MNC and TNC: Does the distinction make a difference?

Figure 1: Total US imports and intra-firm imports of goods

 

MNCs and FDI:

World FDI flows have continued to grow significantly between 1996 and 1999, but at a lower rate every year. In 1999, the value of world FDI outflows was Euro 570 bn.

Between 1996 and 1999, the average growth of FDI outflows was 34.7%.

The major destinations (FDI inflows) are both developed and developing countries, with the share of the former continuously increasing during the last four years. US is the largest recipient (40.5%of world FDI inflows in 1999), followed by the EU (18%). Among developing countries, the distribution of these inflows is highly skewed, with Asia and Latin America attracting the big bulk of FDI. On the contrary, the major sources of FDI outflows are to a large extent developed countries. EU is the largest investor and in 1999 it accounted for more than 50 per cent of world FDI outflows. The US is the second largest investor, with 25 per cent of world outflows originating there. Multinationals from some developing countries are now investing abroad as well, coming mainly from Venezuela, Korea, China/Hong Kong and Brazil.

Figure 2: World FDI inflows by main country grouping

The total value of FDI outflows in 1999 (excluding intra EU flows) was Euro 570 bn,

which is far higher than the 96-99 average of Euro 397 bn. During this period, the average growth of FDI outflows was 34.7%.

Figure 3: World FDI outflows between 1996 and 1999

Data show that world FDI outflows have continued increasing significantly between 1996 and 1999, but at a decreasing rate.

MNCs and Globalization:

An analysis of the role of multinational enterprises (MNEs) can give substantial additional insights into the globalization process. Since MNEs are engaged in foreign direct investment (FDI), and since they carry out large shares of world trade and of the global transfer of knowledge and technology, an analysis of the role of MNE in globalization is necessary over here. The research on globalization describes phenomena and driving forces of recent developments towards global competition and gives stylized facts which serve as a basis for further research. It emphasizes the role of decreasing transport and communication costs for increasing global competition.

Accelerated process of Globalisation is one of the main features of twentieth century world politics and is "one of the most dramatic developments of the period and has more than just economical and industrial significance". Multinationals (MNCs) by their virtue are direct creations of globalisation. Some analysts ague that Multinationals do not dominate the world market and 'are not even global' , while others strongly feel that "multinationals are increasingly going global" and call them "powerful beasts" . Let’s see the power of multinationals in the world politics.

The primary target of promotional policies of multinationals is to create one customer culture, so that people around the globe purchase identical basket of goods: watch Hollywood films on Phillips television set, while smoking Marlboro and drinking Coke. During the 1970s largest number out of 7000 MNCs was based in USA. By the early 1990s there were 35000 multinationals, however USA still maintained its leadership. These companies aim at promoting same goods around the globe in order to create one identical consumer culture, which is very much influenced by that of American. 

The following facts serve as evidence and, most importantly, evaluation of MNC power.

1. Of the world's 100 largest economic entities, 51 are multinational companies and 49 are nation states.
2. Sales and net profit figures for some multinationals are higher than GNPs of developing countries, like for example the annual sales of Shell are roughly £68billion, which is two and half times the income of Nigeria's 110 million people .
3. In 1989, more than 18 per cent of all share trading was in the shares of the major multinationals.
4. In 1993 the combined assets of the top 300 MNCs would make up roughly a quarter of the worlds $20trillion productive assets and there was an accusation that several American companies could "buy out" some European countries.
5. Coca-Cola advertisements are being shown 560 million times a day, everyday in 160 countries, while majority of world population does not know where Fiji is.

These facts and figures undoubtfully may lead to the conclusion that indeed the MNCs do possess distinctive economical superiority over some nation states, and therefore are too powerful for being just a firm with such cynical target as profit maximisation and not welfare of the citizens. 

At the same time, MNCs are a major source of foreign investment, which is believed to bring higher growth rates for the developing countries. Therefore these states are being advised by the United Nations, and indeed do a lot to attract MNCs. This is why particularly developing countries are heavily dependant upon them economically. Because of Third World's financial dependency on FDI, the MNCs have gained a small share in the political power as well. Since the developing countries need to seduce the multinationals, governments are automatically made to follow those policies that will favour these firms and will create suitable financial as well as legal environments for them. Also due to high corruption records in the developing states, multinationals are able and sometimes do obtain various favourable changes. One may notice the interdependency that exists between the states and MNCs; this makes the model appear to be fairly balanced. 

Multinational corporations are the result of market imperfections. These institutions are not necessarily bad; the developing economies acquire higher growth rates because of the foreign investment provided by MNCs. However, due to the virtue of their goals and sudden boost of their power, the humanity cannot possibly afford to nominate these institutions with the responsibility to be one of the key actors on the international arena.

Since the multinationals are undermining the sovereignty and thus the rights of a nation state by gaining too much power, probably the most effective way to loosen the position of MNCs is by strengthening the status of the nation state.

Theories of MNCs:

There are several kinds of theories regarding MNEs. Between 1960s and mid 1970s, the theories were focused on the cause of countries engaged in FDI.

Stephen Hymer:

Stephen Hymer’s book Global reach, identified multinationals as an important field of study. "Global Reach" is one of the first (and only) books to examine the transnational corporation, which was then just emerging as a separate political and economic entity, with the potential to subvert the historic social-welfare functions of the sovereign state, and thereby affect billions of people. Hymer argued that foreign production could not occur without the investing firms possessing some kind of monopolistic advantage over and above those posses by indigenous competitors.

Vernon Raymond:

In mid 1970, Vernon developed the product of life cycle model. As developed by Vernon, international product life cycle theory traces, the roles of innovations, market expansion, comparative advantage and strategic responses, of global rivals in international production trade and investment decision. According to the theory, domestic production begins in stage 1, peaks in stage 2, and slumps in stage 3. By stage 3, however, the innovating firm’s country becomes a net importer of the product. 

John Dunning:

Dunning’s OLI (ownership, location and internalisation) paradigm explained the MNE form and grow because they posses these kinds of advantage. John Dunning has expanded upon this theory by suggesting that 3 conditions must be met before a firm is able to compete with local firms:

1. It must have market power that derives from ownership of some specialized knowledge.
2. It must consider the particular foreign location advantageous for new investments relative to alternative locations, including its home market.
3. It must prefer FDI over exporting and licensing by the usual internalization logic

This expansion is called OLI mode. The ownership in Dunning’s theory refers to intangible assets such as technological capacity, production innovations, and organizational capabilities etc. 

Recent theoretical developments have incorporated endogenous multinational firms into the general-equilibrium model of trade. One simple taxonomy separates the theory into "vertical" models, in which firms geographically separate activities by stages of production, and "horizontal" models, in which multi-plant firms duplicate roughly the same activities in many countries.

Empirical studies on MNCs

There have been various empirical studies on MNEs over the years. We will just emphasize on two of them:

Kravis & Lipsey (1992):

Kravis and Lipsey,  tested Dunnings’ approach. They concluded that:

1. Strong positive relationship between U.S. MNE exports and research and development intensity.
2. MNCs exploit advantages of brand recognition by transferring production to foreign plants rather than exporting.
3. Knowledge based firm specific assets play a central role in FDI.

Markussen & Venables(1995):

Another important empirical study is by Markussen & Venables(1995) which conforms with observations of:  

1. MNE activity is greatest among rich countries.
2. High levels of MNC activity between countries with similar resource endowments.
3. Composition of trade skewed to intra-industry affiliate sales.
4. Two way FDI activity between countries.

Impact of MNCs on LDC AND OECD

Impact of MNCs on LDC’s:

Economic Impact

Proponents argue that foreign investment has a positive effect on Southern economic development because foreign investment fills resources gaps in developing countries and improves the quality of factors of production. They are of the opinion that:

1. MNCs bring unavailable financial resources to the South through their own capital and their access to international capital markets.
2. New foreign investment may help to increase the level of overall domestic investment.
3. MNCs contribute foreign exchange earnings to the developing world through their trade effects.
4. The manufacture for the local market of products that otherwise would have been imported saves foreign exchange.
5. MNCs allow LDCs to profit from the sophisticated R&D carried out by the multinationals and to make available technology that would be out of reach.
6. Technology improves the efficiency of production and encourages development.
7. MNCs train local staff, stimulate local, technological activities, and transfer technology throughout the local economy.
8. Foreign investment by MNCs improves the quality of labor in the LDCs by providing much needed managerial skills that improve production.
9. MNCs have a positive impact on welfare through the creation of jobs, the provision of new and better products, and programs to improve health, housing and education for employees and local communities.

 The positive view of the role of the MNCs in growth, efficiency and welfare has been challenged by critics of the MNCs 

1. MNCs don’t bring in as much foreign capital as their proponents suggest. The financing of foreign investment is done largely with host-country capital. For example, between 1958-1968, US manufacturing subsidiaries in Latin America obtained 80% of their financing locally.
2. MNCs because of their strength have preferred access to local capital resources and are able to compete successfully with and thus stifle local entrepreneurs.
3. Foreign investment in developing countries leads to an outflow of capital Capital flows from South to North through profits (repatriation of profits), debt services, royalties and fees.
4. MNCs introduce inappropriate types of technology that hinder indigenous technological developments and employ capital-intensive productive techniques that cause unemployment and prevent the emergence of domestic technologies.
5. MNCs retain control of their advanced technology and they do not transfer it to LDCs at reasonable prices.
6. MNCs don’t benefit Southern labor. They make only a small contribution to employment by using expatriate managers instead of training local citizens and by hiring away local skilled workers.
7. MNCs create a branch-plant economy of small inefficient firms incapable of propelling overall development. They create highly developed enclaves that do not contribute to the expansion of the larger economy.

Empirical studies examining the economic impact of MNCs on LDCs appear to indicate that while the inflows of foreign investment have a generally positive effect on economic growth, the extent of the impact depends on other variables especially the policies pursued by host governments.

1. One important country-level variable that influences the aggregate impact of FDI flows is the level of human capital development in the host country . FDI flows have positive effects on economic growth in countries where significant investments were made in education and worker trainin.
2. Genuine technology transfer occurs only in the case when the MNC has been able to maintain at least majority control over its subsidiary. So, it is not wise for governments of LDCs to require MNCs to give up majority control of their subsidiaries to domestic venture partners if they want to receive the benefits of technology transfer.
3. The establishment of inefficient subsidiaries in the LDCs has been primarily a function of the small scale of the local markets in most of these nations

As part of their strategy of import-substitution industrialization and high tariffs, LDCs have encourage MNCs to invest in protected markets wher economies of scale are difficult to achieve and costs are high.

Political Impact

Evidence suggests that MNCs have at times intervened in political processes in their host states in the Third World. While most MNCs don’t become actively involved in the host country politics, some MNCs have taken both 

legal (contribution to political parties, lobby with local elites, carry out public relations campaign) and

illegal (illegal contributions to political parties, bribe to local officials, refusals to comply with host laws and regulations) actions within host states

1. to favor friendly governments and oppose unfriendly ones
2. to obtain favorable treatment for the corporation
3. to block efforts to restrict corporate activity

Dependent development encourages the emergence of authoritarian regimes in the host country, and the creation of alliances between international capitalism and domestic reactionary elite. 

• The validity of the argument that foreign investment by MNCs has adverse political effects is ambiguous, despite some examples, given that most LDCs are authoritative
• What the MNCs want the most is political stability rather than a particular form of government

Cultural Impact

The presence of MNCs is characterized as constituting a form of cultural imperialism or Coca-Cola-ization of the society, through which the developing country loses control over its culture and its social development Imported foreign values are detrimental to the development of the country because they create demands for luxury and other goods that do not meet the true needs of the masses.The charge of cultural imperialism can be supported in part. The process of economic development itself is destructive of traditional values, since it involves the creation of new tastes and unaccustomed desires 

Although MNCs may foster the desire for luxury goods, the consumption patterns of the developed countries have a demonstration effect upon elites and masses everywhere.

Impact of MNCs on OECD

Although the interests of the MNCs and the OECD foreign policy objectives have collided on many occasions, a complementarity of interests has tended to exist between MNCs and the government. 

1. The foreign expansion of corporations serves important national interests and OECD policies have encouraged corporate expansion abroad and have tended to protect them.

The expansion of OECD MNCs has been regarded as a means to maintain OECD dominant world economic position in other expanding economies

2. These multinationals have also been viewed as serving the interests of the balance-of-payments of these countries. MNCs are major earners of foreign exchange and thus an important factor in the economies

They have been regarded as an instrument of global economic development and as a mechanism to spread the ideology of free enterprise system.

3. MNCs have also been regarded as a tool of diplomacy, mostly to the displeasure of their business leaders. For instance, the US government has tried to manipulate or control the activities of US corporations in order to induce or coerce other governments to do its bidding.

 In the US, MNCs are accused of causing a variety of economic problems

1. According to labor union leaders, American jobs are lost directly to the labors in the export platforms, and even more jobs are lost indirectly because the foreign subsidiaries monopolize export markets that otherwise could be served by US factories with American workers
2. By exporting jobs, investing money overseas, and having subsidiaries overseas that make it impossible for products made in the home country to be exported, MNCs exacerbate balance-of-trade and balance-of-payment problems
3. MNCs exacerbate the unequal distribution of wealth by moving a variety of productive jobs out of the country, leaving nothing but highly specialized occupations for which only their wealthy and highly educated citizens can qualify
4. FDI by the US MNCs has contributed to the deindustrialization of the American economy

The US economy has become an assembler of components manufactured abroad by American MNCs. MNCs and their defenders do not take these criticisms lying down and in some cases their counter-arguments are convincing. Foreign investment makes substantial, less direct and less visible contributions to the number of jobs in an industrialized country:

1. the wages MNCs pay to workers abroad, create increased demands for American products in the countries where they operate
2. The subsidiaries need parts and capital equipment from the US adding again to the number of jobs in the American economy
3. Products made more cheaply abroad than in US save American consumers thousands or millions of dollars a year
4. Imports create jobs (distribution network)

If US MNCs were prohibited from setting up subsidiaries in export platforms, it would not mean more jobs for Americans. MNCs from other countries would use these platforms to full advantage; production facilities in the US would not be economically viable.The extent to which MNCs are inclined to export jobs to states with lower wages may be exaggerated because low wages are only one consideration and far from being the most important one. Industrialized countries are by far the main sources and destinations of FDI outflows.

Evidence of Impact

Impact of FDI in Brazil:

Report on the Conference “Foreign Direct Investment in Brazil: Achievements and Prospects” held at St Antony’s College, Oxford on 14th June 1999

The past decade has witnessed enormous transformations in the Brazilian economy as market liberalisation and ever closer integration with the global economy have supplanted the inward orientated industrialisation policies of the past. In particular, the growing presence of foreign capital across a whole range of sectors has been exercising an important influence upon the development of Brazil’s international economic competitiveness.

Brazil over the past five years:

Between 1994 and 1998 such inflows rose from approximately US$2bn to US$ 26bn. In large part, the upturn in FDI could be explained by the extent of the macroeconomic stabilisation that has taken place since 1994. The lowering of inflation and the maintenance (at least up until January 1999) of relative exchange rate stability offered a more secure planning environment for private sector investors in general, and foreign direct investors in particular.

However, it was important to note that significant microeconomic policy changes had also occurred and these had had the effect of significantly accelerating the rate of investment inflows as well as affecting intimately their sectoral destination. In particular, the privatisation of public utilities, allied to reductions in taxation on profit and dividend remittances, had dramatically improved the attractiveness of Brazil as a destination for foreign direct investment.

Recent Trends in FDI

The share of FDI allocated to the infrastructure and financial services sectors had increased dramatically. While foreign investment in manufacturing has remained robust, especially in the automotive sector, the real areas of investment growth have been located in the energy, transport and telecommunications sectors. Investment in these sectors had been facilitated by the privatisation programme and the growth potential of the markets served by some of the privatised enterprises, particularly in telecommunications.

FDI and its Impacts on the Brazilian Steel Industry:

The role of foreign capital in the recent development of the Brazilian steel sector is significant. In contrast to a number of other sectors, the participation of foreign capital in this sector had remained relatively restricted. However there were notable examples of significant foreign investments, notably in the cases of Usiminas and Mannesmann. Brazilian steel enterprises had themselves begun to invest internationally. In particular, Gerdau had realised significant investments outside Brazil, notably in North America. Prospects for an acceleration in the rate of foreign investment into the Brazilian steel sector depended on a number of factors, most significantly the need for improved competitiveness and transport links.

One sector characterised by particularly intense foreign investment activity is that of oil and gas.

Policy Liberalisation and FDI

In the Brazilian Oil Sector” began by setting out the dramatic changes in the policy

environment affecting the sector which have occurred over the past five years. The key change identified was the abolition of Petrobras’ statutory monopoly in the fields of oil production and exploration. This, taken together with the auctioning of new sites for oil production, had resulted in a substantial inflow of foreign investment with many of the oil majors strongly represented. The prospects for future acceleration of investment flows appeared reasonably strong, especially in the field of natural gas exploration and production. In particular, the growing significance of gas fired power stations that was expected to accompany the privatisation of the power generation sector, was expected to provide a healthy market for newly exploited natural gas deposits.

FDI and Privatisation in the Banking Sector

The recent evolution of foreign investment in financial services, is a complex and dynamic sector of the Brazilian economy. This is a relatively recent nature of large FDI flows into the Brazilian banking sector. The government, anxious to increase the depth and solidity of domestic capital markets, proved especially willing to countenance a shift in ownership away from traditional, domestically owned financial groups. However, the scope for an acceleration in foreign participation in the sector is likely to be less pronounced in the future. In large part this is because the number of banks still to be privatised – and thus available for potential foreign purchase – is dwindling. Despite this, the role of foreign capital in restructuring Brazil’s financial sector will remain crucial given its historically high current rates of participation and ownership of key strategic institutions.

Fixed Investment, the Real and FDI: Trends, Tradeables and Infrastructure

The nature of the structural advantages enjoyed by multinational firms over local firms in the Brazilian market in the wake of macroeconomic stabilisation. Among the most important of these were lower risk aversion to remaining macroeconomic uncertainty and the toleration of a lower rate of return.

Conclusion

Multinational enterprises (MNEs) are an important part of the international economy. Through international direct investment, they bring substantial benefits to home and host countries in the form of productive capital, managerial and technological know-how, job creation and tax revenues. At the same time, public concerns remain about the social, economic and environmental impact of MNE activities on the societies in which they operate.

References:

1. Richard E. Caves 1996, Multinational Enterprise And Economic Analysis, P 57-81, 133-249, press syndicate of University of Cambridge.
2. David K, Arthur I, Micheal H. 2001, Multinational Business Finance, , P 2-12, 301-355Addison Wesley publishing company.
3. PeterDickens 1999, Global Shift [Transforming the world Economy], P 177-199, 429-457, Cromwell press, Wiltshire, UK.
4. Dunning, J. H. (1974, The Multinational Enterprise, London: George Allen & Unwin Ltd. P39
5. Markusen, J.R., and A.J. Venables (1998). Multinational Firms and the New Trade Theory. Journal of International Economics  P 183–203.