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Business Enviornment-4

Multinational Corporation

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MNCs (Multinational Corporations)

• A multinational corporation is defined by Dunning as “an enterprise that engages in foreign direct investment (FDI) and owns or control value adding activities in more than one country{. There are two characteristics of MNCs:

• (1) coordination of a number of enterprises within a single structure

• (2) coordinated activity takes place across national borders.

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Basic StatisticsBasic Statistics

• According to a survey of UNCTAD in 1998, there are 63459 parent firms with 689,529 foreign affiliates. They employed about 6 million people world wide. Together, parent firms and their foreign affiliates produce about 25 percent of world GDP.

• The number of MNCs is increasing fast. It was 700 in 1900, it rose to 7000 in 1970 and to about 65000 in 2000. The number of MNCs according to UNCTAD is 889,416 of which 82053 are parents and 807, 363 affiliates.

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Size of MNCsSize of MNCs

• Many MNCs are richer than most countries in the world. In 2004, the revenues of US car company, General Motors were $191.4 billion, greater than GDP of more than 148 countries. In its fiscal year ending 2005, Wal Marts’s gross revenue was $385.2 billion, larger than the combined GDP of Sub Saharan Africa. Total GDP of Bangladesh in 2009 was $93.5 billion

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Biggest non-financial MNCsBiggest non-financial MNCsSerial Name Total sale, 20091 Wal-Mart $413 billion

2. Exxon Mobil $310 billion

3. Royal Dutch Shell $278 billion

4. British Petroleum $246 bn,

5. Saudi Aramco $216 bn,

6. Toyota $206 bn.

7. Samsung $178

8. Chevron $171.6

9 Sino pec $165.5 bn

10 ING 165.4 bn

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Biggest Financial MNCsBiggest Financial MNCs

• 1. Citigroup (US)

• 2. Allianz S.E. (German)

• 3.AVN Amro (Dutch)

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Alternative ways of organizingAlternative ways of organizing MNCs MNCs Five ways:Five ways:

1. 1. Branches. The simplest form of Branches. The simplest form of extending business operations is to set up extending business operations is to set up branches in developing countries. Such branches in developing countries. Such branches are linked by the parent branches are linked by the parent company.company.2. Subsidiaries. MNCs also set up national 2. Subsidiaries. MNCs also set up national affiliates as subsidiary companies, A affiliates as subsidiary companies, A subsidiary is incorporated under the laws subsidiary is incorporated under the laws of the country concerned.of the country concerned.

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Alternative ways of organizing MNCsAlternative ways of organizing MNCs

• 3. Joint venture. A joint venture is formed by a MNC in cooperation with a local partner. Most joint ventures are 50-50 partnerships. Some government make joint venture a condition to ensure higher local participation. This makes operation of the firm easy in local conditions but MNCs do not often like it because their ownership of technology and copyright may not remain safe.

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Alternative ways of organizing MNCsAlternative ways of organizing MNCs

• 4. Franchise Holders. Under this arrangement an affiliate firm produces or markets the product of a multinational firm which specifically mentions the rights and royalties that are transferred to the affiliate firm. This reduces risk for parent company and facilitates expansion of market for product at a low cost.

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Alternative ways to expand the market.Alternative ways to expand the market.

• Turnkey projects. The multinational undertakes to complete the project from scratch to the operational stage. They are less risky than a conventional project.

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The benefits of MNCsThe benefits of MNCs• 1.Capital flow and FDI. MNCs had been the

main channels through which FDI flowed to developing countries. It rose from an annual rate of $2.4 billion in 1962 to $185 billion in 1999 and to about $273 billion in 2009. East Asian miracle including Chinese economic development attests to positive effects of FDI. It addresses the twin problems of shortage of capital and foreign exchange.

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Benefit of MNC: Technology TransferBenefit of MNC: Technology Transfer• 2. Technology transfer. MNCs serve as most effective

channels of technology transfer. Because MNCs control proprietary assets which are often based on specialized knowledge, the investments they make in developing countries often lead to the knowledge being transferred to indigenous firms. For example, Motorola Malaysia transferred technology for producing a particular type of printed circuit board to a Malaysian firm. This laid the foundation of electronic industry in Malaysia and Malayasia became an exporter of printed circuit board. Another example is Singer Taiwan which was required to produce 83 percent locally. By standardizing and upgrading local components, Singer produced sewing machines, 86 percent of which were exported. Local sewing machine producers became competitive

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Benefits of MNCBenefits of MNC• 3. Transfer of Management skill. MNCs

introduce latest management skills. MNCs educate local managers about new managerial skills.

• 4. Benefit to consumers. Consumers get better products at the cheapest price.

• 5. Beneficial effects on wages, productivity and labor standards. Competition forces local firms to raise wages and improve labor standards and to enhance productivity with a view to remaining competitive.

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Benefits of MNCsBenefits of MNCs

• 6.FDi by increasing production makes the tax base larger and provides additional resources for improvement of infrastructure

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Disadvantages of MNCsDisadvantages of MNCs• 1. Adverse impact of capital flow• (a) The flow of FDI discourages domestic saving. It

also reduces domestic investment.• (b) The promises of FDI are exaggerated. Total FDI

in 2009 was 1163 billion of which 804 billion was invested in highly industrialized countries and 86 billion in East European and transitional economies. Only $273 billion was invested in developing Countries of which $190 billion was invested in China, Honkong, Brazil and India. Only $83 billion FDI was available for 123 developing countries.

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Disadvantage of MNCsDisadvantage of MNCs• (c) Because of herd mentality, much of FDI is confined to following:• 1. China- $78.1 A. Total of ten largest developing countries• 2. Hong Kong- 52.3 was $235 billion out of $273 billion.• 3.India- 34.5 85% FDI went to 10 largest and only 15 4.Brazil 25.9 percent went to about 123 countries.• 5. Chile- 12.7 Bangladesh received 674 million. • 6.Vietnam-7.6 B. Biggest recipients are industrial countries• 7. Colombia-7.2 USA-$134 billion, UK 73.9 billion, etc.• 8. Egypt-6.7• 9.Romania -6.3• 10 Nigeria-5.7

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Disadvantage of MNCDisadvantage of MNC

• 2. Environment degradation. MNCs are poor citizens in host countries. They are indifferent to environment and evade punishment by abusing their clout.

• (a) Bhopal tragedy. The explosion of the Union Carbide plant in Bhopal killed more than 20,000 people and more than 100,000 had lifelong health damage. The company paid only $500 per person. Because of US refusal, the executives could not be tried

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Disadvantages of MNCDisadvantages of MNC

• (b) Exxon Valdez. The captain of Exxon Valdez who caused oil spills resulting in billions of dollars environment losses was fined only $51000.(c)In Papua New Guinea, a large gold and copper mine, OK Tedi and Fly Rivers extracted $6 billion worth of ore and dumped 80,000 tons of contaminated materials and left without cleaning.In most cases they are protected by international agreements.

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Disadvantages of MNCDisadvantages of MNC

• 3. MNCs destroy small businesses and exploit workers.

• Example of Wal mart: Wall Marts success is based on lower cost. However, lower cost is ensured by lower compensations to workers and its market power to squeeze out higher discount from suppliers. Small firms cannot compete with them and consequently, lot of people lose their livelihood and small communities are destroyed. Wal Mart does not provide health care to half of its employees

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Disadvantages of MNCsDisadvantages of MNCs• 4. Corruption and bribery. They are too big

for state surveillance. Mining and oil companies can often reduce the cost of acquiring natural resources by bribing government official and politicians. They lobby for protecting their interest. Between 1998 and 2004, US pharmaceutical companies spent $759 million for lobbying.

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Disadvantages of MNCDisadvantages of MNC

• 5. The main strength of MNCs is intellectual property rights (trademark, copy right). They jealously guard these rights and make technology transfer impossible in many cases (Coca Cola, Pepsi). Furthermore, intellectual property rights make essential medicines prohibitively expensive for developing countries.

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Disadvantages of MNCsDisadvantages of MNCs

• 6, Tax concessions and avoidance. Although MNCs pay taxes, their contributions are very often reduced by tax holidays, tax concessions, disguised public subsidies (such as cheap land) etc. Transfer pricing is often a source of much abuse. Transfer pricing is the price of inputs or services acquired administratively without competition from fellow affiliates. In such cases, local companies in LDCs are overcharged by foreign affiliates. This increases import bill and reduces tax

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Disadvantages of MNCsDisadvantages of MNCs• 7. MNCs are politically too powerful. The early

MNCs like the East India Company, Dutch East India Company, British South Africa Company established empires and colonies. Oil MNCs like Aramco and Anglo Iranian Oil Company meddled in politics. United Fruit Company in Central America and Nike in Indonesia, Vietnam, Mexico and other countries ran sweatshops and violated human rights. The ITT (international Telegraph and Telephone Company) funded coups in Brazil and Chile. They threaten to withdraw if host country refuses to cooperate

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Disadvantages of MNCsDisadvantages of MNCs• 8.Increased inequality. Two types of

inequalities are increasing. Inequality between rich and poor remains very high. In 2009, per capita income in PPP for low income countries is $1032 while per capita income in high income countries in PPP is $40,433. Within most LDCs gini coefficient is increasing. This happens because the returns to capital and skilled labor increases faster than that of unskilled.

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Main IssuesMain Issues• 1. What are the main advantages and

dis advantages of globalization

• 2. Discuss the main features of MNCs. What are advantages and disadvantages of MNCs / FDIs?