Multinational Corporations in the Global Economy

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Multinational Corporations in the Global Economy

• Lecture 19

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What are Multi-National Corporations?

• The Agents of Economic Globalization
• An enterprise that controls and manages
  production establishmentsplantsin at least two
  countries
• Corporations that Extend Managerial Control From
  One Country into Another.

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How Many MNCs?

• 63,459 Parent Corporations
• 689,520 Foreign Affiliates of these Parent
  Corporations

Source United Nations Conference on Trade and
Development, 1998. World Investment Report
Trends and Determinants. Geneva.
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The 20 Largest MNCs(By Foreign Assets)
1. General Electric (Electronics) 11. Mobil (Petroleum)
2. Ford Motor Company (Automotive) 12. Fiat (Automotive)
3. Royal Dutch Shell (Petroleum) 13. Hoechst (Chemicals)
4. General Motors (Automotive) 14. Asea Brown Boveri (Electronics)
5. Exxon Corp (Petroleum) 15. Bayer AG (Chemicals)
6. Toyota (Automotive) 16. Elf Aquitaine (Petroleum)
7. IBM (Computer) 17. Nissan Motor (Automotive)
8. Volkswagen Group (Automotive) 18. Unilever (Food and Beverages)
9. Nestle S.A. (Food and Beverages) 19. Siemens (Electronics)
10. Daimler Benz (Automotive) 20. Roche Holding (Pharmaceuticals)
Source UNCTAD, World Investment Report, 1999
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What Type of Activity?

• Of the 50 Largest MNCs
• 10 are Auto Producers
• 10 are Electronics and Computers
• 9 are Oil Companies
• 8 are Chemical and Pharmaceutical Firms
• 5 are Food and Beverages

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How Big Are MNCs?
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National Income and MNC Sales, 1992(US Billions)
United States 5,920.0 General Electric 62.2
Austria 185.2 Hitachi 61.5
General Motors 132.7 Venezuela 61.1
Exxon 103.5 British Petroleum 59.2
Ford Motor 100.8 Malaysia 57.6
Turkey 99.7 Mobil 57.4
Royal Dutch Shell 98.9 Colombia 48.6
Portugal 79.8 Ireland 43.3
Toyota 79.1 Nestle 39.1
Hong Kong 77.8 Egypt 33.6
IBM 65.1 Sony 31.5
Source Lairson and Skidmore, 1997, 12-4.
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More Broadly

• Out of the Worlds 150 Largest Economic
  Entitiescountries and MNCs
• More than half are corporations63 countries, 87
  MNCs.
• 30 of these 63 Countries are Advanced
  Industrialized Countries.
• The largest MNCs are larger than most developing
  countries

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How Important are MNCs?

• Produce About 25 of Total World Economic Output
• Employ About 86 Million People Worldwide.
• Two-thirds of the worlds exports of goods and
  services are accounted for by MNCs
• 30-40 percent of this trade takes place between
  Affiliates of the Same MNC
• For Example, American-owned affiliates based in
  Mexico account for about 40 percent of Mexicos
  trade with the United States

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Foreign Direct Investment

• How Much FDI?
• Between 1986 and 1991, 160 billion per year
• In 1997, 400.5 Billion
• More than 80 of MNC Activity Takes Place within
  the Advanced Industrialized Economies
• Advanced Industrialized Countries are the Main
  Sources of FDI
• Advanced Industrialized Countries are the Main
  Recipients of FDI
• Remaining 20 Goes to Developing Countries.

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Where in the World?
Parent Firms Foreign Affiliates in their Economy
Western Europe 49,806 94,623
United States 3,382 18,711
Japan 4,334 3,321
Developing World 9,246 238,906
East Asia 6,067 206,148
Latin America 2,594 26,577
Africa 43 429
Source UNCTAD, World Investment Report, 1999
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The Stock of Foreign Direct Investment
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Why MNCs?

• Three Types of MNC Investment

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1. Market Oriented

• Investment for the purpose of selling to
  consumers in that market.
• Market Orientation is the single largest
  motivation for MNCs.
• Automotive Industry is a Prominent Example.
• 14 of the 100 Largest MNCs are Auto Producers
• BMW, Mercedes, Honda, Toyota All Produce in the
  U.S. for the U.S. Market Ford, GM, Nissan, in
  Europe Producing for European Market.
• Dont Move to Exploit Low Costs, But to Jump Over
  Protectionist Barriers

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2. Natural Resource Oriented

• Investment undertaken in order to acquire raw
  materials.
• Second most important motivation for FDI and MNC
• Oil and Mining Companies are Most Prominent
  Example of This Type11 of the top 100 MNCs are
  Engaged in these Activities.

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3. Efficiency Oriented

• Investment undertaken in order to reduce the
  costs of productionless costly labor, less
  intrusive environmental regulations, tax breaks,
  etc.
• Historically this has not been a primary
  motivation for FDI by MNCs. Of growing importance
  Over Last 20 Years.
• Electronics/Computers are a Prominent Example of
  this Type.
• 17 of the Largest 100 MNCs are Firms Engaged in
  These Activities.
• Labor Intensive Aspects of Production Are Moved
  into Labor Abundant Countries
• Capital Intensive Aspects Retained in Advanced
  Industrialized Countries

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Are MNCs Benign or Malign?

• Debate Between People Who Concentrate on One Side
  or the Other of the Equation.
• More ComplicatedMNCs Carry Costs and Provide
  Benefits.
• Answer Depends upon How One Balances the Two,
  which is Not Easy to Do.

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MNCs are Benign

• Transfer Savings From Advanced Industrialized
  Countries to the Developing World.
• Bring Capital Goods and Technology to Countries
  Where Both are Scarce.
• Create Jobs in Developing Countries that Would
  Not Exist Otherwise.
• Provide Management Expertise.
• Provide Links to International Marketing
  Networks.

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MNCs are Malign

• MNCs Crowd Out Local Investment and Earn Rents
  Both Reduce the Amount of Local Investment.
• Can Drive Local Firms Out of Business
• Often Have Proprietary Control Over Technology
  (Pharmaceutical Industry), and Thus Do Not
  Transfer Technology or Managerial Expertise.

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MNCs Exploit Third World Workers

• Pay Low Wages
• Engage in Sub-Standard Workplace Practices

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Labor Compensation By MNCs(thousands of US
dollars)
High Income Middle Income Low Income Ratio High/Low
All Industries 45.9 19.3 10.1 4.5
Petroleum 72.8 30.7 25.4 2.9
Manufacturing 45.0 14.1 4.9 9.2
Services 42.4 19.7 25.8 1.6
Source Edward Graham. 2000. Fighting the Wrong Enemy. Washington, D.C. Institute for International Economics. Source Edward Graham. 2000. Fighting the Wrong Enemy. Washington, D.C. Institute for International Economics. Source Edward Graham. 2000. Fighting the Wrong Enemy. Washington, D.C. Institute for International Economics. Source Edward Graham. 2000. Fighting the Wrong Enemy. Washington, D.C. Institute for International Economics. Source Edward Graham. 2000. Fighting the Wrong Enemy. Washington, D.C. Institute for International Economics.
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Labor CompensationMNCs vs. Local
Firms(thousands of US dollars)
All Countries High Income Middle Income Low Income
Average Wages Paid by MNC Affiliate 15.1 32.4 9.5 3.4
Average Wages Paid by Local Firms 9.9 22.6 5.4 1.7
Ratio 1.5 1.4 1.8 2.0
Source Edward Graham. 2000. Fighting the Wrong
Enemy. Washington, D.C. Institute for
International Economics
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Sweatshops

• Excessive Overtime
• Required to Work Long Hours without overtime
  bonus.
• Abusive Treatment of Workers
• Exposed to Hazardous Working Conditions Physical
  Punishment of Violating Rules Sexual Harassment
• Bonded Labor
• Pledge your Labor for Length of Time in Exchange
  for a Loan. Parents Often Pledge their Children
• Child Labor
• ILO 250 Million Children Under Age of 14
  Working, Half work Part time.
• MNCs or Local Firms?

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Do MNCs Treat Labor Poorly?

• Cases of Such Abuses Do Exist. However
• Working Conditions in MNCs are not less
  favorable than those of comparable national
  employers often they rate better than the
  average in local firms.
• Large well-established and visible MNCs are
  likely to comply with international standards and
  not to undercut the labor standards of their host
  (and home) countriesThey adhere to minimum wage,
  working hours, overtime, and compensation
  regulations

Source UNCTAD. 1999. World Investment Report
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Do MNCs Export American Jobs?

• Answer Depends Upon Two Factors
• How Many Jobs Stay in the Absence of FDI?
• How Many Jobs Created by FDI?
• Example Maquiladora Program in Mexico
• American Labor Claims this Program has Cost the
  United States Hundreds of Thousands of Jobs.
  Most of these Jobs Would Have Disappeared Anyway.
• American Firms in Mexico Directly Support 154,000
  jobs in the United States. These Jobs Would Not
  Exist Without the Maquiladora Program.
• MNCs Destroy and Create Jobs in the U.S. On
  Balance, Number of Jobs Created is Greater than
  Number Destroyed
• FDI Transfers Jobs Fewer Low Skill Jobs and More
  High Skill Jobs.

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Balancing Costs and Benefits

• Very Little Systematic Evidence That MNCs Make
  Things Worse in Developing Countries or in
  Advanced Industrialized Countries.
• Does This Mean One Cant Find Examples of
  Egregious MNC Practices?
• Some Evidence that MNCs Make Things Better.
• Does This Mean There is No Room For Improvement?
  Absolutely Not.
• Does This Mean That MNCs Exploit Local Conditions
  to their Advantage? Of Course.

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Are MNCs Good or Bad?

• On Balance, Positive Economic Consequences
  Outweigh the Negative Economic Consequences.
• Create Jobs and Raise Wages in Developing
  Countries. Some Sweatshop Aspects, But Not
  Prevalent.
• Destroy Low Wage, Low Skill Jobs and Create High
  Wage, High Skill Jobs in Industrialized
  Countries.
• The Non-Economic Consequences are More Difficult
  to Evaluate.
• Displace Traditional Modes and Substitute
  Technology-Intensive Modes
• Disrupts Peoples Lives Disrupts Entire
  Communities.

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Wheres the Politics?

• MNCs are Challenging the Nation States
  Pre-eminent Role in the International System?
• Rising Conflict within Domestic Political Systems
  in Advanced Industrialized Countries between
  Labor and Capital.
• Rising Labor Challenge to the World Trading
  System.
• Likely to Fuel Conflict Between the
  Industrialized World and the Developing World.