suresh international

8/9/2019 Suresh International

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What Is International Business?

Dealing with so many different cultures and with extensive field experience, I tend toapply the simplest of definitions:

International business =Business transactions crossing national borders at any stage of the transaction.

But then very often other questions crop up.

international business

Hide links within definitionsShow links within definitions

Definitions (2)

1. The economic system of exchanging good and services, conducted between individuals

and businesses in multiple countries.

2. The specific entities, such as multinational corporations (MNCs) and international

business companies (IBCs), which engage inbusiness between multiple countries.

International business is a term used to collectively describe all commercialtransactions (private and governmental, sales,investments,logistics,and transportation)that take place between two or more nations. Usually, private companies undertake suchtransactionsforprofit; governmentsundertake them for profit and forpolitical reasons.[1]

It refers to all those business activities which involves cross border transactions of goods,services, resources between two or more nations. Transaction of economic resourcesinclude capital, skills, people etc. for international production of physical goods andservices such as finance, banking, insurance, construction etc.[2]

A multinational enterprise (MNE) is a company that has a worldwide approach tomarkets and production or one with operations in more than a country. An MNE is oftencalled multinational corporation (MNC) or transnational company (TNC). Well knownMNCs include fast food companies such as McDonald's andYum Brands, vehiclemanufacturers such asGeneral Motors,Ford Motor Company and Toyota, consumerelectronics companies like Samsung,LGandSony, and energy companies such as

ExxonMobil, Shelland BP. Most of the largest corporations operate in multiple nationalmarkets.

Areas of study within this topic include differences in legal systems,political systems,economic policy, language, accounting standards, labor standards, living standards,environmental standards, local culture,corporate culture, foreign exchange market,tariffs, import and export regulations, trade agreements,climate, education and many
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Most companies are eitherinternational or compete with international companies. Modes ofoperation may differ from those used domestically. The best way of conducting business may differ by country. An understanding helps you make bettercareerdecisions. An understanding helps you decide whatgovernmentalpolicies to support.

Managers in international business must understand social science disciplines and howthey affect all functional business fields.

Tom Travis, the managing partner of Sandler, Travis & Rosenberg, PA. and internationaltrade and customs consultant, uses the Six Tenets when giving advice on how toglobalize one's business. The Six Tenets are as follows [3]:

1. Take advantage of trade agreements: think outside the bordero Familiarize yourself with preference programs and trade agreements.

o Read the fine print.

o

Participate in the process.o Seize opportunities when they arise.

2. Protect your brand at all costso You and your brand are inseparable.

o You must be vigilant in protecting your intellectual property both at home

and abroad.

o You must be vigilant in enforcing your IP rights.

o Protect your worldwide reputation by strict adherence to labor and

human rights standards.

3. Maintain high ethical standardso Strong ethics translate into good business.

o Forge ethical strategic partnerships.o Understand corporate accountability laws.

o Become involved with the international business self-regulation

movement.

o Develop compliance protocols for import and export operations.

o Memorialize your company's code of ethics and compliance practices in

writing.

o Appoint a leader.

4. Stay secure in an insecure worldo Security requires transparency throughout the supply chain.

o Participate in trade-government partnerships.

o Make the most of new security measures.o Secure your data.

o Keep your personnel secure.

5. Expect the Unexpectedo The unexpected will happen.

o Do your research now.

o Address your particular circumstances.

6. All global business is personal
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o Go to the source.

o Keep communications open.

o Keep the home office operational.

o Fly the flag at your overseas locations.

o Relate to offshore associates on a personal level.

o Be available to overseas clients and customers 24/7.

MULTINATIONAL ENTERPRISE

A multinational corporation (MNC) ortransnational corporation (TNC), also calledmultinational enterprise (MNE)[1], is a corporation or an enterprise that managesproduction or delivers services in more than one country. It can also be referred as aninternational corporation. The International Labour Organization (ILO) has defined[citationneeded] an MNC as a corporation that has its management headquarters in one country,known as the home country, and operates in several other countries, known as host

countries.

The first modern multinational corporation is generally thought to be theDutch EastIndia Company. Nowadays many corporations have offices, branches or manufacturingplants in different countries from where their original and main headquarters is located.

Some multinational corporations are very big, with budgets that exceed some nationalGDPs. Multinational corporations can have a powerful influence in local economies, andeven the world economy, and play an important role in international relationsandglobalization. The presence of such powerful players in the world economy is reason formuch controversy.

Characteristics

As I see it, following are the characteristics of a Micro Multinational Company.

1. Operates in several countries.2. Normally a small group of people runs it.3. People are scattered around the globe.4. Resources are limited.5. Many people wear several hats.

6. Financing available for growth is not sufficient.7. Usually can be categorized as a small business.8. Adopts the new technologies very quickly.9. Heavily leverages the Internet for expansion.10. Uses resources very efficiently.11. Mostly managed by entrepreneurs with extensive technical backgrounds.12. Most of the people in the company are stake holders instead of employees on

salary.
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13. Routine daily tasks are outsourced to countries with low cost technical labor.14. Yearly combined budget of the growth and management tools is only a fraction of

the annual sales.

Multinational Business Enterprises:

A New Category of International Organizations

- / -

Report orginally published inYearbook of International Organizations, 12th ed, 1968-69,pp 1189-1214 with the detailed report, including the survey data on which this article is

based. The report included a list of 600 multinational business enterprises. Tables

separate. [Version franaise abrege]. Also published inInternational Associations, 1968,1, pp 1-11

Introduction

The editors of the Yearbook of International Organizations have, in previous editions,restricted their attention to non-profit international organizations, whether governmental

or non-governmental.

Nearly all intergovernmental organizations are non-profit but the few exceptions havebeen included in previous editions of the Yearbook to ensure that all intergovernmental

organizations were listed. These include such bodies as Eurochemic and Eurofima.

There are many non-governmental organizations which, although they do not have profitas the main aim, nevertheless operate in order to facilitate profit maximization by theirmembers. Most of these are in the commercial section of the Yearbook classified list.

The distinction between governmental and non-governmental organizations as defined bythe Economic and Social Council of the United Nations, does not differentiate between

profit and non-profit international non-governmental organizations. In practice howeverthe non-governmental organizations accepted into consultative status with the United

Nations have all been non-profit organizations.

Since the 1966-1967 edition of the Yearbook and particularly during the first six monthsof 1968, there has been considerable interest in ' multinational ' or ' transnational '

business enterprises and corporations. Articles dealing with the characteristics andbusiness polices of world enterprises have however been appearing in the HarvardBusiness Review and other American publications since the beginning of the 1950s.

Studies of the definition and classification of international organizations have stressed theneed to include as a separate category the largely ignored group of international profit-
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making organizations. These would then constitute a third major group of organizationson the international scene, together with international governmental and non-

governmental, non-profit organizations.

It must be pointed out that the decision to add profit-making organizations to the list of

international organizations in this Yearbook implied a fundamental assumption which hasin fact been borne out by research in the United States on organizations in general,namely that corporations and corporate structures bear many if not most of the

characteristics of any or all other kinds of organizations. In addition it has been arguedthat as corporations recognize the effects of their policies on the well-being of society,

which is important for their survival, their decisions are governed less by straight-forwardprofit maximization and more by objectives which combine long-term profits withimprovement in the general social welfare. This approximates the decision-making

problem experienced in government agencies.

Apart from a few isolated studies on the classification of international organizations in

general, the main interest in this ' new ' category has come from the field of internationaleconomics and business administration. This interest has been stimulated by the estimatethat within the next decade 75 % of the world's productive capacity will be controlled bya small group of 300 multinational corporations. This has led to the suggestion that theseorganizations can become an instrument of great utility for the general progress of humanwelfare a progress founded on the profit motive as the basis of a free market economy.

The International Chamber of Commerce has recently created a ' Special Committee onthe Transnational Corporation ' of which the first meeting was held on March 16th, 1968.The purpose of the Committee is to undertake a study in depth of the increasing influenceof the multinational corporation and to establish recommendations for governments and

business circles. It is hoped in this way to aid the multinational corporation, of whatevercountry of origin, to fulfil its role in the economic development of countries in which it isactive. The Committee will formulate its conclusions on the basis of a report by

American economist, Dr Sidney Rolfe.

A comprehensive study of the importance of the multinational corporation has been inprogress at the Harvard Graduate School of Business for some years under Prof Raymond

Vernon. The study is specifically concerned with manufacturing organizations listed in 'The 500 Largest U.S. Industrial Corporations ' (' Fortune ', 1934 and 1965) with

manufacturing subsidiaries in 6 foreign countries.

The published studies have not yet produced criteria which could be used to evaluate anybusiness enterprise in order to establish a list of multinational corporations. Criteria have

been discussed but only isolated examples of organizations fulfilling them have beencited. There has been a tendency to restrict attention to very large multinational

manufacturing organizations because of their considerable economic importance. Littleattention has been given to economically less important profit organizations which might

in fact be more ' international ', whether they are industrial, commercial or service


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enterprises. There are, for example, international accounting, engineering, advertising andemployment firms.

The UAI after consultation with the International Chamber of Commerce, has undertakento explore another aspect of this question. The UAI is primarily interested in making

available as soon as possible details on all multinational corporations as internationalbodies, in the same way as is done for intergovernmental and international non-profitnon-governmental organizations. In order to do this, criteria of ' multinationaly ' have tobe developed which are sufficiently general to be applied to all types and sizes of profitcorporation. As an aid to the general debate on this ' new ' category of organizations andto test a few available criteria, it was decided to include in 12th edition of the Yearbook apreliminary list of possible candidates for consideration as multinational corporations.

Definition of'Multinational '

There is a graduation from organizations undertaking international trade to international

business enterprises. A summary of the methods by which a national manufacturingorganization could operate internationally illustrates the problem of definition. A

company can. according to Roy Blough :

solicit purchases by foreign buyers in one or more countries and ship to them inwholesale lots, leaving the further distribution of the goods to them;

market and distribute the goods to their final users in the foreign country. Inwhich case it may make arrangements with local distributors or establish a

distribution network of its own; establish a factory in the country in which it is selling or plans to sell and produce

for sale in third countries and also in the home country;

contact with foreign producers to purchase from them goods which the companydistributes whether in the country of production, third countries, or the homecountry;

sell its patents, technical know-how, and/or trademarks to a company in a foreigncountry or license their use for a term of years in exchange for periodic royalty

payments; undertake to supply management, at a fee, for a foreign manufacturing enterprise

which it does not own or in which it has only a minority interest; combine any of the above methods, depending on the market with which it deals.

These operational differences are complicated by the forms which the relationship

between the parent and the daughter companies can take under differing nationallegislations with different degrees of financial commitment on the part of the parentcompany. Examples are :

Branch office : a foreign local office of the parent company having noindependent or corporate status.

Subsidiary: a foreign firm established under national law of the country, whosecapital stock is 50 % or more controlled by the parent company.


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Joint company : a foreign firm in which the parent company financial interest andforeign financial interest are equally divided.

Affiliate : a foreign firm in which the capital Interest of the participating parentcompany is less than 50 %.

Sub-subsidiary: a subsidiary or affiliate not established directly by the parent

company (or sub-affiliate) but by another subsidiary or affiliate of the latter. Thissituation can be further complicated since the subsidiary can Itself be In the homecountry or in a foreign country.

These definitions are not universally accepted. In the remainder of this note, affiliate willbe used as a general term to describe all daughter and associated companies. Thedefinition of a multinational corporation Is made more difficult since there is no

international corporate law. The parent and foreign daughter companies are establishedon equal footing in terms of their respective national legislation. From an internationallegal point of view a multinational corporation is merely an agglomeration of corporate

entities loosely linked by a network of non-resident shareholdings, of which the majority

happens to be in hands of the parent company. A multinational corporation is not a legalentity. This is also true of the other group of international organizations not establishedby intergovernmental agreement, namely non-profit non-governmental organizations.

Efforts have been made within the European Economic Community since 1960 toestablish a legal basis for a European corporation. This is considered essential to permit

an integration of economic strength to meet American competition. It has been suggestedthat the existence of European corporations would lead to the standardization of corporate

legislation and become the instrument of effective long-term economic integration.

In the course of the lengthy discussions on a European corporation a number of criteria

have been suggested. It has been proposed that only the larger corporations in theCommon Market with a ' European outlook ' should be allowed to take on this new form.A counter proposal suggests that no barrier should be raised to corporations wishing to

take on the new form. Another suggestion is that a minimum capital should be fixed[possibly $250.000 - 500,000). To avoid these somewhat arbitrary distinctions, a furtherproposal attempted to define a European corporation as one with any of the followingcharacteristics : branches in at least one country other than the parent country; financialinterests in corporations in at least one country other than the parent country; financial

control of at least one corporation in a country other than the parent country; quotation ofshares of the corporation on stock exchanges of at least two countries.

Another set of criteria has been proposed by Jacques Maisonrouge, President of the IBMWorld Trade Corporation, namely: basic policies of the corporation must be applied to all

its subsidiaries In order to create a worldwide image; the company must operate in agreat number of countries at different stages of economic development; several of the

subsidiaries must be complete industrial organizations (i.e. their activities must includeresearch and development, manufacturing, sales and service); the subsidiaries must

preferably be managed by nationals so that men of various nationalities can be trained fortop jobs particularly at headquarters; stocks of the company should be quoted on the


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exchanges of the countries in which the company is active so that the capital is in effectmultinational; the company must be a good citizen in every country in which it operates.

A more indirect approach has been made by Professor J Houssiaux of the Universit deNancy. He attempted to develop criteria to describe a national corporation and from this

deduced criteria for a ' plurinational ' corporation. The criteria are : capital spreadthroughout the world through the intermediary of a variety of financial markets; ability tofunction in any region of the globe under the direction of a team of executives of a

number of nationalities, within an organization conceived independently of themanagement techniques of a particular economy; activities oriented in terms of the world

breakdown of the factors of production, whilst taking into account the long termevolution of this breakdown, as compared with the anticipated evolution of income and

demand throughout the world.

Professor Houssiaux notes three conditions as essential for the establishment anddevelopment of such enterprises. These are : unity of management policy and

organization as a guide to the major decisions governing the growth of the enterprise(including : consolidated balance sheet for the entire group; reinvestment of profits fromindividual subsidiaries based on needs of corporation as a whole; continual modificationsand extensions to group structure; organization of transfers and collective services on a

global basis within the group); global conception of development and trade relations; andan environment with institutions based on internationalism.

Attention so far has been concentrated on the better known types of profit corporationwhich are owned by private shareholders. There is however a large group of mixed

government-private corporations, cooperatives, ' associations ', ' societies ', and otherorganizations which may not use terms in their titles which have any connection with

profit-making operations, although this represents a principal aim.

The fundamental question which must be answered in order to establish criteria is whichgroups are to be considered as members of any such organization. Studies to date havegenerally assumed that an organization Is multinational because it operates in a numberof countries, i.e. the subsidiaries are treated as a type of member. To be consistent with

the other forms of organization listed in this Yearbook, the logical requirement is that thestockholders should be considered as members. These are the persons who vote

according to the rules of the organization to elect the directors, etc.. in nearly the samefashion as do the members of other international organizations. Logically it is therefore

the nationality of these members which qualifies the organization as an international one.

Possible Criteria

For the purpose of preparing a definitive list of these organizations as been done for theother two types of international organization, the Union of International Associations

considers that a detailed analysis of possible multinational corporations should considerthe use of all the following characteristics which measure different aspects of the concept

of internationality.


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It may be impracticable to obtain information systematically on some of the items. It willalmost certainly be necessary to consider a number of criteria together in any finaldefinition to cover the many different types of profit organization. Possible criteria

include:

1. Shareholding in parent company: Ideally the shareholding should be balanced suchthat, for example, nationals of no country have control of more shares than nationals twoother countries combined. This ignores all the realities of the respective financial

importance of different countries. A balance of voting strength has not been used as anabsolute criterion in evaluating non-profit organizations for this reason. In many cases

this depends on the financial contribution as in profit organizations. An additionaldifficulty is the impossibility of obtaining systematic data on the nationality of the

shareholder. There is also the difficulty of indirect shareholdings via holding companiesand investment clubs. This criterion may however be useful in certain simple cases.

2. National stock exchanges on which the shares are quoted: A minimum could be

specified for the number of foreign stock exchanges on which the shares are quoted. Thisis a crude approximation to the international shareholding balance. The disadvantage ofthis criterion is that it might exclude some corporations partially or wholly owned by

governments particularly those ofsocialist persuasion. This criterion might however beuseful in evaluating those corporations which expect to be quoted on a stock exchange.

3. Composition of Board of Directors: The national origin or current citizenship ofmembers of the Board may be of great importance to the decision-making process of aninternational corporation, and to the acceptability of its affiliates in host countries. In thecase of non-profit organizations, the nationalities of members of the governing body areused as a guide to the significance of the stated geographical spread of membership. In

the absence of precise information on the nationalities of shareholders, those of membersof the Board (who are the elected representatives of the shareholders) could beconsidered as a first approximation. An arbitrary acceptable ratio of headquarters country

voting directors to foreign country directors could be defined.

4 Composition of executive staff within companies controlled by the parent

company: A multinational management has been suggested as one characteristic. Anideal balance of nationalities is unrealistic but it would be possible to define some

minimum acceptable ratio of headquarters country staff, to foreign staff. The criterioncould be used to exclude excessively ethnocentric organizations. It has the advantage that

the information would not be considered confidential.

5. Balance of factories or installations (excluding sales offices and licensed

producers): A multinational manufacturing enterprise should have its installations in anumber of countries. Minimum criteria could be based on the total number of countries in

which the company has installations, or, more stringently, on the ratio of headquarterscountry installations to foreign country installations. This criterion is clearly not suited to

an evaluation of a trading or service company, or a highly diversified company.


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6. Balance of sales offices (excluding representatives on commission): A trading orservice company could be evaluated on the basis of the total number of countries in

which the company has offices, or, more stringently, on the ratio of headquarters countryoffices to foreign-country offices.

7. Continental or regional head offices: A possible convenient indication ofmultinationality is the existence of regional head offices. These can be considered asevidence of a decentralization of decision-making out of the headquarters-country. This

criterion may be less applicable to smaller corporations.

8. Languages: A possible convenient indication of multinationality is the acceptance of anumber of working languages both in dealing with customers and for internal

communication between the principal head office and the regional or foreign nationaloffices.

9. Income ratio for whole group controlled by the parent company: The ratio of

income earned in the headquarters country to that earned in all other countries can beconsidered as one measure of the relative interest of the directors in home and foreignoperations. The disadvantage of this criterion is that the information may be considered

confidential. Income is often difficult to define consistently.

10. Tangible assets ratio for whole group controlled by the parent company: Theratio of tangible assets in the headquarters country to those in all other countries can beconsidered as one measure of the relative interest of the directors in home and foreignoperations. The disadvantage of this criterion is that information may be considered

confidential. The definition of tangible assets will vary.

11. Relationship between parent group and foreign affiliates: The degree ofindependence in decision-making accorded to foreign affiliates by the parent companycan be considered as a measure of the diminution of the influence of one national

viewpoint in the conduct of the affairs of the company. This is an important concept butthe effects are difficult to measure and are easily confused with a unified management

policy.

12. Tax status: The tax position of the parent company and subsidiaries could be used asa criterion. Tax treaties and tax laws as applied to corporations doing international

business are so very complex that this would seem to be unworkable. The information isalso likely to be highly confidential. This may however become an important criterion in

the future when special international legislation is created to deal with multinationalcorporations.

13. Relationships with non-governmental, non-profit organizations: A possiblemeasure of '' other-directedness ' on the part of the corporation is membership of trade

associations or any other such body for the exchange of technical or commercialinformation (e.g. European Indus- trial Space Study Group, Inter-American Council of

Commerce and Production, International Association of Food Distribution, International


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Copper Research Association, International Superphosphate Manufacturers' Association,This criterion may become important since such organizations will have to make

provision for multinational corporation membership as distinct from that of individualnational companies).

14. Relationships with intergovernmental organizations: Another possible measure of 'other-directedness ' on the part of the corporation is any form of consultative relationshipwith intergovernmental organizations (e.g. with the International TelecommunicationsUnion, or as a partnership with the International Finance Corporation in joint ventures

stimulated by the World Bank, or as membership of the General Committee of theFAO/lndustry Cooperative Program or the FAO Fertilizer Industry Advisory Committee,etc.). The greater the effort made to produce a stringent definition of internationality, themore complex measurement becomes and the fewer the number of organizations whichwill fulfil the resultant criteria. Existing organizations must be assumed to lie on a scale

between extreme protective nationalism and a form of ideal internationalism.

The position of some organizations on this scale may be governed more by therequirements of the business with which they are concerned than with any desire to benationalistic or internationalistic. The desirable multinational corporation characteristic ofcentralized control and decentralized decision-making may not be suitable in a particular

trade or industry.

Sources of Information and Problems in Establishing a List

The most serious difficulty in establishing any list of multinational corporations is thelack of published information on corporations throughout the world which covers the

items mentioned in the possible criteria above. Very few directories give an indication in

detail of the number of countries in which a parent company has affiliates and the extentto which these affiliates are in fact controlled by the parent. The relationship betweenparent, subsidiary, branch and sub-subsidiary is normally very difficult to follow through.A final difficulty is the rapid change in the situation from month to month as subsidiaries

are sold or parent companies merge or are taken over by other companies,

It would have been possible to attempt to send questionnaires to a wide selection ofcompanies but the results obtained would have required a considerable amount of

analysis to permit comparison. The percentage of answers would not have provided thebasis for a complete selection.

The alternative chosen was to analyse information already available in published form toprovide a preliminary list of possible multinational corporations which could be used asthe basis for a more critical list in a subsequent edition of the Yearbook. The directory

which proved suitable to this program was ' Who Owns Whom '. This lists approximately120,000 affiliate companies throughout the world whose 16,000 parents have their

headquarters in the major European countries and the USA. It also indicates whether theaffiliate is wholly owned or controlled (i.e. a '' subsidiary ') or represents only a non-controlling-financial interest (i.e. an ' associate '}. The other types of parent-daughter


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relationship are covered by these two terms which are defined in detail below. The mainadvantage of using this directory was that it included all categories of business

enterprises, not just manufacturing enterprises as do the majority of directories of thistype.

The choice of the first source was based on the assumption that a multinationalcorporation must, in terms of each national legislation, form at least one subsidiary ineach foreign country in which it operates directly. By checking the location of

subsidiaries a direct count of the number of countries should be obtained.

The main disadvantage of this directory is that it did not cover all the major industrializedcountries. No information was available in comparable form on Canadian and Japanese

parent companies and their affiliates. In addition the information on the U.S. parentcompanies was restricted to details on their European affiliates. Since the U.S. parent

companies are considered to be the major group of potential multinational corporations, asecond source of information was required.

The only suitable directory which could be located that was not restricted to one type ofentreprise was the ' Directory of American Firms Operating in Foreign Countries '. This

listed the countries in which 4,000 American parent companies had approximately 14,000affiliates. The disavantage of this directory was that only the 1966 edition was available.It was possible to update the information on European affiliates by making use of the firstdirectory, which was available in a 1968 edition. In addition this directory did not make

any comparable distinction between subsidiaries, associates and branches.

Analysis of Sources

No information is available on the acceptable number of countries to qualify for 'multinationality '. It would have been possible to select some minimum figure and merelyprepare a list of those companies which exceeded this. Two is the logical minimum, but

the criteria for the other organizations in this Yearbook is three. The study at HarvardUniversity is based on six.

Due to the limitation on space available for this preliminary list in the Yearbook acompromise solution was chosen. It was decided to analyse all the companies listed in the

two directories to determine exactly how many there with affiliates in 1,2, 3... etc.countries. On the basis of the analysis the minimum figure could then be chosen so that

the maximum number of companies could be listed in the Yearbook. This minimum

figure was developed from the results of the analysis shown in Table 1. [Tablesseparate]

Table 1Number of countries (excepting the country of the parent company) in whichparent companies have affiliates (i.e. subsidiaries and associates). This table shows forthe major European countries and the U.S.A. how many, for example. German parent

companies have affiliates in 9 foreign countries (13 from the table).
http://www.laetusinpraesens.org/docs60s/68multix.phphttp://www.laetusinpraesens.org/docs60s/68multix.phphttp://www.laetusinpraesens.org/docs60s/68multix.php


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Table 2Number of parent companies for each major industrialized country havingaffiliates (i.e. subsidiaries and associates) in a given foreign country. Whilst preparing

Table 1 it was convenient to prepare Table 2. This shows for each of the major Europeancountries and the U.S.A. how many, for example, Swedish parent companies, have

affiliates in Brazil (21 from the table).

Table 3 Preliminary list of possible multinational business enterprises. Using the data inTable 1 the minimum number of countries was fixed arbitrarily at 10. This gave a

preliminary fist of 600 enterprises which is printed as Table 3.

The parent corporations listed have been arbitrarily split into groups having affiliates in10-12, 13-15, 16-20, 21- 25, 26-30, 31-40, and 41 plus countries. Within each group the

corporations have been placed In alphabetical order within headquarters country tofacilitate consultation.

This list should contain a high proportion of corporations which will fall Into the category

of multinational once general criteria have been defined. The list arbitrarily excludes (dueto the minimum of 10) many corporations which might be considered as multinational,but the data in Table 1 gives some indication of the number of these. The list includes anumber of corporations which might be excluded from a future list. These are the cases

where :

a very large corporation has a relatively minor proportion of its affiliates in othercountries, but because of the size of the corporation the number of these affiliatesis equivalent to or greater than that of a smaller organization with interests more

equally balanced between countries. the affiliates in foreign countries are not owned or controlled (i.e. they are not '

subsidiaries ') but primarily associates in which the corporation has a non-controlling interest. Using the information in the directory ' Who Owns Whom ', itwas possible to analyse each European company included in Table 3 in greaterdetail in order to establish a scale on the basis of which cases falling into thesegroups could perhaps be specified. Four columns of figures follow the name of

each parent corporation as an aid to any future definition of ' mutinational '. Onlytwo columns could be completed for American companies.

The meaning of the columns is a follows :

Column ' a ' r Number of foreign countries in which the parent company has

affiliates (i.e. subsidiaries plus associates). This figure formed the basis for theanalysis in Table 1. Column ' b ' : Percentage of the total number of affiliate companies (i.e.

subsidiaries plus associates) of the parent company which are in foreign countries.No distinction was made between subsidiaries, sub-subsidiaries and sub-sub-

subsidiaries, etc. Column ' c ' : Percentage of the total number of foreign affiliate companies (i.e.

subsidiaries plus associates) which are owned or controlled subsidiaries, as


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opposed to associates. Dormant companies were treated as associates. Since nodata was available to distinguish between U.S. parent company subsidiaries andassociates an attempt was made to approximate the policy of the company in this

respect. Information on the percentage of subsidiaries amongst European affiliatesonly is given in brackets.

Column ' d ' : An index of ' internationality ' combining the information in theprevious column to facilitate comparison between companies. The index isderived as follows : (col. ' a ') X (col. ' b ') X (col. ' c ')/1000 = index of '

internationality '. This gives an index for each parent company in the range 0 -17000 if all possible countries and territories are taken into account. In practice

the majority of companies fall into the range 20 - 150. The upper end of the rangeincludes the companies which have been cited as examples of multinational

corporations. The lower end of the range includes the companies which are morelikely to be excluded from any future list of multinational corporations.

Comment on Initial Criteria and Sources

The criteria used to distinguish between possible candidates have largely been dictated bypublished information available. They represent different attempts to isolate the quality of' internationality '. The results of this survey have been expressed in a manner which does

not preclude a more or less stringent definition of multinationality. None of the criterialisted in Table 3 is wholly satisfactory :

number of countries. Even in the limiting case where a company has no foreignaffiliates, it can be of considerable international economic importance by

operating through intermediate trading and import-export companies. All that canbe said is that the probability of a parent company being ' international minded ' is

higher if it has operating affiliates in a number of foreign countries. percentage of foreign affiliates. This criteria does not distinguish between large

monolithic companies with relatively few financially significant subsidiaries andcompanies with a considerable number of subsidiaries of much less financial

importance. In a particular country or industry it may be convenient to adopt oneor other structure, it has been assumed that the number of foreign affiliates

corresponds approximately to the geographical division of financial interests. Ithas also been assumed, following on from this, that the higher the percentage offoreign affiliates, the lower the probability that the company will be primarilyinterested in its affairs within the country of its headquarters. This criterion is

therefore a crude approximation to a determination of the position of a companyon the line between purely national (ethnocentric) and completely international

(geocentric). percentage of foreign affiliates controlled. It has been suggested that multinational

corporations should only include those cases where the parent company has acontrolling interest in affiliates. This distinguishes such corporations from those

which in the extreme merely have a minority interest. It could also be argued thata corporation with a vast network of minority interest was less centralized and

therefore more international.


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It was not possible to check the two directories used so that It had to be assumed thattogether they represented a fairly complete and accurate coverage of the parent

companies in the European countries and the USA. A certain amount of inconsistencyover the definitions of subsidiary and associate is to be expected. The definitions used

by the editors of ' Who Owns Whom ' are

' A subsidiary is defined as a company more than 50 per cent of the share capital of whichis owned by another company which in the directory is therefore defined as a parentcompany. A company is classified as an associate when it is so described by itself or

where it has annouced that it has acquired a substantial interest in another company orwhere published information is available that it owns not less than 10 per cent of the

share capital of the other company. Members of industrial consortia are listed asassociates. Any company of which another company is the associate as already defined is

regarded as being In association with that other company '.

The definitions used by the editors of ' Directory of American Firms Operating in Foreign

Countries ' are :

' This Directory includes only those firms in which American firms or individuals have asubstantial direct capital investment in the form of stock, as the sole owner, or as a

partner in the enterprise '. ' Bran- ches ' and ' subsidiaries ' are included but notdistinguished or defined.

Comment on survey

From Table 1 there are 2991 parent companies in 14 European countries and the U.S.A.with affiliates In one foreign country only, and 7045 with affiliates in one or more. Of

these parent companies, U.S.A. parents constitute respectively 37 % and 40 %. There are595 parent companies with affiliates in 10 or more foreign countries and 166 withaffiliates in 20 or more. Of these parent companies, U.S.A. parents constitute respectively

45 % and 52%. It is interesting to note that the number of the intergovernmental andinternational non-profit organizations listed in this Yearbook as having headquarters inthe Table 1 countries is 50% of the total of parents companies with headquarters in thesame countries [comparing companies in at least three countries on the assumption thatthese can be considered equivalent to the minimum membership criterion of the other

organizations).

The 7,046 parent companies have affiliates in 26,393 countries, i.e. each company has

affiliates in an average of 3.75 countries. (2.48 in the case of European companies only).The European parent companies included in the Table constitute approximately 40 % ofthose surveyed. The remaining parent companies only have affiliates in their own

countries.

From Table 2 the distribution of the links of the parent companies with foreign countriesis 53 % Europe, 11 % Africa, 25 % America, 9% Asia and 5% Australia. A separate

study of foreign enterprises in Japan gives some indication of the validity of the figures in


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this Table. This study estimated that ' almost 800 ' foreign enterprises had been set up inJapan by 1966. Table 2 gives a corresponding figure of 465. The difference is probably

due to implantations from countries other than those for which information was availabe,and also to the inevitable difficulty of obtaining information and ensuring that it was keptup to date. (One difficulty in the survey which affects the results is the differences in the

definition of a country, e.g.Portuguese parent companies do not consider Angola as aseparate country, whereas companies operating from other countries would treat Portugaland Angola as separate countries. No attempt was made to allow for this.)

Comment on list

The list published in Table 3 can be considered as a selection of cases on which criteriamay be tested. It does not however include any of the mixed category of profit

organizations mentioned earlier in this note.

All the examples of multinational corporations previously cited in published articles

appear to have been included. They tend to lie in the higher groups and have a high indexof ' internationality '. The list includes 70% of the 180 corporations mentioned in an

unpublished list of American corporations which an in the ' Fortune ' list but which havea minimum of 6 foreign manufacturing subsidiaries. This is being used as a basis for

research at Harvard University by Professor Raymond Vernon. The organizationsincluded from this ' manufacturer ' list represent 48% of the U.S. organizations included

in Table 3.

As stated earlier the list does not include business enterprises from a number of importantcountries Including Canada, Japan and the Eastern European countries. Nor was it

possible to obtain information on the parent companies registered in the tax havens.

From Table 1 however, the number of parent companies correlates quite strongly with thefigure for export trade. The countries for which data on parent companies was available,

with the exception of Spain, Portugal and Luxem- burg, all had an export figure of atleast $1.7 thousand million dollars. The only other countries with comparable exports are

Canada (10.6), Japan (10.4), Australia (3.4), Venezuela (2.7), South Africa (1-9), andBrazil (1.7), together with some Eastern European countries. Of these countries only

Canada and Japan are probably hosts to many parent companies which should beincluded in the list.

The list itself contains a number of unexpected cases due to the sources used and the

method employed in the short time available. Examples are Pan American Airways(USA) in the 40 plus group and the travel agents Agence Havas (France) in the 10-12group which are included because of the number of offices in foreign countries. The

index for Agence Havas is however only 8 which makes it one of the least ' international 'in the list according to the criteria employed. Unfortunately the sources used did not

provide sufficient comparable information on Pan American.


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The lack of adequate distinction between branches and subsidiaries or associates in thesource on U.S. corporations makes it difficult to compare details on European andAmerican organizations in the tables. Due to the inclusion of more information on

branches in the American source the figures for American organizations are all scaledupwards. Some indication of the extent of this upward scaling can be obtained by

comparing the figures for Belgium (461 U.S. organizations) with those from a detailedAmerican Embassy list published in December 1967 of U.S. organizations in thatcountry. The list also included some representatives and information offices of American

companies and had a total of 657 U.S. organizations mentioned. Of these 21 % wereindicated as branches or other entities directly dependent on the American parent. This

gives approximately 525 affiliates in comparison with the Table 2 figure of 461.

Information on European organizations has however all been obtained from the samesource. The position of the Compagnie Nationale Air France (France) in the list in the 1012 group, is probably more indicative of the status of national airlines as multinational

companies. The index in this case was zero, since all foreign affiliates were listed as

associates.

The question raised by such organizations, which depend on an international network ofsales bureaus, is whether and to what extent they can be considered as multinational. It isat this point that data on the nationality breakdown of the Board of Directors would prove

useful. But, even if the directors are all nationals of the headquarters country, suchorganizations should perhaps be considered as a special type of multinational corporation.A study of types of multinational corporation which has received a great deal of publicityis that of Professor Howard Perlmutter (Institut pour I'tude des mthodes de direction deI'entreprise, Lausanne). He distinguishes the following groups of corporations in what heconsiders to be an evolutionary chain (although every corporation Is considered to have a

combination of a!l the characteristics):

Ethnocentric corporation : senior management suspicious of foreigners andunfamiliar business methods; headquarters maintains responsibility for all maindecisions; priority is given to nationals from the headquarters country in filling

important posts in foreign subsidiaries; parent company considered to be superiorand have a monopoly of know-how. In practice this type of organization arouses

the suspicion of local governments and can lead to nationalistic attacks. Polycentric corporations : recognition that local situations are different from one

another and from the parent country; subsidiaries operated by the nationals ofeach country; parent company relies on financial controls rather than command

structure to achieve a profit; company becomes a confederation of looselyconnected subsidiaries, many of which have access to all financial and research

data; parent company remains in the hands of nationals of the headquarterscountry who occupy all important posts.

Geocentric corporations : posts filled without regard to nationality; policiesformulated without regard to national preferences; subsidiary directors participatein the formulation of general policies; headquarters location considered to be an

accident of history to be changed according to the convenience of tax laws.


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It might be possible to establish arbitrarily sets of quantitative criteria which would groupcorporations into three such groups, or preferably more in order to split up the higher

proportion of organizations at the ethnocentric end of the range. In this way degrees ofmultinationality could be recognized which would permit satisfactory classification of thesales bureau type of organization. Such a scale could possibly be developed by using the

index technique with more ratio criteria, since low index values indicate organizationswhich are more likely to be ethnocentric as defined above.

The ratio of headquarters country directors to foreign directors does appear to representthe most easily obtain- able and least confidential additional criterion. It is the closestapproximation to the nationalities of the shareholders and may in fact be preferablesince it gives a real picture of the ethnocentrism of the Board and decision making.

Information on the shareholders would only give a theoretical picture of the operation ofthe organization on the assumption that the Board decisions reflected the day-to-day

opinions of shareholders. In addition it is normally by its Board or management that acorporation is judged, rather than by its shareholders.

In examining suitable criteria in the future, provision will have to be made for theconsortium arrangement and the bi-national joint venture which is becoming importantand widespread. Another type of structure which may not fall within any of the criteria

yet suggested is that of a large corporation which controls a complex network of bi-national operations. A further problem is created by individuals families, and national

corporations which create and completely control multinational corporations as a meansof conducting their international operations. There is also the highly charged question ofthe distinction, or the necessity for a distinction, between multinational corporations,

multinational groups (which have been broadly defined as a collection enterprisesbetween which any form of fink may exist which is sufficiently strong and durable to

permit a common economic policy), and international cartels (which have been definedas voluntary agreements among independent enterprises in closely related industries intwo or more countries with the purpose of exerting a monopolistic control of the market).

Conclusions

The main question raised by this preliminary study is how restrictive a definition ofmultinational corporations is required and whether it would be preferable to define

criteria to separate groups of corporations of different degrees of internationality in orderto cover all cases. It may prove to be the case that many small new corporations withsubsidiaries in only a few countries are less ethnocentric and more international than

many of the large corporations.

It might be useful to distinguish between long-established corporations with

international interests in manycountries (mainly trading companies), large nationalcorporations developing International Interests, and smaller corporations recentlycreated as international companies by national corporations from a limited number of

countries (usually two to four).


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It would be an advantage to make any future criteria consistent with those employed todetect international non- profit organizations. The additional complexity of the more

highly developed profit corporations may make it useful to reassess non-profitorganization criteria in order to distinguish between the more and the less international in

a similar manner.

The multinational corporation will become an increasingly important concept over thenext few years as mergers and takeovers establish international economic empires. Thecorporations themselves will have to make great efforts, as some have already done, tobecome truly international in order to avoid nationalization, discriminatory tariffs oraccusations of economic colonialism. They are faced with increasingly complex tax

problems and the burden of double taxation, due to the lack of any international legalstatus or provisions for international non-governmental organizations (whether profit or

non-profit).

One solution is the creation of special national legislation in each country to deal with

multinational corporations which make their headquarters there. At present only the taxhavens such as the Bahamas, Bermuda and Lichtenstein provide an adequate place wherea large multinational corporation can establish its central activity. In the case ofinternational non-profit organizations, Belgium is the only country with special

legislation. An example may however be set by Peru where legislation has just beenproposed to deal specifically with the tax problems of multinational corporations and

their employees.

Another suggestion that has been made is that it is in the interest of national taxauthorities and of such corporations that they should pay a single tax to a specially

constituted international authority on the basis of their consolidated financial statements.

This would avoid the necessity for the current highly complex network of bilateralconventions on double taxation. In view of the significance attached to these corporationsas tools for the rational economic development of the world, such a body might alleviate

another current problem by providing a source of development funds. The tax fundscould be channelled through the United Nations to the countries in greatest need.

The role of the large multinational corporation in aiding the less developed countries hasbeen frequently stressed. This is an important reason for listing these bodies in this

Yearbook. Some of the specific functions that they can (but will not necessarily) performwhich could contribute to general economic devleoprnent are, according to Roy Blough :to make sound and profitable investments in developing countries which for less broadly

based companies would be too risky; to make use of a world-wide store oftechnological, managerial, and other knowledge and skills that are likely to be better

adapted to the needs of the less developed countries than is the knowledge of businessfirms that have access only to home-country technology; to create jobs and stimulate the

desire for education in the developing countries; to make use of their internationalcommunications system to help countries achieve the benefits of cooperation; and to

provide developing countries with contacts with foreign markets without which theirexport trade and industries cannot be rapidly developed. It is to be hoped that listing these


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organizations in this Yearbook will contribute to a greater understanding of the role thatthey will play in developing world society together with the intergovernmental and

international non-profit nongovernmental organizations.

Role of mncs in developing countries

Sustainable Development: The Role ofMultinationalCorporations

Gary Quinlivan, PhD

Saint Vincent College

The economic role ofmultinationalcorporations (MNCs) is simply to channelphysical and financial capital to countries with capital shortages. As a consequence,wealth is created, which yields new jobs directly and through crowding-in effects. Inaddition, new tax revenues arise from MNC generated income, allowing developingcountries to improve their infrastructures and to strengthen their human capital. Byimproving the efficiency of capital flows, MNCs reduce world poverty levels and providea positive externality that is consistent with the United Nations (UN) mission countries are encouraged to cooperate and to seek peaceful solutions to external andinternal conflicts.

It follows that a supporting role for the UN would be to motivate developing

countries to achieve the necessary political and economic environment that attractsforeign direct investment (FDI). Nations lacking FDI have common characteristics: theyhave economies that are heavily dependent on government regulations and controlled byinefficient state-operated monopolistic enterprises, and they tend to have non-democraticregimes. As a consequence, these nations are experiencing extreme rates of poverty,repressed human rights, and excessive environmental damage. These problem countriesare primarily concentrated in Sub-Saharan Africa, South Asia, North Africa, and theMiddle East.1

An important role currently undertaken by the UN is the provision of a valuable anddetailed assessment of the economic impact of MNCs through its publication of the

World Investment Report. In addition, the UNs publication of theHuman DevelopmentReportand the World Banks World Development Report, provide researchers with abroad picture of trends in world welfare. These reports, however, present static measuresof income inequality and are thus too limiting. According to Nancy Birdsall and CarolGraham, the UN and World Bank should also analyze measures of mobility.2 Studies thatfocus only on income inequality, as emphasized by Jere Behrman, may be highlymisleading because countries may have identical income distributions but far differentsocial welfare levels due to differences in economic and social mobility.3


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The primary thrust of this paper is to examine the myths and facts about MNCs thatunderlie public opinion and thus shape public policy.4 In particular the paper addressesthe following questions: Are profit-motivated MNCs engaging in destructive competitionand insidious plots to economically and politically manipulate entire economies? AreMNCs methodically eliminating domestic firms in order to exploit their monopoly

powers? Do MNCs export high-wage jobs to low-wage countries? Are MNCsundermining the worlds environment? Are MNCs augmenting the external debtproblems ofdevelopingcountries? Are MNCs perpetuating world poverty? Do MNCsexploit child labor?

Monopoly Power?

Competition is not destructive, it has compelled MNCs to provide the world with animmense diversity of high-quality and low-priced products. Competition, given freetrade, delivers mutually beneficial gains from exchange and sparks the collaborative

effort of all nations to produce commodities efficiently.

Has the monopoly power of MNCs grown? Granted, some MNCs are very large: asof 1998, they produced 25 percent of global output, and in 1997, the top 100 firmscontrolled 16 percent of the worlds productive assets and the top 300 controlled 25percent. Firm size and market power, however, are dynamic. The Wall Street Journal(WSJ) annually surveys the worlds 100 largest public companies ranked by marketvalue.5 Comparing the rankings in 1999 to that of 1990, there were five new firms(Microsoft, Wal-Mart, Cisco Systems, Lucent Technologies, and Intel) in the top ten.Four of the five new firms were not even in the top 100 in 1990. Even more remarkable isthat there were 66 new members on the 1999 list. The UN tracks the 100 largest

nonfinancial MNCs ranked by foreign assets.

6

Although not as dramatic as the change inthe WSJrankings, from 1990 to 1997, the UN reported a 25 percent change in thecomposition of their top 100. An increase in monopoly power should also lead to fewerand larger MNCs, but as reported by the UN, from 1988 to 1997, the number of MNCsrose substantially from 17,50020,000 to approximately 60,000 with over 500,000foreign affiliates.7

Has the increase in foreign direct investment (FDI) by MNCs harmed domesticinvestment? The UNs 1999 World Investment Reportcited two recent studies: the first,by Eduardo Borensztein, Jos de Gregorio and Jong-Wha Lee, found an additional dollarof FDI increases, crowding-in, domestic investment in a sample of 69 developingcountries by a factor of 1.5 to 2.3; the second study, by the UN, utilized data from 1970to 1996 for 39 mostly developingcountries and found a strong crowding-in effectassociated with FDI in Asia, but offered some evidence of a possible crowding-out effectin Latin America.8 An alternative avenue to examine crowding in/out effects is to surveythe number of new firms that enter the marketplace. According to World Bank datacovering 133 countries, the number of firms (excluding investment companies, mutualfunds, and some others) incorporated and listed on stock exchanges increased from


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29,189 in 1990 to 40,394 in 1997.9 Sub-Saharan Africa was the only region with anegligible increase in the number of listed domestic companies.

Coordinated international manipulations of markets are almost always governmentsupported and directed. For example, in the first two quarters of 2000, OPEC, the

Association of Coffee Producing Countries, and the Cocoa Producers Alliance cartelsattempted to force commodity prices upward. In the 1970s, OPECs oil price distortionswere a major source of world recession and the increased external debt and poverty ofdevelopingcountries. Fortunately, free markets protect consumers from prolongedabuses by government-sponsored monopolies and cartels.

The Right/Left Wing Conundrum

Paradoxically, both the extreme right and extreme left are united in their belief thatMNCs, with an evil intent, are infringing on national sovereignty.10 They view MNCs tobe amoral government-manipulating rent-seeking monoliths that exploit the lack of

environmental regulations and cheap foreign labor in developingcountries.11

Theirremarks, however, lack substance.

MNCs do not operate with immunity they are heavily monitored both in theUnited States and abroad.12 Admittedly, from 1991 to 1998, there has been a tendencytoward the liberalization of FDI regulations. According to the UN, there were 895 newFDI regulations enacted by more than 75 countries, but only 52 of these regulationssought greater control over FDI.13 The role of multilaterals (primarily the UN and WorldBank) should be to promote responsible deregulation that encourages competition,discourages rewards to special interests (both domestic and foreign), and defines andprotects private property rights.

Profits are very important to MNCs, but their investment decisions are heavily deterredby the presence of economic and political corruption. A UN survey of MNCs revealedthat the number one reason MNCs do not invest in given countries is the presence ofextortion and bribery, and not surprisingly, the main source of the corruption isgovernment officials. Both the International Chamber of Commerce and the InternationalOrganization of Employers have established social codes and standards agreed upon bytheir members that attempt to discourage bribes and extortion and to establish principlesfor responsible environmental management.

MNCs are not committed to the destruction of the worlds environment, but instead have

been the driving force in the spread of green technologies and in creating markets forgreen products.14 Market incentives (e.g., the threat of liability, consumer boycotts, andthe negative impact on reputation) have forced firms to police their foreign affiliates andto maintain high environmental standards. The UNs 1999 World Investment Reportnotesseveral studies that confirm foreign affiliates having higher environmental standards thantheir domestic counterparts across all manufacturing sectors. The UN also positivelyreflected on the efforts initiated by MNCs to assist domestic suppliers (regardless ofownership) to qualify for eco-labeling and to meet the ISO 1400 certification-


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environmental standards currently supported by more than 5,000 MNCs. MNCs haveadvanced several programs (e.g., Global Environmental Management Initiative, CauxRound Table, and the Global Sullivan Principles) to establish industry codes dedicated toachieving high levels of social responsibility.15

Multinationals are not siphoning jobs from high- to low-wage countries, in fact, theytend to preserve high-wage jobs in developed countries in 1998, 75 percent of FDIwent to developed countries.16 Besides, labor costs do not determine where MNCs basetheir affiliates, other variables are deemed to be collectively more decisive, e.g., politicalstability, infrastructure, education levels, potential for future markets, taxes, andgovernment regulations.

The biggest threat to the national sovereignty ofdevelopingcountries does not comefrom the MNCs but from rent-seeking initiatives to protect special interests under theguise of level-field trade agendas. For example, proposals, which seek to imposevarious enviro-labor standards have the support of or have been submitted as agenda

items by the WTO, International Labor Organization, UN Conference on Trade andDevelopment (UNCTAD), and non-governmental organizations such as the Union ofIndustrial and Employers Confederations of Europe and the International Confederationof Free Trade Unions. These organizations may have good intentions, but policies such asenviro-labeling and world minimum wage or compensation laws prohibit developingcountries from fully participating in world trade.17

Jobs and Capital Formation

In 1998, MNCs had 86 million employees 19 million in developingcountries and were also responsible for more than 100 million jobs created indirectly through

multiplier effects.

18

Indirect job creation is estimated, by the UN, to be 3 to 7 times thejobs directly generated by MNCs respectively in the manufacturing and food industries.

Foreign direct investment (FDI) is the most desired form of capital flow. The MNC istaking a long-term equity position in the domestic country. If the investment does well,both the MNC and domestic country are better off the MNC receives profits and thedomestic country receives jobs, an expanded tax base, and capital formation. If theinvestment does not do well, the MNC may lose their investment and the domesticcountry does not receive the ongoing benefits aforementioned, but the domestic countryowes no restitution. As a result, FDI does not contribute to the external debt problems ofdevelopingcountries. In 1999, the United States received a record $277.5 billion in FDIof which $87 billion was channeled into manufacturing.19 In April 2000, the United Statesrecorded its lowest unemployment rate (3.9 percent) in 30 years.

External debt problems are portfolio in nature and primarily attributable to loans frommultilateral organizations (e.g., World Bank and IMF) and G-7 governments. Privateloans are problematic to the extent that the government is involved and has givenguarantees to support favored industries. Government loan guarantees cause moralhazard the market does not correctly assess the risk associated with loans because a


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government, the IMF, and/or World Bank are expected to bail out the lenders if a crisisoccurs.

According to the UN, in 1998, $166 billion ($760 billion from 1993 to 1998) or 25.8percent of the world FDI inflow went to developingcountries. Africa, Latin America

and the Caribbean, and Asia, received respectively $7.9, $71.6, and $84.9 billion of FDI.Only $2.9 billion dollars of FDI was obtained by least developed countries (LDC),which are primarily composed of the Sub-Saharan African countries. Given riskconditions, capital flows to where it can earn the highest rate of return. The required riskpremium is much higher when a developing country is experiencing civil wars, suffersfrom over regulation, has a weak infrastructure, is politically unstable, keeps its marketsclosed to foreign competition, has inflexible labor markets, and imposes high taxes.

The Heritage Freedom Index (HFI) measures the degree of economic and politicalrepression present in developingcountries.20 As predicted, FDI is smaller in developingcountries that are repressed. Based on the 2000 HFI, of the 18 economies in the Middle

East and North Africa, 10 are either mostly unfree or repressed and only Bahrain is free.The results are even more dismal for Sub-Saharan Africa where 35 (make that 36 givenRobert Mugabes policy of land-grab terrorism) of the 42 economies in the region aremostly unfree or repressed.

Poverty

Evidence supplied by the World Bank and the UN strongly suggests that MNCs are akey factor in the large improvement in welfare that has occurred in developingcountriesover the last 40 years.21 In those countries (the LDC) where the presence of MNCs isnegligible, severe poverty rates persist and show little sign of improvement.

From 1960 to 1995 fordevelopingcountries:22 The purchasing power parity measureof real per capita GDP improved a healthy 3.5 percent per year. While the LDCs growthrate was a mere 1.7 percent per year. Adult literacy rates increased from 48 to 70 percent.Only the Sub-Saharan African and South Asian regions literacy rates remained stagnant.Overall, infant mortality rates dropped 56 percent. Children born in 1995 were expectedto live 16 years longer as compared to 1960 it took industrialized countries onecentury to achieve the same results. From 1980 to 1997, life expectancy for low incomecountries increased from 52 to 59 years.23 Sub-Saharan Africa and South Asia were onlyable to increase their life expectancies from 48 to 51 and 54 to 62 respectively. But indevelopingcountries most open to MNCs, the improvement in life expectancy has beendramatic: East Asia and Latin America and the Caribbean regions have achieved a lifeexpectancy nearing that of the industrialized countries.

The daily per capita supply of calories, cereals, fat, and protein and the production offood has, with one minor exception, improved over the last 16 to 25 years at all levels ofhuman development fordeveloping nations.24 The production of food per capita has risen39 percent from 1980 to 1996. The weakest performance, from 1970 to 1995, in dietimprovements and food production per capita occurred in Sub-Saharan Africa, which lost


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3 percent of their daily per capita supply of protein and for whom food production percapita dropped 1 percent from 1980 to 1996. From 1975 to 1990-97, malnutrition ratesfor children under age five plummeted from 40 to 30 percent. Sub-Saharan African ratesimproved by only one percentage point and in South Asia, 50 percent of children underage five still suffer from malnutrition.

From 1980 to 1998, world child labor rates (i.e., the percentage of children workingbetween the ages of 10 and 14) tumbled from 20 to 13 percent.25 Child labor ratesdropped from 27 to 10 percent in East Asia and the Pacific, from 13 to 9 percent in LatinAmerica and the Carribean, and from 14 to 5 percent in Middle East and North Africa.Regions lacking MNCs had the worst child labor rates and the smallest reductions: Sub-Saharan Africas and South Asias child labor rates dropped respectively from 35 to 30percent and from 23 to 16 percent. The reduction in child labor rates was attributable toincreased family income, which has permitted families to improve their diets, to havebetter homes, and to provide their children with more educational opportunities. Asevidenced, enrollment rates for ages 6 to 23 rose for all developingcountries from 46

percent in 1960 to 57 percent in 1995. Only Sub-Saharan Africa had an enrollment ratiobelow 50 percent in 1995.

Finally, following the financial crises of the 1980s, mobility case studies revealedincreased economic and social mobility in Latin America and the Caribbean, especially inPeru and Chile.26 As expected, almost all the contributing authors in Birdsall andGrahams book point out that education has been the principal reason for the increase inmobility over the last century. Once again, the improvement in education is conditionalon increased real income and, thus, positively affected by the presence of MNCs.

Summary

The role of MNCs is underappreciated they have provided developingcountrieswith much needed capital, jobs, and environmentally friendly technologies. Through freemarket initiatives, MNCs create wealth, which provides the income flow necessary forwelfare improvements. If the desideratum ofdevelopingcountries is to escape severeconditions of poverty, they need to privatize, deregulate, protect private property rights,and establish a rule of law the MNCs will then provide the capital

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