MULTINATIONAL & TRANSNATIONAL CORPORATIONS First MNC was Dutch East India Co (1602), granted monopoly in colonial trade. Today, UN estimates about 62,000 MNCs with 900,000 affiliates. • Why do nations trade goods and services? What are gains from specialized production? • How economically important are foreign direct investments of multi- and transnational corporations? Who benefits most from FDI? • How much do MNCs harm LDCs, outweighing any alleged benefits? • Is a sinister network of interlocked firms dominating the world economy, using its political power to oppress? • Who can compel MNCs to become more accountable
Transcript
MULTINATIONAL & TRANSNATIONAL CORPORATIONS
First MNC was Dutch East India Co (1602), granted monopoly in colonial trade. Today, UN estimates about 62,000 MNCs with 900,000 affiliates.
• Why do nations trade goods and services? What are gains from specialized production?
• How economically important are foreign direct investments of multi- and transnational corporations? Who benefits most from FDI?
• How much do MNCs harm LDCs, outweighing any alleged benefits?
• Is a sinister network of interlocked firms dominating the world economy, using its political power to oppress?
• Who can compel MNCs to become more accountable corporate citizens?
Comparative Advantage Theory
David Ricardo refuted Adam Smith’s absolute advantage theory: when a country could produce every good more efficiently than another nation, it would maximize those goods’ productions. Ricardo formalized Robert Torrens’ comparative advantage idea, in his On the Principles of Political Economy and Taxation (1817), using a classic example of trading English cloth and Portuguese wine.
Altho Portugal produced both goods with less labor input than did England, their relative costs differed: very hard to make English wine, less difficult to produce cloth. Thus, Portugal should produce excess wine, and trade it for English cloth. England benefits from free trade because its cost of producing cloth is unchanged, but English now drink wine at closer to the cost of cloth.
In general, every nation should specialize in producing & trading those goods in which it enjoys a comparative advantage – calculated not as co$t, but as lower opportunity cost (= amount of good1 given up to produce unit of good2).
Classical theories of international trade argued that nations gain mutual benefits by specializing in producing goods with lower opportunity costs.
Free Trade Maximizes National UtilityEconomists since Ricardo claim that “free trade” makes all nations richer, as comparative advantages increase global production levels.
Without protectionism (e.g., high tariffs), free trade enables nations to devote their scarce resources to producing goods & services for which they enjoy comparative advantage. Economies of scale plus specialization increase the “production possibility frontier,” yielding highest global customer utility.
But, Friedrich List (1841) wrote that nations locked in to providing raw commodities couldn’t industrialize. By 20th century, African (agriculture, diamonds, gold) and Arab (oil, gas) nations had all developed much less rapidly than some countries that were lacking in plentiful raw materials (Japan, Taiwan, Singapore).
How has rapid mobility of international financial capital eroded comparative advantages among nations? Does the global search for highest investment returns equalize all countries’ relative abundances to attract new capital?
The Competitive Advantage of NationsMichael Porter’s competitive advantage model advocated success via national competitive advantages in firms, clusters, innovative products.
• Factor conditions – created by sustainable, heavy investments in specialized production factors: skilled labor, capital, infrastructure • Demand – domestic pressures for quality • Related & supporting industries – facilitate continuous info exchanges promoting innovation• Firm strategy, structure & rivalry – firm organization & nature of domestic rivalries
Based on industry case studies in 10 nations, Porter developed his “Diamond Model” of four key interlinked production factors. Pro-active governments can stimulate these factors, but they’re very difficult for firms to duplicate, resulting in national competitive advantages. For example, outsourcing occurs because cheap labor is unavailable inside advanced economies. Ease of technology flows undermine any absolute and comparative advantages they may have over Third World.
Competence & Sustainable Advantage
Firm skills/assets that comprise core competencies: • Customer focus, ability to manage customer lifetime value • Superior product quality, employees, management team • Extensive distribution contracts • Accumulated brand equity and positive company reputation • Low-cost production techniques • Patents and copyrights • Government-protected monopoly
Source of firms’ sustainable competitive advantages is some core competence that is distinctive, proprietary, and difficult to replicate.
Porter’s diamond promotes a cluster of competence in a region when resources and competences reach critical thresholds, giving it a key position in global industry & sustainable advantages over other places.
1. Techno clusters - well adapted to a high-tech knowledge economy, formed around a core of renowned universities & research centers
2. Historic know-how clusters - based on traditional production activities that maintain their advantage in know-how over years or centuries (e.g., Terza Italia).
How can clusters boost competition? By increasing the productivity of firms in a cluster? Driving innovations? Stimulating new businesses?
MNC / TNCPorter wrote, “The rise of the multinational corporation … weakened the traditional explanations of why and where a nation exports.”
Multinational corp – manages production facilities located in at least two countries
Transnational corp – controls assets of other entities in other than its home economy, usually via equity
1. Horizontally integrated: manage production establishments located in different countries to produce same/similar products
2. Vertically integrated: manage establishments in one country to produce products that serve as inputs to its production establishments in another country
3. Diversified: manage establishments located in different countries that are neither horizontally or vertically integrated
3rd World: Hutchison, Singtel, Cemex, LGE, Petroleos de Venezuela, Petronas
Foreign Direct Investment
Control means owning ≥10% of incorporated firm shares; ≥ 10% of voting power for unincorporated firm; or developing a new branch plant that is a permanent establishment of originating firm.
FDI may comprise > 20% of global GDP.
MNCs are source of FDI, the movement of capital across national borders that grants the investor control over an acquired asset.
Greenfield investment: Direct investment in new or expanded facilities, creating jobs & transferring technology and know-how. Greenfield plants are the principal FDI mode used to invest in less-developed countries.
Mergers and Acquisitions: Transfer of existing assets from local to a foreign firm, creating either new legal entity or a company affiliate. Primary FDI mode in developed countries.
Capital Flows to Developing Nations
In 2001, private capital flows to less-developed countries (including Central & Eastern Europe) totaled $171 billion, versus $57 billion in official development assistance.
SOURCE: UNCTAD 2004 Development and Globalization: Facts and Figures
But, Most FDI Goes to Developed Nations
Note sharp drop in just two years!
MNCs: Benefits & Costs
MNC investments fuel the local growth-engines:
• Higher wage-incomes, stimulating local businesses
• Training, human capital build higher-skilled labor force
• Contribute to government taxes & fees, or revenues by purchasing and privatizing existing national assets
How much do MNCs harm LDCs, outweighing any alleged benefits?
► Exploitation of low-wage labor; expatriate managers remit incomes & firm profits to the developed nations’ most privileged classes
► Capital-intensive production worsens LDC poverty and income inequality
► Government corruption, reaping tax concessions, subsidies, lax enforcement
► Transfer pricing shifts accounting to off-shore tax havens (Cayman Islands), minimizing corporate tax burdens and reducing nation-states’ tax revenues
MNCs benefit less-developed countries, but also impose costs on them
Power of the Megacorps
Do largest MNCs manipulate international relations, using economic clout inside political districts, lavish spending on public relations & political lobbying, control of IGOs like WTO?
What recent instances of popular resistance to the rising political power of the MNCs? How best hold MNCs accountable for their actions?
Does a nefarious web of transnational ownerships and interlocking directorates controlling the world’s economies? (See network figure)
Is a global corporate culture emerging to convert employee loyalties from national identities?
Are MNCs obtaining global power and influence?
In Gibson’s Neuromancer, megacorps are massive conglomerates, holding monopolistic power across multiple markets, so powerful that they can ignore the law, control military-scale security forces, own vast territories, even behave as if they were sovereign governments.
WTO – Ensuring Free Trade?
“The WTO is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business.” <www.wto.org>
The WTO, created in 1995, is a primary target of activists in the anti-corporate globalization movement.
The WTO multilateral trading system is negotiated and signed by governments. These contracts guarantee member nations’ trade rights & bind governments to keep trade policies within agreed limits. Their purpose is to ensure that trade flows as predictably and freely as possible, by helping producers, exporters, and importers of goods and services conduct their business smoothly.Core WTO principles are “Trade
without Discrimination” & “Promoting Fair Competition” among nations.
WTO – A New Evil Empire?Anti-globalists criticize the WTO for its allegedly undemocratic decision-making and lack of openness in reaching agreements. They claim the 25 richest developed nations manipulate trade deals to the disadvantage of 120 poor developing countries.
What should be a “level playing field” in free-trade talks?
• Should all nations have equal access and status in trade disputes? How can poor nations afford negotiators & experts?
• Should negotiations produce actually equal outcomes and implementation? Would genuine trade “fairness” require a massive transfer of wealth from the richest to poorest nations?
LDCs often lack staff and expertise to win favorable tariff reductions. Textile quotas block clothing imports from low-wage countries. US, EU, and Japanese subsidy rates are $20,000 per farmer.
