Multinational Corporations Essay, Research Paper

MULTINATIONAL CORPORATIONS

What are MNCs?

Multinational corporations (MNCs) are another type of nongovernmental actor and are private businesses headquartered in one state that invest and operate extensively in other states. They are sometimes called transnational corporations or international corporations.

Much controversy surrounds MNCs. There are many individuals and organisations who have critical and negative views about MNCs, and then of course there are those who support them.

MNCs generate enormous global sales – approximately $5.2 trillion pa.

A conservative estimation of the number of jobs associated with MNCs is 150 million.

Transnational Banks (TNBs) have played a major role in the expansion of MNCs. TNBs have made capital highly mobile and their contribution to globalization has led to worldwide financial integration.

MNCs’ Global Reach and Economic Power

Before WWII, most MNCs established foreign operations to secure sources of raw materials.

After 1957, when the EEC was created, large numbers of MNCs began investing in Europe, mainly in manufacturing. It was advantageous for US firms to build production facilities in Europe, where they too could be protected by the tariff wall of the EEC. In other words, goods could be produced and sold within the EEC as domestic products, and not as imports with tariffs.

However, the reasons for foreign investments are not as simple as that. MNCs usually have a headstart in the development and initial production of new products, and according to the product-cycle theory, foreign expansion is in fact a manoeuvre aimed at suppressing foreign competition. Once the technology or know-how required for manufacturing a new product becomes widespread, MNCs relocate production facilities abroad.

On page 197, Table 7.4 shows the rankings of the 100 biggest economies and revenues in 1996. By examining the list, you will be able to see that there are numerous MNCs whose revenues are higher than whole countries!

Foreign Direct Investment (FDI) measures the investment activities of MNCs, and it can be formally defined as “ownership of assets in one country by residents of another for purposes of controlling the use of those assets”.

Unlike the “bipolar” investment configuration of earlier times (which was dominated by the United States and a few European countries acting independently), we now have a “tripolar” investment configuration consisting of European Union, Japan and the United States. Networks of affiliates clustered around their home countries have been constructed, and as a result, FDI is now increasingly regional and principal host countries in the Global South receive the bulk of its funds from a single member of the investment triad – usually the one geographically closest to it. FDI “stocks” reveal the current structure of global production and the principal location of economic activity, and the FDI “flows” indicate changing patterns. The Global North is both home and host to most FDI stock. However, the Global South’s share of FDI flows is increasing.

The Effects of MNCs on Home and Host Nations

Much controversy regarding MNCs arises from this point.

One argument against MNCs is that shifting production facilities to industrially backward countries causes structural unemployment in the industrially advanced countries. The MNCs shift production facilities abroad in order to avoid demands for higher wages from labor unions. In industrially backward countries, labor is cheap and there usually aren’t any unions.

MNC supporters argue against this point and contend that MNCs reduce balance-of-payment deficits, create new employment opportunities, promote competition in both domestic and foreign markets, and reduce rather than widen income inequalities between and within rich and poor states.

Occasionally, we do hear of incidents on the news relating to MNCs’ exploitation of cheap labor eg, last year we heard of the Nike operations in Vietnam and the shocking conditions the workers had to tolerate, as well as the illegally low wages.

I think these incidents are, however, only occasional, and although the Global South has long viewed MNCs with suspicion, this attitude has changed and is still changing. Now, many Global South countries are welcoming the penetration of MNCs, hoping that they will act as a catalyst in their country’s economic growth.

Politics and Multinational Corporations

Another concern regarding MNCs is their involvement in domestic political affairs of local or host countries.

The text book names several cases such as IT&T in Chile; Dresser Industries in France; and OPEC. Often a problem exists because the host nation subsidiary of the MNC is involved in actions which are contradictory to the political wishes or policies of the home government.

Sometimes, MNCs will lobby their home government for policies which back their disputes or facilitate their activities. One result of such lobbying is the promotion of free trade. MNCs have been a powerful influence in making governments reach agreements with each other to liberalize economic transactions in the global marketplace.

MNCs play an unavoidably pivotal role on the world’s political stage. Although they are nongovernmental actors, they do have a strong influence on governments.

MNCs’ Influence

A question posed by the strength of MNCs is: Will MNCs erode state sovereignty?

Joint ventures, interrelationships, and shared ownership make MNCs almost impossible to control from the level of one single state. New international mergers such as the one between Daimler-Benz of Germany and Chrysler Corporation in the US, as well as other similar mergers, are blurring the identity of such companies. Chrysler Corporation, which along with other very “American” companies is almost a symbol of the american way of life, is very simply, no longer american!

Part of the reason these strategic corporate alliances are so hard to control is because in 1996, about one-third of the world’s $6 trillion trade in goods and services occurred within multinationals – that is, from one branch to another. Another third of world trade was between different multinationals. So, multinationals accounted for two-thirds of the 1996 world trade.

There is no debate that MNCs are now undoubtedly a permanent and influential force in the international arena. State sovereignty is being threatened by the ever-increasing power of MNCs, which and I hate to use a clich?, but they are making the global village smaller and smaller. As stated in the UN Commission on Transnational Corporations, “Many issues related to corporate responsibility cannot be resolved satisfactorily in the context of a single national legal regime…. Globalization of business activity-problems…are beyond the capacity of national regimes of governance”.