Will Multinational Company prove beneficial or harmful in the long run in context of Bangladesh?
...to finance the acquisition of German equipment by a subsidiary in Bangladesh, a Swiss-based pharmaceutical firm may use capital raised in London on the Euro-dollar market. The growth of technology and “ know-how” and cross-country labour movements have generated a new global environment for economic activities. “The new economy” or “economies of scale” are some of the new phenomena in the arena of business operations. Information technology also makes it possible for worker skills to flow with little regard to borders. As a result, the global economy is faced with a dichotomy between international competitiveness and broad macro-economic differences among countries. Central to these changes are the operations of MNCs. MNCs in Bangladesh The Indian subcontinent has been a region for the operations of multinationals for centuries. The advent of the Dutch East India Company in the sixteenth century exposed this part of the world to foreign capital. Subsequently, the British Raj maintained relative economic openness of this colonial territory as an economic unit in the imperial global order in order to facilitate its economic exploitation. However, following decolonization in the late 1940s, newly emerged independent countries of South Asia opted for inward looking protective economic policies. Tariff, and even more importantly, non-tariff barriers were extremely high, state interventions in economic activity had become pervasive, attitudes to foreign investments were negative, often hostile, and stringent exchange controls were in place. As a result, the activity of MNCs was very limited. But with changes in economic policies towards more liberalization, FDI started to reach this region. The operations of MNCs in Bangladesh are very limited compared to other developing countries, particularly the dynamic Asian economies. Despite instituting far-reaching economic reforms in recent years, FDI inflow into Bangladesh remains scanty. As seen from Table below, FDI inflow into Bangladesh started in 1977 following the bloody change of regime in 1975. But until the early 1990s, it remained negligible. The expansion of FDI is clearly related to the speed of economic liberalization that took momentum under the Khaleda Zia regime. While looking at the nature of FDI, it is observed that it mainly takes the form of joint ventures with local investors. The MNCs which have formed joint ventures with local investors include: Fisons, Rhon-Poulenc, General Electric Co., Reckit and Colman, Lever Brothers, Glaxo, ICI, Berger Paints, Avery, and Burmah Eastern from the UK; Singer, Squibb, Pfizer, and the producers of Coca Cola and Pepsi from the US; Bata and Milners from Canada; Siemens, BASF, and Hoechst from Germany; Philips and Organon from the Netherlands; and Swedish Motors from Sweden.81 In addition, there were “100 per cent equity”, “nonequity” and “licensing” forms of foreign investments in Bangladesh. Table: Flow of FDI into Bangladesh (in million US$) Year Amount sanctioned Year Amount sanctioned 1972 1975 1977 1980 1983 1985 1987 1990 Nil Nil 0.68 3.48 25.62 6.21 51.96 60.27 1991-2 1993-4 1995-6 1996-7 1997-8 1998-9 1999–2000 25 804 1,516 1,054 3,440 1,926 2,119 Source: Board of Investment, Government of Bangladesh It reveals that the commodity-wise composition of FDI has undergone significant changes over the years. Since 1991 when there was significant rise of FDI, the sectoral composition fluctuates in different years. FDI has not been confined to a certain sector for any considerable period. Another interesting observation is that FDI in the manufacturing sector is very low, while it is booming in the service industries. Table: Commodity Group-Wise FDI in Bangladesh (US$ million) Commodity group 1991–2 1993–4 1995–6 1997–8 1999– 2000 Agro-based industries 0.665 16.75 46.258 8.652 6.46 Food and allied industries 11.075 3.425 32.865 377.618 2.62 Textile industries 7.325 360.275 96.367 101.124 44.58 Printing and publishing 0.050 1.1 0.993 0.00 0.2 Tannery, leather and rubber 3.125 4.850 16.202 22.989 0.68 Chemical industries 0.125 372.050 561.443 58.697 1,045.78 Glass, ceramics and non-metallic 0.00 7.90 47.033 108.315 154.44 Engineering industries 1.175 24.1 162.146 11.57311.573 22.8 Service industries 0.00 9.075 62.630 2484.18 837.76 Miscellaneous 1.900 4.6 490.361 266.831 3.48 Source: Board of Investment, Government of Bangladesh With regard to the inflow of FDI into Bangladesh, it is observed that in the 1970s, the Western industrialized countries dominated foreign investment, while in the late 1980s and the 1990s, the Newly Industrializing Economies (NIEs) of East Asia made significant strides. However, Bangladesh presently receives FDI significantly from both Western and Asian sources. Having discussed the extent of MNCs’ operations and FDI inflows in Bangladesh, we briefly examine the impact of FDI on Bangladesh. Historically, like many conservative developing nations in Latin America, Africa and Asia during the 1950s and 1960s, Bangladesh maintained a considerably regulated environment for MNCs’ operations. Even the Ershad regime (which was famous for implementing World Bank–IMF guided Structural Adjustment Programmes (or SAPs) in Bangladesh) was suspicious about the operations of MNCs. For example, in the mid-1980s, the Ershad regime introduced a new Drug Policy prohibiting production of several medicines/tonics mainly manufactured by MNCs, which has undoubtedly discouraged foreign investment in the pharmaceutical industry. As already noted, the significant expansion of MNCs’ operations through FDI took place in the early 1990s. The concentration of FDI is in a few sectors like readymade garments, textiles and knitwear operating in the export processing zones. Theoretically, FDI is supposed to contribute to the economy of Bangladesh as a recipient country in various ways. Most notably, transfer of technology appears to be contributing to the economic development of Bangladesh. Interestingly, as foreign investment in Bangladesh is largely labour-intensive, it has very limited contribution to technology transfer. As Reza and Rashid claim, only 4 per cent of FDI comes in the form of capital equipment.83 Another rationale for attracting FDI is to fill the resources gap in Bangladesh between desired investment and local savings. In other words, the imperative of capital formation plays a critical role in wooing FDI. However, in reality, Bangladesh has not been successful in this effort given the very low level of FDI inflows into that country. But the greatest contribution of FDI in Bangladesh lies in employment generation. Since the most attractive comparative advantage for Bangladesh is the abundance of low-cost labour, it receives increasing attention of MNCs. As a result, because of the small volume and highly labour-intensive nature, FDI has failed to play an important role in economic development as observed in the case of late industrialized countries. However, in the pursuit of market economy under conditions of globalization, Bangladesh is increasingly dependent on FDI inflows for achieving the desired economic development. More significantly, dwindling foreign aid compels the country to look for FDI more and more. The incentive structure for attracting FDI reveals the fact that unlike past regimes of the 1970s and 1980s, present political regimes take a highly positive approach towards MNCs. All controversy and debate centring around the operations of MNCs are a matter of the past. Ironically, for MNCs, the reality is somewhat paradoxical. The operations of MNCs have been generating new questions on the extent MNCs could contribute to the development of Bangladesh. It is true that the process of globalization empowered MNCs with more globally binding rules and regulations for host countries as successfully architectured by the OECD, World Bank, World Trade Organization, etc. Unlike the Cold War era, MNCs are now guided by self-regulation or the regulations created by the OECD. Amid such growing power of MNCs, Bangladesh faces the daunting task of making sense from the increasing involvement of FDI in the Bangladesh economy in the changed global environment. In this context, the issue of sustainable development becomes a major concern for this country. While it is undeniable that MNCs have a positive impact on economic development, their unfettered activity could jeopardize the interests of the country. A case in point is the Magurchara gas explosion. We examine this case to illustrate how the operations of MNCs generate the imperative for sustainable development to ensure mutual gains. Effects MNCs operation Techno-economic Implications It is generally assumed that MNCs contribute to domestic economies through capital formation, employment creation, and transfer of technology. Tons of theoretical and empirical studies demonstrate that developing countries desperately require those elements for industrialization. The case of NICs of East and South-East Asia is repeatedly illustrated to show empirical evidence behind the proposition that FDI contributes to development of host countries. The situation becomes bewildering when we observe that the countries of Latin America, South Asia and Africa having been exposed to MNCs’ operations for decades, failed to flourish economically. The FDI/MNCs that made an important contribution to the miraculous economic development of East Asia have failed to do the same in other countries. Let us identify the specific areas of the problem related to MNCs in Bangladesh and South Asia. Table: Economic Costs and Benefits of MNCs Benefits Costs Economic growth Technology transfer Employment generation Trickle down effect Market competition Capital formation Access to foreign markets Breaking monopoly Economic dependency Limited technology transfer Unemployment Disappearance of local firms Enclave effect Foreign market dominated by MNCs Abuse of dominant position International cartels Technological acquisition Resource exploitation Table shows that MNCs could facilitate economic development as well as create hindrances for it in many different ways. Most of the negative techno-economic implications for domestic economies have long been discussed in various studies. These are not new in any case. The fact is that they continue to exist, so are not irrelevant. Rather, the process of globalization draws our attention to these issues more pointedly. Now the question is as to how these problems are generated by MNCs. A variety of reasons are responsible. Williamson, Buckley and Casson demonstrated that MNCs can internalize markets within the industrial organization through their capabilities of using information. This establishes the superiority of MNCs vis-à-vis domestic firms in the market. It reduces transaction costs, creates market imperfections in their favor, and confines valuable technology within their organizations. In many cases, this results in the disappearance of domestic firms. Second, most MNCs indulge in the strategy of transfer pricing to evade tax in host countries. “Transfer pricing” is the process of transforming financial resources by overcharging or undercharging the exchanged commodities. The unfair practice of transfer pricing deprives host economies of receiving revenue. Third, MNCs make the process of transfer of technology difficult, if not impossible, by imposing higher prices and creating unnecessary barriers to local acquisition of technology. They concentrate their R&D in home countries, restricting the transfer of modern technology and know-how to host countries. In many cases, they enter these markets through outright purchase rather than developing new production facilities in host countries. Last, multinationals are charged with resource exploitation disregarding the economic and social consequences for host countries. The oil and gas sector is a classical case in point. Most recently, they are charged with bio-piracy stealing genetic materials and traditional knowledge from indigenous communities and patenting them. For instance, India’s neem tree is the subject of patents, mainly for the pesticide properties of the plant. Local users who have long known and benefited from the tree’s properties get nothing for the appropriation of this knowledge by European and US firms. Plant-derived sweeteners long nurtured by Indian farmers and painkillers developed in China have been stolen by MNCs. As a result, various local communities are actively engaged in campaigns in order to free “genetic resources” from the exploitation of transnational agribusiness corporations. Environmental Effects By their extensive operations all over the world, MNCs have emerged as the major polluters of the environment in the present-day world. It is estimated that MNCs are responsible for 50 per cent of global CO2 emission and 20 per cent of global warming, the causes being as follows. • Transboundary pollution. • Environmental hazards. • Transboundary exports of hazardous things. • Problem of health and safety of workers. • Inadequate disaster preparedness. From the above, it can be observed that the operations of MNCs have deeper implications for the environments of host countries. The categories of environmental effects differ based on the nature of an MNC’s activity, and the strategies and behavior of the companies. In Bangladesh, most of these categories are seen. Pollution, inappropriate disaster preparedness and inept waste management are the major environmental concerns related to the operations of MNCs in this region. The environmental NGOs in Bangladesh target all kinds of MNCs, particularly those in the oil and gas sector as destroyers of the ecological balance, thus depicting these corporations as threats to sustainable development. The Magurchara accident in 1997 in Bangladesh show us how MNCs can create environmental problems and health hazards. THE MAGURCHARA GAS FIELD DISASTER The oil and gas sector in Bangladesh has seen rapid development with government as well as private-sector investments already having been made and many more in the immediate pipeline. One of the issues facing all the investors in the oil and gas sector is the appropriate environmental guidelines that need to be followed. A few years ago, with the bidding process on different gas and oil blocks under way, there was tremendous optimism over Bangladesh’s economic future. The country looked set to “emerge as South Asia’s next success story”. The gas production that came on line recently under a previous Production Sharing Contract (PSC) appears to be costing the country millions of dollars instead of making money. One of the major causes behind such pessimism is the experience of the Magurchara gas explosion. The Magurchara gas field disaster illustrates the necessity of environmental control in the operations of MNCs in host countries. This disaster was the result of a massive explosion of a gas well when the multinational oil company Occidental started drilling its first well at Magurchara, Moulavibazar. The accident that took place on 15 June 1997 is a great tragedy in the history of MNCs’ operations in Bangladesh. Magurchara gas field is situated in block no. 14 of Surma basin, which is very rich in hydrocarbon reserves. Occidental discovered the Magurchara gas field in 1989. Petro Bangla signed a production-sharing contract with the Occidental International Exploration and Production Company, USA in January 1995.86 After necessary survey of the geophysical condition of the area, the company started drilling its first well. Why did the Explosion Take Place? Although Occidental termed it “human error” or “simply an accident”, experts in Bangladesh considered the probable reason behind this disaster as lack of sufficient precaution by Occidental when it started drilling such a huge and costly gas well. The company has been held responsible for negligence in the blowout. According to a local expert, usually in this situation, heavy mud or chemical substances are used to prevent the upward flow of gas. Probably Occidental could not do it properly. According to another expert, the cementing operation at the time of drilling was faulty. It was seen at the time of accident that one pump was operating erratically. The explosion was caused by lack of proper management skills of...