Multi-national Multi-national Corporations & Global Corporations & Global

ProductionProduction

Multi-national CorporationsMulti-national Corporations

Facts about Multi-national Corporations (MNCs)Facts about Multi-national Corporations (MNCs) By the end of 1990s, produced a quarter of the global By the end of 1990s, produced a quarter of the global

productsproducts Top 100 MNCs controlled 16% of world’s productive assetsTop 100 MNCs controlled 16% of world’s productive assets Increase in number in the last 20 years (tripled bteween Increase in number in the last 20 years (tripled bteween

’88 and ‘97 )’88 and ‘97 ) Political prominent and influential Political prominent and influential MNCs are not free from domestic/foreign regulationsMNCs are not free from domestic/foreign regulations MNCs decide locations of investment based on:MNCs decide locations of investment based on:

Local government regulationsLocal government regulations Tax incentivesTax incentives Political stabilityPolitical stability InfrastructureInfrastructure Skilled, young and cost-effective labor forceSkilled, young and cost-effective labor force Local market potentialLocal market potential

75% FDI goes to DCs75% FDI goes to DCs

Multi-national CorporationsMulti-national Corporations

Facts about Multi-national Corporations (MNCs)Facts about Multi-national Corporations (MNCs) Job creation in LDCsJob creation in LDCs

19 million jobs in LDCs19 million jobs in LDCs MNCs also called “transnational firms” MNCs also called “transnational firms” Operate in two or more countriesOperate in two or more countries

at least one FDI project it has management rights or at least one FDI project it has management rights or controlcontrol

Ethnocentric in decision-makingEthnocentric in decision-making D&R in home countryD&R in home country

Geo-centric or statelessGeo-centric or stateless Several MNCs entering into production allianceSeveral MNCs entering into production alliance

Entry into foreign countries via joint-venturesEntry into foreign countries via joint-ventures

Multi-national CorporationsMulti-national Corporations

Rationale to Become Transnational CorporationsRationale to Become Transnational Corporations Establish, increase and defend market shareEstablish, increase and defend market share More competitive with local firmsMore competitive with local firms Overcome trade barriersOvercome trade barriers Lower production costsLower production costs Avoid uncertaintyAvoid uncertainty Limit competitionLimit competition Avoid government scrutiny of business Avoid government scrutiny of business

activitiesactivities

Methods of OperationMethods of Operation Horizontal integrationHorizontal integration

Production of same products in different subsidiaries Production of same products in different subsidiaries overseasoverseas

Multi-national CorporationsMulti-national Corporations

Methods of OperationMethods of Operation Horizontal integrationHorizontal integration

Production of same products in different Production of same products in different subsidiaries overseassubsidiaries overseas

Vertical integrationVertical integration Distribution of different production functions in Distribution of different production functions in

different subsidiariesdifferent subsidiaries R&D in home countryR&D in home country Technologically challenging assembly in NICsTechnologically challenging assembly in NICs Labor-intensive in LDCsLabor-intensive in LDCs

Multi-national CorporationsMulti-national Corporations

Factors Impacting MNCs Growth Factors Impacting MNCs Growth Breakthroughs in communications, transportation, Breakthroughs in communications, transportation,

and technologyand technology Rapid economic growthRapid economic growth International economic system and states International economic system and states

welcoming MNCs activities welcoming MNCs activities Increased global capital flow due to relaxation of Increased global capital flow due to relaxation of

capital control resulting in greater amount of FDIcapital control resulting in greater amount of FDI Trade protectionism encourages MNCs expansionTrade protectionism encourages MNCs expansion

Multi-national CorporationsMulti-national Corporations

MNCs and Foreign Direct Investment (FDI)MNCs and Foreign Direct Investment (FDI) FDI traditionally concentrated in N America, Europe & FDI traditionally concentrated in N America, Europe &

JapanJapan DCs absorbed 80% of DFI as of 1995DCs absorbed 80% of DFI as of 1995 China, the only country absorbing large amounts of FDIChina, the only country absorbing large amounts of FDI

Leading FDI Host Economies (1995)Leading FDI Host Economies (1995) USAUSA UKUK FranceFrance ChinaChina SpainSpain BelgiumBelgium NetherlandsNetherlands AustraliaAustralia CanadaCanada

Multi-national CorporationsMulti-national Corporations

MNCs and Foreign Direct Investment (FDI)MNCs and Foreign Direct Investment (FDI)

Leading FDI Host Economies (2004)Leading FDI Host Economies (2004) ChinaChina USAUSA UKUK FranceFrance

MNCs and DevelopmentMNCs and Development

Perceived Benefits of MNCsPerceived Benefits of MNCs Provision of diversity of high-quality and low-Provision of diversity of high-quality and low-

priced productspriced products Win-win gains for both MNCs and host nationsWin-win gains for both MNCs and host nations Serving the interest of the world community Serving the interest of the world community

as a whole and against ultra-nationalismas a whole and against ultra-nationalism Thus promoting world peaceThus promoting world peace

Contributing to poverty in LDCsContributing to poverty in LDCs Child labor in South Asia, a major problem where Child labor in South Asia, a major problem where

MNCs are insignificant in numberMNCs are insignificant in number Child labor in East Asia, no longer a problem, where Child labor in East Asia, no longer a problem, where

MNCs have a huge presenceMNCs have a huge presence