ourse: International Political Economy M.A: IR & Political Science Topic: Multinational Corporations in the Global Economy. ‘Ao MING is a firm that “controls and manages production establishments — plants ~ in at least two countries, This definition shows that MNCs have two aspects. (2) It (MINC) places multiple production facilities under the control of a single corporate structure. (b) MNG is a firm that has internationalized its activities. Difference between MNCs and other Firms:A simple firm buys its input from and/ output to other firms. Whereas MNC acquires inputs from its own factory and sells a part of its output to its owned factories. MNCs simultaneously undertake economic production, international trade and cross-border investment, When a corporation or firm based in one country creates a new production facility in a foreign ‘country or buys on existing one, it extends its managerial control across the national borders. It enables the firm which now becomes an MNC, to make decision about how and where to employ resources that have consequences for the country in which it is based and for the country in which it invests. The decisions of the MNCs are based on the global strategies for corporate success, rather than on the basis of conditions within any of the states in which it ‘ conducts business. Activities of the MNCs The activities of the MNCs are concentrated in certain parts of the world, Almost 75% of all MNCs are based in industrialized world (the west) whereas 97 out of the one hundred largest MNCs are also based in these countries. 5 Similarly, the advanced industrialized states are the mast recipients of the world's FDI. In the Post war period til 1980, almost % of the FDI went fo the Western Europe and the United States, which was later dropped to % (which was 60% in 2008). Some of the developing countries also attracted FDI since late 1980s, and shW*8t the LDCs increased from % to % between 1980 and 1997. Bul this FDI was not evenly distributed. These investments were heavily concentrated in few Asian and Latin American states. It mostly went to East Asia (where Ghina alone attracted 50% of that investment) or Latin America (increased from 6% to 14%fits 53% share went to 4 countries Brazil, Argentina, Chile and Mexico).‘Some developing countries have also become home base of MNCs. But they are a few like, / Hong Kong, China, South Korea, Singapore, Taiwan, Venezuela, Mexico and Brazil ete. their s are, however smaller in size and influence. Economic Explanation of the Expanding role of MNCs. Why do MNCs establish its subdivision/branches of production facilities instead of producing in one country and exporting its products outside? The economic theory explains this phenomenon n terms of Locational Advantages and Market imperfections. (4) Locational Advantages: Some specific country characteristics provide locational advantages to the firms to operate from. There are three types of such country characteristics: 4. Large natural resources reserves. 2 Alarge market 3. Opportunities to enhance the efficiency of the firms operation. Locations! advantages in natural resource investments arise from the presence of the large eposits of 2 particular natural resource in a foreign state e.g. many firms invest outside in mining etc, The 12% of the 100 large MNCs are related to petroleum and mining industry. Moreover, MINCs would prefer to invest outside where cheap raw material is available and other conditions necessary for investment also exist. (2) Locational Advantages for Market Oriented, Investments ome from presence of large markets expected to go further in the time to come. The MNCs, sometimes facing tariff or non-tariff barriers to its exports, find it prudent to invest in foreign countries and jump over such hurdles to sale of its products. However, during this process, they prefer |. The states having larger markets. IL The states having less local competitive firms in their related products. Ill The existence of tariff and non-tariff barriers to imports. ‘As such the countries having large and fast growing markets, with relatively small number of local firms in the particular industry and that are protected from international competition represent attractive opportunities for market oriented MNC investment, e.g. atilo industry in EU and USA. Japanese investment increased in USA after VERS. (C)Efficiency Oriented Investment:The locational advantages in’Eiiciency oriented investments arise from the presence of the factor of production at a lower cost. In such type of investment, the present firms allocate different stages of production process to different parts of the world,(matching the factor intensity of a production stage to the factor abundance of particular country) e.g. labor intensive production stage in a labor abundant country and capital intensive production stage in a capital intensive country. (D)Market Imperfection:in order to avoid any unwanted obstacle in its business in the long run, MNCs prefer to internalize its operation placing them under single corporate control taking out of the market e.g. a firm having business in oil refinery has strong 2connection with gaits In other case, to avo! have contro! their ‘peentive to internalize its operations through having strong companies so that it can have undisruptive supply of oil "Wvctuation in prices of intermediate products, firms would prefer to production importance of the MNCs for the Host Countries: The role of MNCs is controversiali@n one hand) ey bring some benefits to the host country But, these benefits are not without cost. : Benefits: MNCs generally bringg scarce resources to the host country which help increases its welfare and contribute to its economic development, At least, the following THREE resources are more important (@) Capital:The countries need savings to invest for development. When a country does not have enough savings to meet its domestic development requirements, foreign direct investment (FDI) becomes a blessing. As such MNCs transfer savings from one state to another to help develop economically, provide job and raise revenues etc.“they invest in factories, which cannot be movediremoved from a country and reflect more durable investment (Fixed investment) (b) Managerial Skills:MINCs bring knowledge, and expertise, which the developing states in particularly lack in. They transfer it from their own firms to other firms also. This Specializes knowledge, expertise and managerial skills help increase economic efficiency, (c) Technology:MNCs also transfer technology to the host country which put positive impact on the entire economy of the country. For instance, a transferred technology Produces goods which are used for production of other goods and is available on lower price as compared to imported ones; i wll reduce cost oftheir production ism of MNCs: There are critics who highlight the other (negative) side of the role of MNCs. 1. MNCs Infringe National Sovereignty: The decisions about allocation of resources, (how much and where-within or outside, and in which sector etc,) are made by the foreign nationals (corporate managers) taking into consideration the global economic complexities. The governments are generally unable to guide or regulate their activities. In some cases, they manipulate political process in their favor, intervene in local politics and even play their role, directly or indirectly, in changing the governments, 2. MNCs Promotes Corruption:MNCs also promote corruption through bringing politician, government officials and national leaders to get undue favors. 3. Abuse of Human Rights: Some MNCs are accused of abusing human rights because they employ child labor in the production process. (Nike in Vietnam in 1997).4, Plunder the Economic Resources: MNCs take home the large cha we profits earn abroad leaving too little capital for further in investment. Sometirnes, they take home more than 50% of the profit 5. MNGs Reduce the Funds for Investment: In some cases MNCs borrows funds from the host country’s financial market (bank) instead of bringing money from outside. As such domestic savings are used by foreign firms (MNCs) leaving {00 lite for local firms to borrow for investment, Vix $5" cov? 6. Licensing and Royalties: MNCs charge licensing fees and demand royalties and as such a4{Mi%> additional resources from the country. Since, its local units are required to buy from or sell goods to MNCs or its subsidiaries/affiliated production Units, it can over price its sales and underprice its purchases from the host country and further plundering its wealth feeavse nk 7. Expelling Local Firms out of Business: One+o its competitiveness arising out of better technology, and managerial skills and larger investments, MNCs can force its local competitors to leave the business and increasing unemployment. 8. Control over Technology: MNCs are reluctant to transfer technology particularly the intangible assets (knowledge, design and expertise etc.). Control over Managerial S| MNCs generally do not hire services of local people on the top executive positions and hence transfer of managerial skills does not take place 10. Little Increase in Employment: MNCs employ as little workers as possible through adopting different means. Overall, the 200 largest MNCs accounting for 28% of world trade employ less than 1% of the world workers. 11, Disregard for Environment: MNCs disregard environment related concerns and Violate world standards. Reforming MNCs: UNO has tried to reform MNCs, In 2004, in a meeting organized by the UNO in corporation with International Chamber of Commerce and attended by executives from 50 major companies, a Global Compact was signed. It included principles related to respect for human rights, the environment, labor rights and elimination of corruption.