Lesson 10 - Multinational Corporations in the World Economy (PDF)

Republic of the Philippines ISABELA STATE UNIVERSITY Cauayan Campus SCHOOL OF ARTS AND SCIENCES Lesson 10. Multinational Corporations in the world economy Introduction A m...

Republic of the Philippines ISABELA STATE UNIVERSITY Cauayan Campus SCHOOL OF ARTS AND SCIENCES Lesson 10. Multinational Corporations in the world economy Introduction A multinational corporation (MNC) operates and has assets in at least one country other than its home country. A multinational firm often has offices and/or factories in several countries, as well as a centralized headquarters from which global management is managed. In this chapter, presents the history of multinational corporations as the agents of globalization. It explains how multinational corporation works, the examples of multinational companies and its economic explanations. Learning Outcomes 1. Identify the history of foreign direct investment and multinational corporation during the late 19th century. 2. Understand how a multinational corporation works in every country. 3. To highlight the tensions between an emerging global economy and a fragmented international political economy. Content Multinational Corporation: The agents of Globalization Multinational Corporations are situated at the intersection of production, international trade, and cross-border investment. Multinational corporation sometimes called transnational corporation (TNC). According to Caves (1996) it is “an enterprise that controls and manages production establishments plants in at least two countries.” According to the United Nations Conference on Trade and Development, there are approximately 63,459 parent firms that together own a total of 689,520 foreign affiliates. Together, these parent firms and their foreign affiliates account for about 25% of the world’s economic production and employ some 86 million people worldwide. (UNCTAD 1999). A firm becomes a multinational corporation by engaging in foreign direct investment (FDI). Foreign Direct Investment occurs when firm based in one country builds a new plant or a factory in a second country or purchases an existing one. Historically, firms have engaged in foreign direct investment to achieve one of three objectives. Firms have invested across national borders to gain secure access to natural resources. Firms invest across borders to gain secure access to foreign markets. MNCs make cross-border investment account for a substantial and rapidly increasing share of cross-border investment, and it is in this type of investment that is creating the global production process to different parts of the world. History Prior to the 19th century, most foreign direct investment was relatively short-lived. (Jones,  Republic of the Philippines ISABELA STATE UNIVERSITY Cauayan Campus SCHOOL OF ARTS AND SCIENCES 1996) Foreign direct investment and multinational corporations began to emerge as significant and enduring components of the international economy only during the late 19th century. By 1914, multinational manufacturing was taking place in a large number of industries, including chemicals pharmaceuticals, electrical, machinery, automobiles, tires, and processed foods (Jones, 1996). The first wave of multinational business was dominated by Britain, the world’s largest capital exporting country in the 19 th century. British firms invested in natural resources and in manufacturing within the British Empire, the United States, Latin America and Asia. American firms dominated foreign direct investment following the WWII. Concerned with postwar reconstruction and unwilling to risk the balance of payments consequences of capital outflows, European and Japanese governments discouraged outward foreign direct investment. As a consequence, America firms accounted for 2/3 of all new MNC affiliates created between 1945 and 1960 (Dunning, 1996). The largest share American FDI went to Europe for manufacturing. In summary, multinational corporations are important participants in international production and trade. They extend managerial control across borders, and they account for about a quarter of global production and a third up global trade. It is this central role that has led many to consider MNCs to be the agents of globalization, more responsible than any other groups of actors for the integration of national economies. MNCs invest overseas for a variety of reasons – to gain access to critical markets, to acquire raw materials, and to enhance the efficiency of their production process. Despite their prominence, MNC activity is concentrated within a relatively restricted set of counties. As was the case with world trade flows, most MNC activity takes place among Western Europe, North America, and Pacific Asia. Multinational Corporation A multinational corporation (MNC) has operations and assets in at least one country other than its own. A multinational corporation often has offices and/or factories in many countries, as well as a centralized headquarters from which worldwide management is coordinated. Certain of these corporations, also known as international, stateless, or transnational business entities, may have budgets larger than some tiny nations. How a Multinational Corporation (MNC) Works? A multinational corporation, known as a multinational firm, is an international corporation with operations in at least two nations. Some authorities define a multinational firm as any company having a global branch; others limit the term to enterprises that generate at least a quarter of their income outside of their home country. Many global corporations are headquartered in industrialized countries. Multinationals, according to proponents, provide high-paying employment and technologically advanced items in nations that would not otherwise have access to such opportunities or goods. Critics of big firms, on the other hand, claim they hold undue political power over governments, exploit developing countries, and produce employment losses in their own countries.  Republic of the Philippines ISABELA STATE UNIVERSITY Cauayan Campus SCHOOL OF ARTS AND SCIENCES Multinational Companies Examples 1. Microsoft Microsoft Corporation is a global technology business based in Redmond, Washington. The company's headquarters are located in Redmond, Washington. It develops, licenses, maintains, and sells computer software, electronics, and associated services. Bill Gates and Paul Allen founded the company on April 4, 1975. 2. Nestle Nestle is a Swiss multinational food and beverage production company based in Vevey, Switzerland. Since 2014, it has become the world's largest food company in terms of sales and other criteria. It is rated No. 64 on the Fortune Global 500 in 2017 and No. 33 on the Forbes Global 2000 list of the world's largest public corporations in 2016. 3. Coca-Cola Coca Cola, commonly known as Coke, is a carbonated soft drink produced by The Coca Cola Company. It was created in the 19th century by John Stith Pemberton. The name of the drink refers to two of its primary ingredients: coca leaves and kola nuts. Coca-Cola's recipe is a trade secret. It is one of the highest earning Multinational Company. 4. PepsiCo PepsiCo, Inc is an American multinational food, snack and beverage corporation. The corporation has headquarters in Harrison, New York. It is involved in the production, marketing, and distribution of grain-based snack foods, drinks, and other items. 5. Apple Inc. Apple Inc. is a global technology company based in Cupertino, California. It creates, manufactures, and sells consumer gadgets, computer software, and internet services. In April 1976, Steve Jobs, Steve Wozniak, and Ronald Wayne founded Apple to build and sell Wozniak's Apple I personal computer. Within a few years, in 1980, Apple went public, resulting in Economic explanation for MNC's The prevalence of multinational corporation in the contemporary international economy is puzzling for neo-classical economics, because firms can choose how they will participate in the international economy. A firm can rely upon market-based transactions to carry out its international activities, importing its inputs from foreign suppliers and exporting its products to foreign markets. Or a firm can internalize these international transactions within a single corporate structure by owning the foreign firms that supply its input and by locating production in foreign markets rather than exporting its products. The existence of MNCs implies that many firms have chosen to internalize their international transactions. Market imperfections Market imperfections are the primary factors that drive firms to internalize their  Republic of the Philippines ISABELA STATE UNIVERSITY Cauayan Campus SCHOOL OF ARTS AND SCIENCES transactions within a single corporate structure. A market imperfection arises when the price mechanism fails to promote a welfare improving transactions. Regulating MNC Activity Governments have responded to this dilemma by trying to manage the terms under which MNCs operate in their countries. In Regulating MNC Activity, governments have sought to harness foreign direct investment to further their own economic policy objectives. The effort to manage MNC activity has been common to developing and advanced industrialized countries alike, developing countries have relied for more heavily on such practices than have the advanced industrialized countries. MNC’s and Labor in the Global Economy Multinational corporations have been heavily criticized for the way they are alleged to treat workers in developing and advanced industrialized countries. MNCs are accused of exploiting workers in developing countries by paying low wages and maintaining sub-standard workplaces, also they were accused of eliminating large numbers of jobs in countries. The developing country workers employed by MNCs receive better wages and enjoy better working conditions than do developing countries’ workers employed by local firms. In the advanced industrialized countries, outward investment by MNCs changes the kinds of jobs available in the domestic economy, but does not reduce the total number of jobs available in the domestic economy. Conclusion Multinational corporations are perhaps the most controversial aspect of the international economic system. Controversy over the role that MNCs plays in the international economy arises from their size and from the nature of their managerial structure. MNCs are very large firm that extend managerial control across borders and make decisions in reference to global strategies. This managerial and decision-making framework coexist somewhat uneasily with an international political system that remains organized around national governments controlling exclusive territorial domains. Because multinational corporations and governments pursue independent objectives, there are times when the global strategies of these firms come into conflict with the economic objectives of the governments that host them. MNCs highlight the tensions between an emerging global economy and a fragmented international political economy that continues to be organized around sovereign nation states. Teaching and Learning Activity Activity 1 Provide 5 examples of multinational corporations that are not included in the report and explain how they aided the global economy. Recommended learning materials and resources for supplementary reading Chen, J. (2022). Multinational Corporation (MNC). https://www.investopedia.com/terms/m/multinationalcorporation.asp  Republic of the Philippines ISABELA STATE UNIVERSITY Cauayan Campus SCHOOL OF ARTS AND SCIENCES Flexible Teaching Learning Modality (FTLM) adopted Online (synchronous) - Class collaboration through the GC/SeDi LMS Remote (asynchronous) - Individual task/activity through module References Thomas Oatley, International Political Economy: Interest and Institutions in the Global Economy (Pearson/Longman, 5th edition, 2016)