The Impact Of Multinationals On Afghan Economy
By: Mohammad Esmail Waziri
Amsterdam
Table of Contents
Definition of Multinational company. 3
Case Study Foreign Direct Investment (FDI) in Afghanistan. 3
The advantages of MNC investment for the host country. 4
The disadvantages of MNC investment for the host country. 5
Introduction
The main purpose of this paper is to write an essay about the impact of multinational corporations on Afghan economy. In this phase the vision of people is described about the topic of multinationals which are criticized for exploiting the workers in Afghanistan, and contributing to economic problems such as illegal and unprofessional extractions of mines and ethical issues.
Despite the negative impacts of Multinationals, they have a significant positive effects on Afghan economy. Further is this paper organized as follows, the first section deals with the background information of multinational companies, the second part describes a case study in Afghanistan, the third segment sheds light on the issues of foreign direct investment and its advantages for the host country, and the fourth section describes some drawbacks of investment for the host country.
In conclusion, this paper will give an account and reason why and how multinational companies might have impact on Afghan economy and recommendations will be provided in order to attract FDI to Afghanistan.
Definition of Multinational company
The United Nations has identified more than 60.000 Multinational firms around the world. Before attempting to know more about multinational corporations and its impact on Afghanistan, it will be informative to define the term multinational firm. According to Sloman, J. (2007), p.509 “Multinational firms mean businesses that own or control foreign subsidies in more than one country”. There is no definition for the developing economies like Afghanistan, but the International Monetary Fund (IMF) uses a flexible classification system that considers per capita income level, export diversification, degree of integration into the global financial system.
The aim of this essay is to find out the impact of the multinational corporation on Afghan economy. This kind of economy is increasingly important for multinational enterprises ( MNEs) as growing market. Next, a case study on investment opportunities in Afghanistan will be presented.
Case Study Foreign Direct Investment (FDI) in Afghanistan
Nowadays it is a common trend that countries, especially developing countries want to attract as much foreign direct investment as possible. One of these countries is Afghanistan, which is currently ruled by the Taliban. None the less Afghanistan could still be a good place to invest. For instance, the low level of competition creates opportunities for foreign investors and exporters to bring in new products with potentially good profit margins. With its strategic geographical location connecting Central Asia to South Asia and leading to Europe, Afghanistan could serve as a portal for investors seeking to enter the regional market. Local professional business people are keen to adapt to changing economic slowdown and political uncertainties. The middle class is gradually growing in Afghanistan and about 70% of the of the population is below 25 years of age. There is also a significant potential for exploration in minerals, and in oil and gas. Foreign companies benefit from a 0% duty on import of machineries and 1% duty on import of raw materials.
On the other hand, there is also a drawback. For example, anti-government and political violence are increasing and public concerns regarding security constrain economic activity. As the international forces left, security remains a primary concern for investors. Foreign firms operating in country report spending a significant percentage of their revenues on security infrastructure and operating expenses. While the new Taliban government is committed to improve business climate and investors’ confidence, the country scores very low on the Doing Business Index of the World Bank owing to cumbersome bureaucracy and weak infrastructure. The legal system is not developed enough to handle complex commercial issues and local authorities do not have enough experience in project management and in dealing with foreign companies. Corruption continues to be a major problem as the country is ranked very poorly on Transparency International’s Corruption Perceptions Index.
However, the caretake Afghan government of Islamic Emirate of Afghanistan seeks to bolster foreign investment as the country is on its recovery since they are in power. Pursuant to the Private Investment Law, which was passed in 2003 and amended in 2006 and later in 2014 the Afghan state is committed to maximizing private investment and to create a legal regime and administrative structure that encourage and protect foreign private investment in the Afghan economy. There are no sector restrictions regarding foreign investment; conversely, any investment above USD 3 million requires the approval of the High Commission on Investment (HCI). The same law also guarantees national treatment for foreign investors and allows them to lease land up to 50 years (foreign land ownership is not allowed). Furthermore, companies domestic or foreign can be wholly foreign-owned.
The advantages of MNC investment for the host country
The host country can gain a lot from foreign investment for instance , the latest value for foreign direct investment, net ( BoP, current US$) in Vietnam was 31.15 billion $. Despite impacts of covid19 pandemic, the inflow of foreign direct investment in Vietnam is still rose up to 9,2 % annually. The income is also increased and so does the employment. The economic growth has been averaged 6.38 percent from 2000 to 2020. It is more likely to remain the same and the Vietnam economy has become much more stable. The host country can also benefit from the technology, capital which leads to economic growth and other skills the multinational brings into the country. For example, when multinational companies train their host county employees and hence the workers will learn new skills and knowledge. In addition to this, it can also contributes to improved standards of living, reducing unemployment
The disadvantages of MNC investment for the host country
It is easy to see the damaging economic effects of multinational on Afghanistan, and yet Afghan take care government of Islamic Emirate of Afghanistan is eager to attract more FDI from MNCs and turn a blind eye to many excesses. For instance, recently some capital intensive companies from Pakistan signed a contract with some Afghan companies, however it did not generate any work opportunities for Afghanistan. Besides Pakistani companies uses heavy trucks to transport coal and other precious stones from Afghanistan to Pakistan and then to export them to the world, this too destroys the infrastructure of the host country. In addition to this some multinationals are using monopoly due to their access to resources and gaining from profit maximization rather than improving the welfare of the Afghan people. This view is widely shared, as Sloman (2007) stated that, it is important to understand that the MNCs may be uncertain like they may close down their businesses and a abandon or they may reduce their taxes liabilities through a process called transfer pricing.
The environmental damage caused to developing nations by the world’s richest countries amounts to more than the entire third world debt of $ 1.8 trillion, according to the first systematic global analysis of the ecological damage imposed by rich countries. The Multinationals are also accused of going to the poor nations and run their business operations especially in those countries where the environmental regulations are relaxed. Although, the real figures are not clear about the environmental damages to Afghanistan, but the above figures may verify some of the claims to be true.
In the following illustration from the World Bank you can see the in inward foreign direct investment in Afghanistan between 2010-2020.
World Bank (2020) Inward Foreign Direct Investment ( Online). Available at:
Afghanistan Overview: Development news, research, data | World Bank. Accessed on 30-6-2022
Conclusion
On the whole, it is demonstrated that despite some disadvantages such as MNC might destroy the infrastructure of the host country by carrying heavy trucks than allowed; gaining from profit maximization rather than improving prosperity in Afghanistan and contributing to the environmental pollution. Never the less, the host country can still benefit from investment. In this paper it is explained how multinational companies have impacts on Afghan economy. This essay has argued, that foreign direct investment indeed helped the Afghan economy with reducing unemployment, resulting economic growth, increasing revenues. So in short it can be concluded that multinational corporations can be beneficial rather than damaging.
Recommendations
In order to attract more multinationals to invest in Afghanistan, the Afghan government should provide some facilities such as: Providing secure and safe environment for the investors; building infrastructure to facilitate the transport of goods and services; making simple legislation and rules that are easy for investors to start their business activities; providing electricity; employing skilled and professional people for the positions they fit in; good operational banking systems to make international transactions.
Bibliography
- And Slomman j ( 2007). Economics for business.4th Harlow: Prentic Hall.
- Collinson, S and Rugman A. (2009), p.40. Inertational Business. 5thHarlow: Prentice Hall.Hinde, K.
- Doing Business in Afghanistan. Available at: Doing Business in Afghanistan – World Bank Group. Accessed on: 2 April 2022.
- High Commission On Investment. Available at: Afghanistan – Investment Law | Investment Laws Navigator | UNCTAD Investment Policy Hub. Accessed on 2 July 2022.
- Report on corruption in Afghanistan. Available at: Afghanistan – Transparency.org. Accessed 2 July 2022.
- World Bank Report on Afghanistan. Available at: Afghanistan Overview: Development news, research, data | World Bank. Accessed on: 30 June 2022.
