There are two ways in which multi-national businesses may manifest. In one case, a company maintains operations to provide goods and services in another country and is completely self-contained. In other words, the goods/services provided are provided by individuals in that country for individuals in that country. This is simply another closed system(1), albeit with a company that originated elsewhere.
The other case, is where segments of production exist in various locations with the products of its efforts being directed indiscriminately to whatever global markets exist. In this situation, we have a complex economic situation whereby the means of production and consumption do not have a precise definition. Various systems may be used to exploit each other or to gain advantage which can create a very aggressive business strategy.
However, despite what many people may feel, economics isn’t about business, it’s about society. Success or failure in business is not the purpose of economic theory, but rather it is a social science that is intended to model how societies can operate under these conditions.
Therefore despite how successful a particular business strategy may be, it is incumbent on economic theory to also consider the effect on the supporting societies. In a previous post I indicated that the relationship between supply and demand is largely symbiotic in that both sides benefit by operating within the closed system. In an open system, the relationship becomes parasitic whereby the business exploits various sectors without any need to provide benefit. I want to be careful to ensure that this statement is not intended as a value judgment regarding business. I’m not suggesting that such businesses are evil or bad, but rather that they operate as a direct consequence of how their operation is organized. In economic theory, we need to establish an explanation that helps us understand whether such an arrangement provides benefit or not and to whom.
Just as communism had flaws because of its dependency on altruistic behaviors, so does the idea of the unfettered multi-national corporation have flaws in its ability to disrupt the underlying societies it exploits.
Consider a company X operating in country A which is the intended target for its products. The labor however exists in country B. The company X is increasing the money available in country B which increases the demand side, while decreasing the money available in country A which reduces the demand side. In this simple example, it is clear that the company X could not sell any products in country A because there can be no demand (money = $0). However, when we add other companies, it becomes clear that the company X is depending on other companies subsidizing the demand side to create a revenue stream for its products. In other words, company X has become a parasite on that society by draining resources. Similarly if other companies are available in country B to exploit the increased demand, that economy will tend to grow as resources are infused into the system.
No matter how such a scenario is viewed, invariably country A’s economy must decline while country B’s economy will grow(2). Often this discussion is couched in terms of competition, but there is no competition since it is the same company operating in both countries.
One of the effects of such globalization is that many countries can more readily compete on the labor front because of lower standards of living or laws that effect labor. However, in the arena of foreign trade, this becomes part of the political environment to ensure that parity is achieved by the use of tariffs to equalize competition. The failure to do so will result in a “race to the bottom” so that only the cheapest solution will prevail. Once again, this type of activity doesn’t raise the standard of living, it lowers it for all involved.
Whether a company benefits from such choices is immaterial, since (as I’ve already stated) it is not the purpose of economic theory to produce profitable companies. Instead economic theory needs to be able to guide public policy so that the actions of individual companies doesn’t decimate the societies in which they operate.
(1) The concept of the closed system is intended to demonstrate how the distribution of resources is symbiotic between the supply and demand side. Companies provide wages which fuels the demand side, which generates income for the supply side. This cycle of money represents a closed system. If one of the parties can go outside of this cycle, then clearly the model doesn’t not represent the complete flow of money and does not represent a supply/demand model
(2) This is an obviously simplified example, in that we are examining the behavior of one group of consumers (demand) and one group of suppliers only. The point is only that if a company doesn’t put resources into the system (i.e. wages to consumers), then it can only be said to extract resources (i.e. income from products).