  Areas with crop failures received grains, frontier towns were supplied, and the staples of Roman life (wine, olive oil, art, glass and weapons) were available throughout the empire.  The Roman also developed the sea route from Egypt to India, through which luxury goods were imported from the east. Spices, luxury hoods like teak, silk, porcelain and pearls came from India and China.  Trade with the Northern African interior, conducted through Aden, was in Ivory, rhinoceros horn and hides, tortoise – shell and slaves.  Rome paid for these luxuries in gold and silver in such amounts that there was a large drain of hard currency out of the empire.

AFRICAN TRADE ROUTES

By 1000AD northern Africa and especially the great ancient Egyptian civilization had already entered into large scale trade with Europe and Asia, and Islam dominated most of northern Africa.  Although primitive trans-sahara trade routes had always existed, sub-saharan Africa was still almost completely isolated form the rest of the world.  By 1500AD, a number of African kingdoms were well developed, centered around the Sudan, the Niger and Congo River, Zimbabwe, and the Horn of Africa Trade in iron copper, cattle and other goods between these states, especially between coastal and central states was well established.  Trans-saharan trade in salt, slaves, hores and other goods reinforced the spread of Islam, which arrived in tropical Africa.  The east coast of Africa was past of the Indian ocean trading network for Ivory Pottery, animals skins, and gold, and Arab traders settled a number of new town.

THE VIKINGS

While commonly considered, only as raiders and plunderers, another view of the Vikings maintains that their liberation and redistribution of wealth from kings and churches stimulated economic development from key to Dublin and that trading was as important as pillaging for Vikings living abroad.  Around 1000AD Dublin and that trading was as important center for Viking trade.  The ships coming in would carry wine and ceramics from England, silk from Baglidad, broken glass from Germany to make beads with silver from the middle east and wairus Ivory from arctic regions.  The Viking settle Iceland and greenland, and had early short lived settlements on new found land, Canada, and perhaps father south.  Norse artifacts found in Northern Canada indicate that the Vikings traded with native Americans.  It has been postulated that these trading relationship existed for centuries.

2.4 MULTINATIONAL CORPORATION IN THE DEVELOPING COUNTRIES

Like all raw materials producing states the developing countries (DC’s are attractive to foreign investors with their economic and social status and most of them are their world nations.  The outlook of their economy in terms of cheap labour and natural resources makes the multinationals rough to such countries.

Nigeria as one of the DC’s was a colonial state under British control, domination and exploitation.  At a political independence in 1960, Nigeria emerged as a neo-colonial state.  Although the country is no longer a colony; its economic, political, social and educational institutions are structured along western capitalist model.  The Nigerian political economy is subject to imperialist control of the western world and it is integrated into the international capitalist economic system, which served the interest of the international capitalist economics the Nigerian economy is by visualizing it in terms of the relationship between the output of the various sector of the economy such as industrial (which shall be the major concern of this research project as it is being affected by foreign investment in the country).  Agricultural, mining and quarrying, distributive, building and construction sectors.

The structure of the Nigerian economy can therefore be conceived in its neo-colonial capitalist nature in which the clientele class of the national bourgeoisie and compradors exercise dominant influence on the economic life and activities of majority of Nigerians.  They do such through the state, relations with the western bourgeoisie and activities of the multinational corporations (MNC), which dominate major sectors of the economy.

The mining and quarrying sector is one of the sectors where the forces of imperialism are dominant.  The domination of this sector by where the foreign business interests is highly pronounced.  The discovery of oil as the major foreign exchange earner in the 70’s attracted mining multinational companies to expand the scope of their oil exploration and exploitation in this part of the world multinational oil companies such as Agip, mobil, EIF, Ashland e.t.c. have dominated.  The exploration and exploitation of petroleum resources in Nigeria.  These foreign companies posses technology to engage in such operation efficiently.  This had led to the dependence of the advanced capitalist states.

The manufacturing and crafts is also dominated by the multinationals.  The share of manufacturing investments out of these huge foreign investments was relatively large.

In 1966 for instance, foreign investors in manufacturing sector controlled 92.5% by Nigerians. (National Institute for International affairs, 19870 in 1970 , foreign investment controlled 57.3% while Nigerians controlled 42.7% and in 1976 also foreign domination continued even after the indigenization decree had been promulgated the controlled 56.7% as against 43.3% controlled by Nationals.  Most of the multinationals; UAC, Lonrho, Unilever groups – controlling this sector rely heavily on foreign input for it survival.  The manufacturing industries import almost all the need in order to be in production (O. Onido, NIIA 1987)

Multinational corporations have grow in dramatically in size and influence in the expanding economy.  Consequently, multinational corporation have become the object of considerable discussion and animosity R.J.Barnet and R.E. Muller (1974) referred wearily to the global term “commodore to suggest those entities increasing power in the international area, R. Gilpin (1995) has attributed U.S power to the multination corporations; D.H. Blake and Walters (1987) ask the often posed question whether multinational corporations is a growth or under development for the host countries, and Sampson 91975) has exposed the oligopolisic aspiration of the major oil companies known as the seven sisters.  Operating at times with resources that often exceed the GNP of its host country and uncertain industries (notably oil) participating in the cartels designed to control prices and production internationally the multinational corporation is both a source of capital investment and a threat to the nation-state.

The multinational corporations according to marx rose because of the rise of a new age of capitalism which lowing called “imperialism” the highest stage of capitalism.  The multinational corporation that arose represented a more developed state on the concentration of production and circulation of both goods and capital.  The multinational corporations took the firm of direct investment, which related portfolio investment.  In 1914, 90% in all international capital movements took the form of portfolio investment by individuals and financial oligarchies, now 75% of capital outflow are in the firm of direct investment entailing of ventures (D. Nabudere, 1977).

Some workers have drawn parallels between the new multinational corporations and earlier mercantilist internationals these, which are medici of Florence, genoa and Venic in the 13th century, he gross Regensburg sells chaft in the 15th century, Germany and fuggersin Augsburg, were family business in two countries under the vary different condition of feudalist Europe.  The multinational corporations of today are really a new phase international business organizations which can only be properly understood in the context of the development of the capitalist system (D. Nabudere 1977).

Historically, the United State has been the home country for the largest proportion of parent companies, followed by Britain and West Germany furthermore, although the growth of multinational corporation is a global phenomenon,  if the magnitude of foreign direct investment is used to measure their global reach, it is parent that the major part of all transaction at business is located in the developed areas making up the first world.  Practically, foreign direct investment originated in developed market economics, which also absorb more than three quarters of all investment flows (commission of transactional corporation, 1985 – 6).  The developing countries share of foreign direct investment grew in the 1970’s but it plummeted during the debt crisis of the 1980’s (center of transnational corporations 1986).

Another development in the global pattern of foreign direct investment is the emergence of Japan as a major home country.  The outflow of Japanese foreign direct investment increase nearly four fold between 1975 and 1985, moving from $3.3 billion to $12.2 billion during that period (center on transnational corporations, 1987 – 9).

The growing number and economic power of multinational corporations contribute to the controversy surrounding their impact.  It has been estimated that in the early 1980’s, about either thousand multinational corporations world wide controlled assets in two or more countries and that these corporations were responsible for making roughly about four-fifths of the world’s trade (excluding that of the centrally planned economics).  Between 1960 and 1980 the revenues of the top two hundred multinationals firms escalated as their combined share of the world’s gross domestic product (GDP) increased form 18 to 29 present (claim Monte and Cavanaugh 1982; 149, 152, 155).  The main characteristics identifying the multinational corporations are its central direction.  The plan is draw up at the headquarters and the activities of the subsidiary are tightly integrated with each other.  the availability of goods, international communications, air service, telephone, tele-printer and telex services as computers become vital to the multinational corporations most multinational corporations are open about their movies.  The point out that co-operations go transnational to preserve and expand market in areas protected by tease barriers, to provide consumers with the produced in the home country, to take advantage of economic séance and comparatively actively lower prices than export, to search for raw materials and cheep labour if this will contribute to general efficiency and obtain knowledge cheaply by calling on local enterprises.

The multinational corporations must however, always seek to obtain profits greater than average profits.  In order for a country to go over seas, it must be in a position to make higher profits there than it can in the domestic market.  This is the central motive for the multinational corporation rotations which determines the artesian for its investments decision.

It is generally fine to say that most multinational corporation make a general survey on the size of the market, investment climate cost (production, transportation and resource factors) profitability, payback, period and the average rate of return before investing in particular economy.  As far as the market is concerned, the corporation will try to determine the present and protective growth of demand and their share to this market.  They would negatively consider whether they could attain sufficient scales for economic production and a satisfactory level of profit.  To help them come to such conclusion, they will analyze a country’s gross national product (GNP) and GDP population and its distribution, industrial production of specific sectors of the industry and levels and trends in consumption, imports to determine the investment climate, the corporation will analyze the impact of various factors such as receptivity and special incentives to foreign investors, including tax concession and low interest loans, whether there are laws restricting the repatriation of earning, high tariffs, import and exchange restriction e.g. D. Nabudere (1977) high tariffs and import restrictions as already pointed out, may attracts investors as they help to establish a local plant.  They analysis of transport costs, taxes, production costs of production factors such as wages and rent will help the company determine whether it is worthwhile investing.

multinational corporation have some advantages over states in the approaching play of social forces leading to a new system of world order for the first time in history, managerial skills and technology make the management of the globe as a integrate.  Unit of growing possibility its purpose include transnational effort to adapt corporate capitalism to changing economic and political forces to ensure capitalisms future in non-territorially oriented economy facing possible conflicts with territorially based national government disposed classes (Talk 1990).  Multinational corporation place less emphasis on the interest of one state in the system or the will being of its domestic population than national governments.  Despite the technologies possessed by the advance economies, the multinational corporation presence in third world economies only creates technological dependence in Nigeria for instance, despite apparently favourable capital flows, information available indicates that far from having a net positive effect on capital accumulation, multinational corporations have tended to promote the recapitalization of the host economies.  Also, despite the apparent net inflows in the years 1971 – 77 the picture may be different if the covert transfers such as result from price manipulation, payment for second hand of ………… equipments and machines reconditioned and presented as new, and fraudulent transfer such as occurred with the Johnson Matthew Bank (JMB) involving multi-billion Naira fraud as well as many other cases revealed by specials set us since the Buhari Administration over in voicing sale of Naira in western markets at a very low rates are taken into account (Nig. Inst for inter affairs 1989).

It has been maintained that the major interest of these Nigerian share holders, directors, managers, properly owners, transporters, dealers, layers, accountants, and contractors is to make as much as money as possible an keep most of them aboard in the countries of these multinationals.  It is also important to indicate the sectors in which the foreign direct investment has tended to contract in order to establish their pervasive impact on the political economy.  Cumulative investment in the manufacturing and processing sector increase form N06.2 million in 1975 to N550.7 million 1976 and N703.8 million in 1977.  Evidence exists to show that claim that they are agents of industrialization and technological development can be amply faulted following the policy of import substitution instituted during the colonial period, when there was a marked absence or a viable industrial and technological base, the post independence era had witnessed no major break through in technology being dominated by low technology light industries.  The dependence, which is move acute in the high intensive technology sector like oil and iron and steel, is replicated by and large in the other industrial sectors including the construction of automobiles sectors where imparted inputs constitute from 60 – 80% of inputs under the circumstances it is not surprising that the auto injuries in which local participation has gone up to 60% are able to hold the Nigeria government to ransom by frequently excessive increases in prizes, shutdown and resentments.  Despite the involvement of the multinational corporations ion these sector, Nigeria remains technologically under developed.  The blame however blame cannot be placed solely on the Nigerian state and the ruling class, which by various accommodative policies have encouraged this pattern of development under development since independence.  They have done so by promoting the illusion that multinational corporation are interested in developing the technological capacity of Nigerians and by offering them incentives fiscal and other forms of protection, which encouraged in efficient local resources, lack of seriousness in implementing the expatriate quota system which is apparently intended to stimulate local training progressive replacement of expatriates by Nigeria by a series of policies and legislation which emphasize transfer rather than local development of technology (NAII, 1989).  More importantly, the list of directors and shareholders in joint ventures in which the multinational corporations control is a list of retired generals, permanent secretaries to government functionaries, traditional rulers all of whom are strategically located in the power structure or have substantial influence in government policies or access to decision makers.  Allies of foreign capital, these petty bourgeoisies serve the interest since despite independence the center for deliberation still lies outside.  They as client of the state and the multinational corporations, from the third arm of the new colonial triangle and are not in a position to quantitatively shape the political economy (NIIA,1989).

The multinational corporation expansion could not have occurred on the scale achieved without the financial contribution of the world’s international banks.  Indeed, the transnational bank (TBN) has itself also become a major actor and price in the global political economy.  In 1985, the combined assets of the world’s twenty five largest banks has grown to $2.6 trillion a figure nearly triple the combined sales of the twenty five largest industrial firms.  Reflecting trends elsewhere in the transforming global economy, 1985 five of the ten largest banks were Japanese, whereas in 1987 only one of the ten largest banks was Japanese (center in transnational corporation, 1987 –40).

Regulating the activities of multinational corporations in the third world countries quite differs from that of the industrialized states.  Host government in industrialized state are frequently more concerned about the integration of foreign owned branch plants into the domestic economy than they are about their location.  Multinational corporations, which make substantial domestic sales involving a significant import, content, notable in high technology sectors; can create adverse balance of payment effects.  In so far as branch plant rely on flows of in-house good and services provided by the corporate parent, they create fewer demand for output of local firms (Britton, 1976) and generate employment characterized by a truncated occupational profile, one which lack serious managerial position on research and development (RSD) functions (Hayter, 1982).

Nations such as the United kingdom and France are in a stronger position to exert pressure on multinational corporations to organize their business in ways which promote national interests that are nations in the third world, which face similar problems.  The allocation of public sector spending is itself a powerful instrument to encourage desired pattern of behaviour.  The organization of IBM in western Europe represents on response to demands that if act as a good corporate citizen, albeit at the loss of some efficiency.  Production plant are so located that value added in given country is in fair proportion to JBM sales come from states where there some effort is made to ensure that bought import come from states where there is no direct manufacturing (the economist, 29 October 1977, pg 2).

2.5      THE EFFECT OF MULTINATIONAL ON THE INVESTING COUNTRY

The time perspective plays an important role for the balance of payments of the investing country’s.  If the investment in the country is given 21.4 one injection, it would take six years for it to pay off, in the sense that the balance of payments of the investing country would again be positive.  If the direct investment, instead, consisted of a steady flow of $100 million per years, it would take eleven years to reach equilibrium, if the flow of direct investment increased by 22 percent per year, it would never pay off.

In the long run, direct investment ought to have a positive effect on the investing country’s balance of payments.  This is especially the case if the flow of direct investment is steady.  We can see this effect today on investment from the United State and some other developed countries in their dealings with several developing countries (DC’s).  If the flow sharply increases, there could be marked adverse effects on the balance of payments.  Direct investments undoubtedly strained the United State external position in the late 1950’s and 1960’s.

Other problems that could arise are more concerned with real factor with the increasing of nay single own independent economic policy become circumscribed.  Corporations could gather in one country to work out pricing and market arrangements for another country.  As long as there is no international legislation concerning taxes, restrictive business practices, e.t.c. any single country will difficulties in efficiently implementing its own law.

Earning on us direct investment aboard (percentages of book value at the beginning of the year).