Transnational Corporations
Business in International Comparative Perspective
Topic: To what extent should government policy give greater priority to managing the contribution of transnational corporations to national economic success?
Introduction
Transnational corporations play an imperative role in a country’s development and foreign direct investment is considered among the most widely used approaches for economic growth in developing nations. The extent to which the government policy should give priority to managing transnational corporations’ contributions to national economic success is however a subject of debate. Depending on the national goals, the government may place stringent or relaxed measures in managing transnational corporations.
China is among the countries that have embraced foreign direct investment and whose policies on transnational corporations have been geared towards supporting their contribution to the economy. Accordingly, China’s foreign direct policies have contributed significantly to its current economic state, making it among the rapidly growing countries in the world in terms of economic growth. As the country continues to advance economically, local companies have demonstrated exponential growth; with an observable growth in the number of transnational companies.
Expectedly, these Chinese companies operating internationally are contributing a substantial proportion of the country’s income. It is for this reason that China is highly supportive of companies that invest internationally, ensuring that they can support the national economic success. However, China is yet to put in place vital laws and regulations aimed at protecting or advancing international business expansion.
This paper is a discussion of the extent to which government policy should prioritise the management of transnational corporations’ contribution to economic success. It seeks to recommend whether China should expand its investments and business to Britain and Japan through comparing competitive advantages and disadvantages of the two countries. It also details the lessons learnt with regards to government policy and managing transnational corporations’ contribution to economic growth, besides giving policy recommendations with reference to China’s policy formulation towards host economies.
Government policy and the contribution of transnational corporations in China
A number of studies have established that government policies are highly influential in the activities of transnational corporations. Through policy, the government can easily control the growth rate of transnational companies and thereby influence their contribution to the economy (Tihanyi et al, 2015).Cardoza, et al (2015) sought to study whether government policy has an impact on international expansion of transnational corporations; concluding that government policy can determine the performance of transnational companies and hence influence economic performance.
According to Cardoza et al (2015), governments should actively influence the contribution of transnational economies in order to maximize the gains derived from them. This may be achieved through encouraging international expansion, based on policies that support the growth of transnational corporations. Chow (2016) and OECD (2012) identify state ownership, public financing, assistance programs and regulatory frameworks as some of the policy issues that may influence transnational corporations’ contribution to the economy.
China’s economic growth has to a great extent been associated with foreign direct investment (FDI). In a bid to promote economic growth, China’s policy on FDI was considerably accommodating, thus leading to an influx in foreign companies that sought to take advantage of cheap labour and raw materials (Chow, 2016). However, the increasing number of foreign corporations almost proved unmanageable and China had to put in place more stringent measures to control FDI and to protect the local industries.
In contrast, China has shown great support for local companies investing internationally, with an aim of growing local organizations while ensuring that the country gains more from international trade (Das, 2015). It is evident that the number of transnational companies in China has grown tremendously over the years, a process that is attributed to increased globalization and government support for transnational companies.
The government is encouraging companies to invest internationally through its ‘go global’ strategy. Established in 1999, the policy as aimed at promoting large enterprise internationalisation through offering financial resource accessibility and state-supported research (Chow, 2016). The policy which has been instrumental in Chinese multinational company expansion ensured that companies could access below-market rate capital in the form of soft and subsidised loans from state-owned banks. This policy greatly influenced the growth of transnational corporations in China.
In 2002, the SME Promotion Law was adopted, with an objective of persuading financial institutions to make financing available to small and medium sized companies. As a result, a considerable number of SMEs have expanded globally and account for 70% of exports in China (Chow, 2016).
Government tax incentives issued by China on transnational corporations ensure that companies can reinvest their proceeds in the country and thus contribute to economic development. In China, transnational corporations can get a 40% refund on profits which are re-invested to increase the firm’s capital or develop a new firm (UNCTAD, 2016). The tax refund is only applicable if the company has re-invested the capital for five years. Such an incentive not only encourages business growth but it also ensures that money earned from international business is beneficial to the economy.
Reduced corporate tax for businesses exploring overseas expansion has also been instrumental in influencing the growth of transnational corporations and consequently their increased contribution to the economy (UNCTAD, 2016). Therefore, government control through policies can play an important role in ensuring that transnational economies can contribute to economic performance.
The stringent measures taken by the Chinese government in managing multinational companies in the country has had a direct impact on local companies. As the country seeks to protect domestic industries, there has been exponential growth among small and medium firms, many of which are exploring international possibilities in a bid to expand their businesses.
Britain’s competitive advantages and disadvantages
Advantages
Britain’s competitive advantages are mostly associated with the friendly business environment. Britain is considerably open to foreign investment and the equal opportunities are given in private company formation and operation (UKTI, 2016). There are no special national requirements, except that one of the company’s directors must reside in the UK. Accordingly, the government is keen on defending all businesses despite their ownership nationality.
This makes investing in Britain highly favourable for foreign firms. In addition, Britain is a key economy and is known as an export platform linking with most major economies, and hence a suitable investment destination (Ernst & Young, 2016).
Britain is considered one of the strongest world economies in the globe. By this virtue, Britain is a favourable destination for international business. Other economic advantages include skilled labour availability, advanced infrastructure, low inflation, low taxation and government commitment to economic reform including privatization and deregulation.
Britain enjoys a relatively stable political environment. This is a major prerequisite for successful international business as it ensures productivity and return on investments. Dittmer (2016) notes that political instability could affect business significantly through disrupting operations, hence the need for organizations to assess a target country’s political environment.
Britain’s membership in various trade alliances presents a major advantage as it means that the country has a wide market for its products. Britain belongs to the Commonwealth of Nations, United Nations, OECD, G7, G8, G20, and the World Trade Organisation among others.
Disadvantages
Britain’s heavy taxation and regulations place the country at a disadvantage and has been a constant barrier for investment. 21% in corporate tax is charged on profits that exceed $ 2.1 million (UKTI, 2016). This is because foreign companies have to sacrifice a significant portion of their income towards tax and other legal requirements.
Britain’s economic performance has slowed considerably, a factor associated with global trends, the recent recessions and the country’s housing market slump (Stepek, 2012). Declining economic performance has a considerable impact on business proceeds for companies investing in Britain.
Britain’s EU exit, which has been christened ‘Brexit’ is currently considered a disadvantage because of the uncertainty that engulfs the country’s decision to exit. It has been argued that this may lead to trade imbalances and affect Britain’s international trade prospects. According to BBC News (2016a), the future trading relationship between EU and Britain is uncertain and this may impact the economy through lower levels of investment and reduced consumer spending, from 2.5% expected this year to 0.5% next year. Economic growth is thereby expected to slow down considerably before the country stabilizes.
Japan’s competitive advantages and disadvantages
Advantages
Japan is among the best performing economies globally, with the country being ranked the third largest based on nominal GDP (Agr, 2014). Japan’s per capita GDP was $37,519 in 2014. The country is known to achieve trade and international investment surplus.
Japan is considered among the countries with the highest innovation and this has propelled the economy to a great extent. The country is the home of manufacturing companies and innovations including vehicles, machinery and technology. Japan’s automobile industry is the 3rd largest in the globe while the electronics products industry is the largest.
Foreign companies investing in Japan can benefit from the accommodating foreign investment rules. Japan is generally considered as a friendly international business destination based on the ease of business. According to the 2013 ease of doing business index, Japan was ranked 27th out of 185 countries (Agr, 2014).
Entry of foreign of companies in Japan is considerably easy and the country is considered as having among the lowest tax rates globally for consumption and personal income taxes. Japan also has among the leading stock exchanges in the globe, following the merger of Tokyo and Osaka Stock Exchanges (BBC News, 2016b).
Disadvantages
Japan’s currency exchange is highly volatile and this makes it prone to economic fluctuations. Due to the volatility, the country’s GDP in terms of dollars oscillates significantly. The currency fluctuations can be a major short-coming for foreign companies because they are likely to experience major losses in the process of transferring funds back to their countries and during the process of exporting and importing raw materials and finished goods (Yildirim & Ivrendi, 2016).
While the government is easy on personal and consumption tax, corporate tax is relatively high at 36.8% and considered second highest globally (Temple-West & Dixon, 2012). A high tax bracket can limit business performance exceedingly by impacting on profitability. Organizations that seek to invest in Japan must evaluate their strategy to determine whether it would be profitable to invest in the country.
Japan is currently experiencing a shrinking workforce and this is likely to influence companies’ ability to access skilled workforce. This can be explained by the decline in birth rate and the country’s immigration barriers (Takao, 2014).
Lessons to be learnt with regards to government policy and the contribution of transnational corporations
Transnational corporations experience constant challenges in the quest to successfully profit from their international business endeavours. Accordingly, they require adequate support from the government through policies that favour their international competitiveness.
The first lesson derived from this discussion is that while transnational corporations play an imperative role in driving a country’s economy, ensuring international success requires considerable support from the government (Marinov & Marinova, 2012). Through this paper, it can be established that having targeted policies that recognize the contribution of transnational corporations in economic success is highly necessary.
Despite the efforts by the Chinese government to encourage foreign investment, the country must put in place dedicated efforts to develop effective policies to protect transnational companies. According to Chen (2014), a majority of private enterprises in China are still in the development stages as far as international expansion is concerned. They are not only small-scale but also lack basic support in terms of laws protecting their transnational operations.
Chen (2014) notes that the government needs to develop an overseas investment and insurance legislation, institute financial lending mechanisms and support innovation and technology development. It is notable that Chinese companies face considerable resistance in the international market due to business culture differences that impact on profitability margins. An example is that Chinese firms focus on the production of cheap products, which are often labour intensive, such that their profitability overseas is greatly dwarfed by competitors.
Creating trade alliances with various countries can contribute significantly to promoting the contribution of transnational corporations to a country’s economy. Backer (2015) note that by creating trade relations with foreign countries, an economy can benefit from tax benefits and more favourable environment for their businesses abroad.
This makes it easier for transnational corporations to survive in the foreign market and thereby contribute more to national economic performance. China must strive to forge new trade treaties and put in place policies that support such alliances, with countries in which it targets for investment. This way, businesses can gain an easy mode of entry and also benefit from higher profitability levels.
Circumstances and evidence for China in formulating policy towards host countries Britain and Japan
As the economy of China continues to grow, it is evident that the level of global competition has grown significantly. In order to position itself for further economic growth, China must formulate policy that will ensure that its economic growth prospects are assured (Mesquita, 2013). Through formulating policy towards host countries, China can influence its operations in those countries and consequently its economic performance.
Surviving in a foreign economy can be daunting for transnational organisations due to high competition. Accordingly, the formulation of policy must be done with the objective of protecting local companies in the host countries and ensuring that they are profitable enough to sustain their activities overseas. This insinuates that the government can develop policy that reduces transnational corporates’ expenditure if they invest in Britain or Japan. This way, the country can encourage companies to invest in those countries.
Formulating policy towards host countries ensures cooperation between a country and the host, given that there are clear guidelines on their relationship (Mesquita, 2013). This includes the kind of environment that the country’s businesses operate in. It therefore becomes clear for companies that seek to invest in the host countries, about the business environment they are expected to operate in.
Glass & Saggi (2014) explore the question of tax policies and determine that such policies are likely to affect foreign direct investment. Cognisant of this, developing policies that seek to influence host countries into offering favourable tax policies may be effective in promoting transnational corporation expansion into the host countries. In Britain for example, the high tax rates may discourage Chinese companies from investing in the country and by formulating policy towards Britain, China may influence the tax rates and hence encourage investment in this economy.
Conclusions and recommendations
Effective economic contribution by transnational corporations is dependent on various factors, among them the level of support offered by the government in their quest to venture overseas. This includes the policies adopted to support international business and promote performance of transnational corporations. In essence, the government should to a great extent influence transnational corporations’ economic contribution through its policies.
In order to maximize the performance of its transnational corporations, China must strategically make policies aimed at improving their international market survival. This will ensure that they can compete effectively and that they have adequate returns to bring back home. Through developing various regulations including taxation policies that favour international expansion, making funding easily available for budding transnational corporations and easing international trade barriers, China could effectively utilize policy to influence transnational corporations’ contribution to the economy.
Japan and Britain both offer great prospects for China in terms of foreign investment. Being among the world’s largest economies, Japan and Britain present favourable investment destinations for transnational corporations in China. Britain offers great investment opportunities in a country with a stable economic and political environment, which are major prerequisites for business growth.
As a country that is highly developed, transnational companies from China stand to gain considerable international experience through investing in Britain. Besides, Britain promises a wide market for products due to its numerous memberships in international trade alliances. In Japan, it is evident that economic growth is at its peak, as the country continues to rank among the top economic performers in the world. This promises great opportunities for Chinese companies that invest in Japan.
It is notable that despite the attractiveness of host countries, there are always shortcomings or comparative disadvantages that a company must explore before making a decision to invest. Based on this discussion, it is evident that Britain and Japan are characterised by various disadvantages, with the main one for Britain being the uncertainty associated with Brexit and for Japan the currency exchange volatility. Accordingly, China must weigh its options before investing.
A comparison between the advantages and disadvantages of investing in Japan and Britain indicates that Britain have great prospects for international trade. While disadvantages exist, these are outweighed by the advantages. In conclusion, China should seek to promote trade relations with Japan and Britain, with the objective of expanding business and investing in these countries.
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