Multinational corporations in the global economy final

Multinational Corporations in the Global Economy

Claro G. Ganac

International Economics - DBA 722(B)

GLOBALIZATION IN THE WORLD ECONOMY

Globalization is the opening up of domestic

economies to international trade and commerce.

Globalization has been expanding since the emergence of trans-national trade because of the liberalization of domestic markets.

Specifically, it has accelerated over the last 20–30 years under the framework of General Agreement on Tariffs and Trade (GATT) and World Trade Organization (WTO)

Globalization is the increasing economic integration and interdependence of national, regional and local economies across the world through an intensification of cross-border movement of:

goods,

services,

technologies and

capital.


Global EconomyResources, markets and

competition are worldwide in scope.

GlobalizationThe process of growing

interdependence among elements of the global economy.

Global SourcingFirms purchase products and

services from around the world for local use.


Multinational corporations (MNC) are organizations that own or control overseas companies or production or service facilities in one or more countries other than the home country.

MULTINATIONAL COMPANIES (MNC)

For example, when a corporation is registered and has operations in more than one country or in more than one country, it may be attributed as MNC.

Usually, it is a large corporation which both produces and sells goods or services in various countries.

It can also be referred to as an international corporation, or a "transnational corporation“ which usually connotes headquarter operations in more than one country.


FOREIGN INVESTMENTS

FOREIGN INVESTMENTS

Foreign Investment (also called foreign direct investment or FDI) is the entry of capital and/or companies into a business enterprise in one country by an entity based in another country.

FDI makes possible the movement and inflow of international factors of production around the world. These factors basically include capital, manpower and technology.

FOREIGN INVESTMENTS FDI is distinguished

from Portfolio Investment, a passive investment in securities in a host country (as stocks and bonds).

The country of origin or form of the investment does not impact the conceptual definition of FDI.

The investment may be either "inorganic" by buying a company or "organic" by expanding operations in the host country.

MNC AND FOREIGN INVESTMENTS

The economist John Dunning has identified four primary reasons for corporate foreign investments (Global Capitalism, FDI and Competitiveness, 2002):

Market seeking: Firms go overseas to expand markets and find new buyers. A company may take advantage of a unique or superior product in foreign markets.

Another motivation is when producers have a saturated home market, or when they believe investments overseas will bring higher returns.

MNC AND FOREIGN INVESTMENTS Resource seeking: Put simply,

a company may find it cheaper to produce its product in a foreign subsidiary- for the purpose of selling it either at home or in foreign markets.

The foreign facility may be able to obtain superior or less costly access to production (land, labor, capital, and natural resources) than at home.

Strategic asset seeking: MNCs may seek to invest in other companies abroad to help build strategic assets, such as a global brand, distribution networks or new technology (e.g. Lenovo, Heinz).

This may involve the establishment of joint venture or partnerships with other local or foreign firms that specialize in certain aspects of production or distribution.


Efficiency seeking: Multinational companies may also seek to enter new overseas markets in response to broad developments.

For example, a new free trade agreement among a group of countries (such as AFTA) may suddenly make entry into one country to make access to other countries more available, or where there is lower tariff rates within the group. (Bayad Center)

Fluctuations in exchange rates may also change the profit calculations of a firm, leading the firm to shift the allocation of its resources.


POSITIVE IMPACT OF FOREIGN INVESTMENTS

International investment can be vital for developing countries.

MNCs produce jobs and provide downstream opportunities for ancillary businesses (such as construction, food, housing for expats, etc.).

MNC factories can produce economic multiplier effects due to “backward linkages” with suppliers that provide local content and materials to the production facility.

FOREIGN INVESTMENT FORMS

Exporting. Local products are sold abroad

Importing. The process of acquiring products abroad and selling them in domestic markets.

Licensing. one firm pays a fee for rights to make or sell another company’s products.

Franchising. a firm pays a fee for rights to use another company’s name and operating methods.

Joint Venture. A firm operates in a foreign country through co-ownership with local parties.

Strategic Alliance. Long-term partnership with local entity to develop the local market

Foreign Subsidiary. A local operation completely owned by the foreign firm.

FOREIGN INVESTMENT FORMS


For example, when a firm decides to build a plant that assembles cars, the firm is also likely to encourage the development of new local industries that can supply it with electric motors, fans, and other parts for its production.

Thus, MNCs can significantly increase GNP/GDP in the host countries.

Developing countries have both the demand for a good or service, and the labor and natural resources to supply it. But they lack the knowledge or access to capital necessary for local production.


Large enterprises in the developed economies (like the US) have excess capital or may raise funds in their home markets to expand overseas.

Technology transfer: When companies build plants, they bring the same production techniques and technologies with them that they use in domestic production. This helps raise the skill level of the workers employed in the new plants.


Proponents of liberalization point out that essentially no developing country has managed to achieve rapid and sustained growth, successfully raising the prosperity levels, without increasing their openness to foreign investment (Blustein, 2001).

Productivity spillovers: Productivity spillovers can spur growth and raise productivity in developing economies. For example ”just in time” manufacturing from Japanese MNCs allowed firms in the Philippines to learn the technique. This has reduced the need for warehousing and higher parts and materials inventories. This innovation has helped improve Philippine productivity.


Productivity spillovers: Productivity spillovers can spur growth and raise productivity in developing economies. For example ”just in time” manufacturing from Japanese MNCs allowed firms in the Philippines to learn the technique. This innovation has helped improve Philippine productivity.

Increased competitiveness: Competition from foreign corporations often encourages domestic companies to become more efficient and globally competitive.


Increased outward orientation: Multinationals are more outward market oriented and often seek out new foreign markets.

In turn, this outward orientation often helps domestic firms become more aware of international opportunities. This was what happened to South Korea, which is now a major producer of consumer electronics and automobiles (the technology came from Japan)

Sweatshops

• Employ workers at very low wages, for long hours.

• Poor working conditions.

Child labor -- The full-time employment of children.

Sustainable Development

• Environmental issues

• Operations should meet the needs of the present without hurting future generations.

NEGATIVE ISSUES ABOUT FOREIGN INVESTMENTS

Foxconn (Apple's main contractors) recentlyr aised wages by up to 25% after a spate of suicides last year and reports of long hours for the hundreds of thousands of staff.

Protectionism. Liberalization have often earned

the ire of some quarters like farmers who

pressure the government to put up tariff barriers

against imported commodities (e.g. sugar) that

are also produced locally. Retail trade is also

restricted to foreign investors in the Ph.

Corruption. There is perception of illegal

practices and bribery of local officials to give

preferential treatment to investors especially for

bidded large-scale projects.

NEGATIVE ISSUES ABOUT FOREIGN INVESTMENTS

MYTHS AND REALITIESMyth: It is only the Least Developed Countries or Developing countries that receive foreign investments. Reality: Until 2012, the US has been the biggest recipient of FDI in the world. Chinahas increased considerably in the last decade, reaching $59.1 billion in the first six months of 2012, making China the largest recipient of foreign direct investment after the US, which had $57.4 billion of FDI. In 2013 the FDI flow into China was $64.1 billion, resulting in a 34.7% market share of FDI into the Asia-Pacific region. By contrast, FDI out of China in 2013 was $18.97 billion, 10.7% of the Asia-Pacific share.

MYTHS AND REALITIESMyth: The “US” has a huge trade deficit with “China”. In 2004, this amounted to $162 billion. Reality: There are two basic problems with this statement: 1) almost half of the “trade deficit” is accounted for by US multinational corporations (MNC) in China exporting back to their “home market”.

2) What is called “China” and the “US” is a fiction as the commercial transaction takes place within a global supply chain network. China is just a production base and MNCs such as Apple exports these China-made products back to the US and the rest of the world.

MYTHS AND REALITIES

Myth: It is factor endowment (natural resources, low labor wages) that determine the economic growth of a country. Reality: Michael Porter in his book The Competitive Advantage of Nations which was supported by cross-sectional empirical study showed that it is people, the entrepreneurial and management expertise and capital that determine the success of a country in achieving economic performance.

Myth: The most popular myth is that held by ultra-nationalists who depict MNCs and foreign investment as capitalistic imperialism. They believe that these purposely keep Third World countries poor, so that the MNCs can have ready access to cheap labor.

Reality: The experience of China and the earlier Asian tigers (Hong Kong, Singapore, Malaysia and Thailand) in the 1980s and 1990s has shown that export-oriented foreign investment policies can benefit the host countries to the extent of accelerating economic growth, GDP and incomes of the population.

MYTHS AND REALITIES

Reality: Simply stated, historians and others have shown, rather convincingly, that economic expansion—the search for foreign markets for U.S. surplus agricultural and industrial production—has played a key role in American foreign policy, particularly after President Woodrow Wilson (1913–1921) enunciated his concept of a new world order predicated on classical liberal and capitalist principles. http://www.americanforeignrelations.com/E-N/Multinational-Corporations.html#ixzz3DtnybR6L

MYTHS AND REALITIES

http://www.americanforeignrelations.com/E-N/Multinational-Corporations.html

FOREIGN INVESTMENT IN THE PHILIPPINES

FOREIGN INVESTMENTS POLICY IN THE PHILIPPINES

It is the policy of the State to attract, promote, and welcome productive investments from foreign individuals, partnerships, corporations, and governments.

The activities should contribute to industrialization and socioeconomic development to the extent that foreign investment is allowed in such activity by the Constitution and relevant laws.

The law that governs the participation of foreign entities in economic and commercial activities in the Philippines is Republic Act No. 7042, as amended, otherwise known as the Foreign Investments Act of 1991 (“FIA”).

It is supported by the Omnibus Investments Code of 1987, also known as Executive Order No. 226, contains the current investment policies of the Philippines. The government encourages foreign and domestic investments.


Foreign-owned enterprises can register under the Board of Investments (BOI) to avail of fiscal incentives such as: exemption from income

taxes,

exemption from custom duties and taxes on importation of equipment, supplies and spare parts.

INCENTIVES FOR FOREIGN INVESTORS

Non-fiscal incentives -- permission to employ foreign nationals.

Simplification of custom procedures.

Capital gains tax exemptions

Protection from infringement of patents and trademarks

INCENTIVES FOR FOREIGN INVESTORS

These are the requirements to be qualified for investment incentives:

• Investing in PIONEER Areas and areas of investments listed in the Investment Priorities Plan (IPP).

• at least 50% of production is for exports, if Filipino-owned.

• at least 70% of production is for exports, if majority foreign-owned enterprise (more than 40% foreign equity).


To encourage foreign investments, Philippine laws expressly recognize various rights of foreign investors in the Philippines:

Repatriation of investments,

Remittance of earnings

Freedom from expropriation (except for public use or in the interest of national welfare) of property

Freedom from requisition of capital or investment

Individual freedoms guaranteed under the Constitution

RIGHTS OF FOREIGN INVESTORS

INVESTMENT PRIORITY AREAS

An important legislation is the classification of industries that the government deems to be in need of more investments. PIONEER activities can go up to 100% foreign ownership, subject to constitutional and/or statutory limitations.

A domestic market enterprise is an enterprise which produces goods for sale or renders service or otherwise engages in any business in the Philippines. An export enterprise is a manufacturer, processor, or service (including tourism) enterprise that exports 60 percent or more of its output.

These foreign-owned enterprises should be in at least one of these industries:

NEGATIVE LIST

Excluded Investment Area for Foreign Equity

Mass media, except recording

Except in cases prescribed by law, the practice of all professions, including, but not limited to, engineering, medicine, accountancy, architecture, customs brokerage, geology, and agriculture

Retail trade enterprises with a paid-up capital of less than US $2.5 million

Private security agencies

Small-scale mining

PREFERRED INVESTMENT PRIORITY

Up to 25 percent Foreign Equity

Private recruitment companies, whether for local or overseas employment

Construction and repair of locally funded public works except infrastructure/development projects covered by RA 7718 and projects that are foreign-funded or assisted

Contracts for the construction of defense-related structures


Exploration, development, and utilization of natural resources

Ownership of private lands

Operation and management of public utilities

Educational institutions

Supply of materials, goods, and commodities to government-owned or controlled corporations, companies, agencies or municipal corporations



Culture, production, milling, processing, trading (except retailing), and acquisition of rice and corn and the byproducts thereof

Acting as project proponent and facility operator of a build-operate-transfer project requiring a public utilities franchise

All forms of gambling


SPECIAL ECONOMIC ZONES

The Subic and Clark Economic Zones (RA 7227) and Special Economic Zones (RA 7916) provide another vehicle for foreign investors to put up their business with incentives in the Philippines.

During the Ramos administration, the government converted the former Clark and Subic bases into economic zones for developmental and export-oriented projects.


RA 7227 made Subic a separate customs territory ensuring free flow or movement of goods, equipment and raw materials into and going out the economic zone.

Subic and Clark Special Economic Zones provide incentives such as tax and duty-free importations of raw materials, capital and equipment.

Philippine Economic Zone Authority (PEZA) was created to help promote investments in the export-oriented manufacturing and service industries.

It actively assists investors in registering and facilitating their business operations in service facilities inside selected areas in the country (called PEZA Special Economic Zones).


SEZ locators such as export oriented enterprises and manufacturers enjoy specific privileges. The locations are equipped with complete infrastructure facilities, security and sometimes strike-free provinces.

Other activities also eligible for PEZA registration and incentives include business process and knowledge outsourcing, tourism, medical tourism, logistics and warehousing services, and agro-industry.


Multinational Corporations in the Global Economy

Claro G. Ganac

International Economics - DBA 722(B)

Multinational corporations in the global economy final

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