MNCs in Developing Countries: Impacts, Theories & Policy

Introduction

Globalization has enabled a degree of interconnectedness across the globe that would not have been imagined just a few decades ago. This interconnectedness is largely driven by the expansion of international business, which has positively and negatively affected international relations and trade. Technology transfers, the mobility of human capital across borders, and the establishment of foreign subsidiaries have fostered transnational trade — outcomes that are only possible through multinational corporations (MNCs). This paper provides a literature review on MNCs and their worldwide impacts, examining the theories and concepts that have shaped our understanding of this phenomenon.

Definition of a Multinational Corporation (MNC)

A multinational corporation (MNC) is a company that operates in more than one geographical location around the world (Kim & Milner, 2019). Its products and services extend to diverse locations, which may also include ownership of subsidiaries at a global level. Kim and Milner (2019) not only discuss MNCs' definition and functions but also highlight their importance as political influencers over host countries. Apart from bringing new technological resources and human capital to foreign countries, large corporations become exporters and, in some cases, affect political interventions and government policies governing how new business entrants operate. Changed policies — such as those enabled by NAFTA — facilitate free trade and allow MNCs like Walmart to enter markets such as Mexico with relative ease. High spending in the new country, convenient transportation of goods, and control over operating costs all add to the utility and political impact of MNCs (Kim & Milner, 2019). Bilateral treaties, trade agreements, and the restructuring of banking and institutional financial systems are among the broader benefits associated with MNC activity. Foreign policy remodeling and foreign direct investments (FDIs) are part of the business capitalism that MNCs catalyze as drivers of market forces.

MNCs are also known as transnational organizations, as their business operations span both domestic and international arenas (Pritt & Mackta, 2010). A theoretical research-based study clarified that they employ a highly specialized workforce to link regional managers with global functional managers in a systematic way — a process that requires disciplined communication capable of overcoming both language and cultural barriers. MNCs and transnational corporations play a key role in the medical industry, for example, as they must conduct animal testing in accordance with policies approved across various geographical locations (Pritt & Mackta, 2010). Cultural barriers arise when MNCs hire employees from diverse ethnic or national backgrounds. Virtual teams, distance communication, and electronic connectivity are integral to MNC business models when operations are separated by thousands of miles.

When working across different cultures, MNCs are expected to understand the socio-cultural values and ethics of each context, which can vary considerably. What is considered ethical in one culture may not hold the same significance in an MNC's home country. It is the sole responsibility of MNCs to conduct thorough research about the culture of any host country they plan to enter — including its government policies, regulations, and the social perceptions of the people who may become future employees. The authors reiterate that these measures are necessary to avoid penalties from host countries, since the standardization of core ethical values must be embedded in the organization's design (Pritt & Mackta, 2010). This is particularly significant in animal science research related to patient safety and drug manufacturing. Support through transnational or virtual teams, alongside genuine acceptance of diverse ethnic and cultural backgrounds, is imperative for effective medicine-based research, since human lives ultimately depend on the quality of transnational management practices that reduce ambiguity.

Theories About MNCs and Their Business Operations

Several foundational theories explain how MNCs operate and why they choose to expand internationally (Kusluvan, 1998). Location theory suggests that MNCs expand their operations based on both supply- and demand-oriented considerations. The location is selected after evaluating four factors: the availability of cheap labor, transportation costs, access to raw materials, and the potential of an untapped market. The transfer of capital, human capital investment, and technology infusion all depend on these four elements, which collectively have the capacity to boost the host country's economy.

Another significant theory discussed by Kusluvan (1998) is the Aliber theory, which describes MNCs' tendency to transfer investments from strong-currency countries to weak-currency regions. This reflects MNCs' interest in gaining financial advantage in the host country — the greater this advantage, the more attractive a given host country becomes as a location for expansion.

Cheng et al. (2022) suggest that internationalization theory comes into play as soon as an MNC enters a foreign market. Investments in technology, assets, and human capital are inevitable, but the actual internationalization process begins with the cognitive interpretation of cultural and economic dynamics. The authors argue that internationalization is initiated when management and employees agree on knowledge sharing (KS) with the host country. The MNC's openness to cultural differences drives KS, and leadership and executive management play a crucial facilitative role (Cheng et al., 2022). Drawing on a broad body of literature, the study concludes that — in light of cultural influence theory — the motivation for knowledge conversion rests on acquiescence, identification, and internalization. The article further highlights a neuroscience explanation of the cultural collectivism and individualism spectrum when MNCs enter foreign markets. Cultural differences create a cognitive mapping that leaders, in particular, must adapt to, as they make crucial business decisions amid cultural tensions and the transfer of what is sometimes termed "emotional knowledge" (Cheng et al., 2022).

A detailed contextualized study used theorizing as a groundwork for investigating how MNCs behave in foreign countries as organizational entities (Piekkari et al., 2022). Using Carlsberg Group as a case example, the study found that to become a fast-moving consumer goods (FMCG) company competitive with rivals such as Nestlé and Procter & Gamble, Carlsberg had to be vigilant about costs, efficiency, and operational tactics. As contingency theory suggests, adjusting business functions and preparing employees for the transition from a domestic to a foreign cultural context requires sustained effort. Country-based differences are especially complex in the initial stages, making MNCs institutionalized entities that must converge and settle into host-country contexts as a vital part of their business evolution (Piekkari et al., 2022). Additionally, open system theory and Cyert and March's behavioral theory contribute to understanding how MNCs are shaped in international markets. These theories hold that, despite being experts in their domestic markets, MNCs face cross-cultural and cross-boundary complexities when entering new countries — complexities that leaders must balance over time through adaptability and sound decision-making.

The transaction cost economics (TCE) framework is also explained in another valuable article that illuminates the identity of MNCs (Dabic et al., 2014). This theoretical study synthesizes literature from 1,116 papers published between 1975 and 2012 to construct a conceptual map of MNC strategy and structural change. Additional frameworks discussed include game theory, the resource-based view, agency theory, the knowledge-based view, and institutional theory. The study reveals that internationalization is an inevitable part of MNCs' trajectory, and that internalization — where firms incorporate foreign operations rather than simply exporting or partnering with local players — is equally central (Dabic et al., 2014). Over time, MNCs tend to find that foreign production is more favorable than selling products to local rivals. However, each theory has its shortfalls, as management styles and strategic approaches have continually evolved. Agency theory, for instance, describes the relationship between an MNC subsidiary and its home-country headquarters but does not fully capture entrepreneurship in foreign markets at the corporate level. Game theory, in turn, has been used to discuss resource capacity and value creation, framing today's competition as "co-opetition" (Dabic et al., 2014). Among the most frequently appearing contemporary concepts in the field are learning organizations, global thinking, resource value, and value absorption.

Conclusion and References

The propositions developed above reflect a critical evaluation of hypothesis development grounded in qualitative literature review analysis. Most of the reviewed literature builds on prior research studies, while several contributions draw on case study evidence from countries such as China and Nigeria. Theories, concepts, and critical scholarly insights have given analytical weight to each selected article, supported by evidence from international law and business dynamics. The literature reviewed here does not rely on quantitative data but instead draws on a rich body of theoretical and narrative evidence. The case examples strengthen the argument and align closely with theories formulated decades ago — many of which remain highly applicable despite changed market conditions, new competitive criteria, and revised international and host-country regulations. The proposed hypothesis for the current research is:

Multinational companies (MNCs) do more harm than good in developing host countries.

It is significant to test this prediction against the investigated phenomenon. Subsequent sections of the research will rigorously and systematically examine the hypothesis to determine whether it aligns with or diverges from the findings of the literature review.

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Cheng, H., Agbanyo, G. K., Zhu, T., & Pan, H. (2022). Internationalization of multinational companies and cognitive differences across cultures: A neuroeconomic perspective. Frontiers in Psychology, 13. https://doi.org/10.3389/fpsyg.2022.807582

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