Essay On How Large Firms Contribute To The Country’s Economic Growth And Development

Type of paper: Essay

Topic: Company, Economics, Business, Commerce, Corporation, Development, Growth, Investment

Pages: 6

Words: 1650

Published: 2020/12/13

Globally, large firms have a substantial effect on the economic growth and development of particular countries. The large firms are considered as the driving force that foster the increase in the Gross Domestic Product and the living standards of people in a given country. Large firms are firms that employ more than 250 workers. According to Brian Roach, (2007, p.1) large corporation are not only the economic force but the political, cultural and environmental force that is inevitable in the contemporary globalized economy. According to Sanidas (2007, p.61), both the small and medium enterprises and Large firms have a substantial impact on the growth and development. However, he suggests that although both are necessary, large firms usually lead the economy and subsequently the leaders of the economic growth of the country. The large firms contribute to job creation with higher wages, increase in exports, regional integration, and the competitive advantage that helps the forms to thrive in the international market. However, some of the weaknesses of the large firms include corruption, and negative social, political, and environmental impacts
The dominating factor of the large firms in the economy is associated with certain factors such as structure and strategy, diversification, and firms’ capability and resources. Sanidas (2007) conducted a literature review from various sources and found out there is a correlation between the Large Firms and the intensity and propensity of the exports. The literature suggested that the large firms have a greater impact on export compared to Small firms because of the three main reasons. Large firms incurs less “transaction cost and hence economies of scale; risk perception; and availability of resources” Sanidas (2007, p.62). Therefore, holding import and other factors constant, the increase in the exports as a result of the large companies increases the net export, which is given by export minus import. Consequently, the increase in the net export increases the GDP of the country and hence the economic growth.
According to the research conducted by the U.S. Department of Commerce (2014), an increase in the export performance of the country contributes to other factors such as job opportunities, high wages, and productivity improvement. For instance, in the United States, job associated with total exports increase from 1.6 million in 2009 to 11.3 million in 2013 (U.S. Department of Commerce, 2014 p.4). In addition, the people employed in the export-intensive industries get high wages due intensive investment in capital and technology. Consequently, the investment increases the workers’ productivity, which subsequently increases the earnings. In addition, firms that have high export performance experiences productivity improvements in terms of total factor productivity and the labor productivity. The main reason behind the increase in productivity is associated with the pressure resulting from the increased competition in the international market. A study conducted by Edmiston (2007) also concluded that the large companies are fountainhead of job creation and typically offer better jobs than the small firms. However, both the two sectors are significant innovators in the modern economies. Significantly, large firms contribute to the innovation, experience and research in the labor market.
Another significant role of the large firms, such as multinational companies, is that they foster the informal regional integration. For instance, the “Japanese multinational large firms have been very active in South East Asia [and are accompanied by] network of outsourcing part of their local production in this area” (Sanidas 2007, p.63). In addition, according to Sanidas (2007) American’s large firms are considered as the catalyst to the international integration especially in the Pacific and European countries. The final consumer goods that are produced by these multinational companies have a significant impact on the societal and cultural aspects across the globe. The regional integration also increases the employment in the region served by such companies and hence economic development due to improvement in the people’s standard of living.
Sanidas (2007) also suggests that large firms are important in the establishment of the competitive advantage with respect to product specialization. Through the aggressive search for the new strategies to maximize profit in the global market, the large firms discover the best and most efficient product that fit their organizational capabilities, technical, and available resources. For instance, the Large Firms in Korea have generated competitive advantage in the semiconductor sector, and hence increasing the exports of the country (Sanidas 2007, p.69). Consequently, this raises the living standards of the Korean as well as the economic development of the country. In addition, Roach (2007) argues that such large firms such as Multinational Corporation acquire the competitive advantage through the ability to transfer resources across international borders. Therefore, large firms are able to acquire not only the new markets, but also the cost-effective production opportunities in the international market. Contrary to the small firms that rely on the high-cost domestic labor, the multinational companies can acquire low-cost labor force from the foreign market. Consequently, the large firms’ produces more profit than the small firms and hence increase in the economic development and growth of the host country and the home country.
There are several adverse effects induced by the large firms to the economic growth and development in a country. The corporate scandals experienced by large firms may negatively affect the economic growth and development in the country. Most firms have failed to respect the existing laws leading to the emergence of corporate scandals (Roach, 2007 p.23). It is unethical when large firms exaggerate the garnered profits to attract investors. The workforces may apply illegal accounting practices to increase the value of stock prices with an objective of attracting a large customer base. In most instances, top executive boards members participate in scams where they sell stocks worth of billions at exaggerated prices. In the process, the local investors are subjected to massive losses when such corporate scandals are revealed. The executives use the accounting scandals so that they can compensate the experienced loss without considering the effects caused to the ordinary investors. This practice should be condemned since the executive is expected to run the large firms with the interest of all stakeholders at the heart. The stock price of the firms fluctuates because the executives are only concerned with their interests as they aim at making abnormal profits. The executives with big shares in stock holdings are motivated to inflate the firm's stock price momentarily so that they can trade their share at increased prices. Before the prices of the stock prices depreciates, the executives benefits from huge profits while other stakeholders lose multibillions in the scandals. The illegal accounting methods help the firms to keep off losses and liabilities from their books of account. For instance, the WorldCom telecommunication firm experienced a reduction of their stock price from over $60 to pennies. The executives overstated the profits of this firm by $4 billion (Roach, 2007 p.24).
Large corporations also lead to social and environmental impacts. For instance, a corporation manufacturing fertilizers and pesticides leads to environmental pollution and the costs associated with the damage is subjected to third parties. The problem with the multinational firms is that they have a large political influence that allows them to escape responsibilities as they cannot be punished by the authorities, and this develops significant external costs. Studies have indicated an existing relationship between minimizing costs and capitalizing on the profits. Therefore, any firm that wants to maximize the profits and at the same time enjoy political influence will have an incentive to take advantage of the power so that they can externalize costs (Roach, 2007 p.24). The good news is that most firms fear damaging their ethical standards since they can harm the reputation of the organization, and this may damage the public opinion towards them.
Large firms can also affect the decision-making process of the government and other responsible bodies. For example, the corporations can use their powers to influence the construction of a road that passes near the organization. The benefits of such a road to the public may not be felt since it target the distribution and access to the production facility. Sadly, municipalities are easily influenced by these firms and the decision made fails to favor the opinions of the public (Roach, 2007 p.25). The firms are concerned with imposing externalities by shifting costs to third parties, and this becomes hard to measure in economic relationships. The public experiences hard economic times when the costs directly affect their way of life. These firms must change their way of doing things and establish consider the well-being of the society in making the word a better place to live. Most decisions reached by government organs are influenced by powerful individuals who are only interested in their affairs.
Despite the large firms contributing negatively towards a country’s economic growth and development, the benefits associated with their impacts outweighs the disadvantages. As expounded above, the large companies will increase the net export, and this will help the economy to improve. Also, multinational corporations foster the informal regional corporation. Countries get the opportunity to relate to each other when conducting business and this creates political stability in most parts of the universe. The regional integration acts as a hub of creating employment for residents of different countries. Nonetheless, the multinational corporations play a significant role towards the establishment of the competitive advantage with respect to product specialization. This ensures that the products meet high-quality standards as expected by consumers. The benefits associated with multinational firms are significant since they influence the rate of economic growth and development in a country 9Frederiksen & Looney, 1983). The negative effects induced by the multinational Corporations can be controlled by the use of effective strategies. The government must ensure that they fight the existing corruption that makes the corporations unpunished when they break the law. It is important to ensure that there is accountability and transparency when the executives deal with the stock prices. It is necessary to avoid greed and considers the interests of all stakeholders. The Municipalities must also make fair decisions that aim at benefiting the public and avoid the influence of the multinational corporations.

References

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Edmiston, K. D. 2007. The role of small and large businesses in economic development. Available at SSRN 993821.
EurActiv.com. 2012, August 30. Bigger is better: Large companies good for the economy, study finds | EurActiv. Retrieved from http://www.euractiv.com/innovation-enterprise/bigger-better-case-firms-contrib-news-514484
Filipovic, A. 2005. Impact of privatization on economic growth. Undergraduate Economic Review, 2(1), 7.
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Roach, B. 2007. Corporate Power in a Global Economy. Global Development and environment Institute–GDAE. Tufts University.
Sanidas, E. 2007. The impact of large firms in promoting economic growth, exports, and regional integration: A Chandlerian perspective. Middle East Business and Economic Review, 19 (2), 61-75.
Thirlwall, A. P. (2006). Growth and development (Vol. 2). Basingstoke, UK: Palgrave Macmillan.
U.S. Department of Commerce. 2014. The Role of Exports in the United States Economy. Retrieved from Economics and Statistics Administration |International Trade Administration website: http://trade.gov/neinext/role-of-exports-in-us-economy.pdf
Wang, Y., & You, J. (2012). Corruption and firm growth: Evidence from China. China Economic Review, 23(2), 415-433.

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