How useful are Multinational Corporations?
I have read Dr Opiyo-Oloya and Miss Pamela Birungi’s responses to Dr Charles Mugoya’s comments on Genetically Modified Crops (GMCs). For the record, Charles was my best friend in our P7 class – so I have kept my response professional.
Charles apparently wrote an article comprising two distinct but related fields – the science of GMCs, and a bit of economics where stated that, ‘…the people of Uganda need Monsanto more than it needs us…, etc’.
This article clarifies Charles and many others’ perceptions about the usefulness of investment commonly known as Foreign Direct Investment (FDI) undertaken by international companies, including Monsanto. An extensive review can be found in my book ‘Globalisation, FDI, Regional Integration and Sustainable Development, Aldershot, Ashgate, 2002’.
You must have heard the phrases, ‘…the customer comes first’, and ‘…the customer is always right’. These phrases aren’t entirely true for publicly listed companies, particularly transnational corporations (TNCs), including Monsanto.
A shareholder is a TNC’s most important person. The main objective of a TNC is therefore to foster strategies that maximise profits and hence dividends for the shareholders. This was evident recently when British Petroleum initially prioritised dividends payment despite being the focal point of the disastrous oil spill.
So, when Monsanto’s strategists discuss its internationalisation strategies, are their objectives to create jobs, transfer technology, pay taxes, develop human capital, stimulate international trade, etc, for the host country?
No. The benefits any host country accrues from Monsanto’s investment are mere spillovers from the physical investment, not deliberate strategies. Monsanto’s strategists instead discuss opportunities that will create either immediate or future benefits for its shareholders. This could either be product or a market development.
Product development is out of question in the Monsanto-Uganda case because it is undertaken in-house at Monsanto’s headquarters where the necessary resources are abundant. So the option left on the table is market development, which could be achieved through either licensing arrangements, exporting or physically investment commonly known as FDI.
A TNC will pursue FDI if it can exploit simultaneously three advantages.
- The ownership advantage – which outweighs its disadvantage of being foreign. It arises from the possession of relatively large amounts of firm-specific assets – production technology, financial resources, managerial resources and marketing techniques. They give TNCs a competitive edge.
- The host country’s locational advantages – these attract physical investment in the host country, which serves the market of the host country, or uses it as an export base – a large or a potential domestic market (purchasing power), availability of natural resources, abundant low-cost high quality labour, low infrastructure costs, generous investment incentives, lax pollution controls, political stability, and sound macro-economic policies, etc.
- Internalisation advantage – it induces the company to choose between FDI over the arms-length arrangements such as production licensing arrangements. It includes the desire to diversify and minimise the risk of investing in one country.
Monsanto’s strategists have to consider two investment strategies – market-seeking and resource-based. The market-seeking strategy is pursued to supply the local market, when the local market size (purchasing power) is either large or it has future potential. Neither Ugandan or the larger Eastern Africa currently qualifies for this.
The resource-based strategy comprises:
- Raw material seeking FDI – to extract raw materials, either for export to other countries or for further processing and sale in the host country or other countries. This type of FDI is undertaken to ensure availability, and reduce uncertainty and risk in the provision of raw materials.
- Export platform FDI – mostly associated with production in countries where one or more of the factors of production (capital, labour or land) are under-priced relative to their productivity.
In Monsanto-Uganda’s case, export platform FDI is the undisputable strategy. In addition to the extremely under-priced land and labour, Ugandais blessed with both excellent weather and fertile land almost unmatched elsewhere in the world. You can plant a seed in a bush, and you won’t fail to harvest a crop even without weeding!
Not all FDI is always and automatically in the best interests of the host country. In fact, FDI can have adverse effects on the host country’s development. Whereas governments seek to spur national development, TNCs seek to enhance their own competitiveness moreover, in the international context. Therefore, TNCs’ strategies aren’t devoted to the development of host countries.
At best, FDI offers a mixture of positive and negative effects. This is a market failure which can be corrected through governments’ pre- and post-investment intervention.
The pre-investment intervention is through investment targeting. The host country identifies a few priority competitive sectors/industries, and targets companies whose objectives and potential benefits support the country’s development objectives.
But, the complexity of the FDI package means that host countries face trade-offs between different benefits and objectives. They may have to choose between FDI that offers short as opposed to long-term benefits. Short-term benefits may lead to static (one-off) gains, but not necessarily to dynamic (sustained) gains.
The real test comes during the post-investment period. In the Monsanto-Uganda case, the need for constant monitoring to ensure that Monsanto doesn’t abuse its position is paramount. This monitoring is best done by people like Charles who are knowledgeable in the GMC science.
Unfortunately, we are starting from a negative point where Charles believes Monsanto is doing Uganda a favour. Worse still, we can’t overlook potential problems resulting from weak morals, job insecurity, corrupt cultures, etc. Monsanto could use its financial muscle to ensure that the ‘rusting joints’ of the officers in charge of monitoring are well oiled! What do you think these officers will monitor – ‘joints oiling’ or ‘Monsanto’?