Some people would think that the raise of MNCs is a phenomenon of the post world war II, but we should not considerate this, since multinationals existed before 1936, when enterprises such as the Dutch and the English Trading Companies were already founded. Grimwade (2000). Meanwhile, others argue that even though, MNCs emerged before war I, the hoist of the global economy is largely due to the post world war II phenomenon. During 1950s and 1960s , Multinationals were equal with American Corporations, due to the dominance of the American economy at that time. However, in the following years, the patter of multinational investments is now more geographically dispersed, flattening in somehow the pyramidal shape of multinationals dominated by the American Corporations. Dieter E. (2002).
Multinational companies have been the best actors prepared to operate appropriately on global scale, in spite of the entry difficulties that have been found in many markets. The changes operated in the international system together with the deep technological transformations in transport, communication, and production systems, have led excellent conditions for the multinational companies to expand and unfold strategies on global scale, in a world more competitive every day.
Therefore, nowadays, with the dramatic improvement in communications and with the significant reduction in constrains on the international movement of both goods and capital , the European Union as an example, there are more than 63,000 multinational companies with over 800,000 foreign affiliates. Its participation in the world-wide economy is of 70% from the total, where more of the 40% is from international transactions of merchandise and services made between multinationals or the parent firms and their affiliates, controlling the 75% of the world-wide investments. They have, therefore, a great influence in the international politics and economic relations and to a large extent are responsible for the economic globalisation. (UNCTAD, WIR.1999)
The last decades have seen a fundamental change in the activities of MNCs. They have increased not just in their extent, but also in their intensity and variety. These developments are often associated with the process of globalisation. This process has led to a widening of the extent and form of international transactions, and to a deepening of the interdependence between the actions of economic actors located in one country and those located in others (Dunning, 1997). The influence of globalisation on international business activity has ushered in fundamental changes in which MNCs undertake cross-border activities, in what Dunning (1995) has described as 'alliance capitalism'. Reference
Nevertheless, the importance of multinationals fully exceeds the quantitative aspects derived from the most or least penetration of its merchandise in the markets. In the first place, MNCs have a great influence in the economic relations and international politics, for instance, they have played a decisive role in the process of European integration. Secondly, the immense majority of the technological advances are coming from them. Therefore, the improvement of products and processes of production, and the new products nearly have their origin in a multinational, or for its success, they finish being absorbed by one of them. Thirdly, multinationals make a net of enterprise’s network suppliers, for trade of their products, attendance of technical post- sell and services related to their products or their activity that depend considerably on the decisions of the parent firms. Formally, these companies are not of multinational origin, but its activity and its own existence depend totally on the same one. Finally, their vast volumes of capital, locate them in a good negotiating position with governments, turning them into the main workforce of financial markets. Therefore, Multinationals are of a hegemonic organizational form of great capital and, consequently, their importance and its power are considerable. Reference
Above of all those important facts mentioned before, multinational corporations (MNC) are the main institutional agent of international production, and FDI is typically the preferred means by which international production is undertaken and organized. FDI takes two forms. The first one is the Greenfield investments which are characterised by establishing a wholly new operation overseas. And the second ones are the Acquiring or merging acquisitions which area characterised by joining with an existing firm in the foreign country. Lecture notes.
The deepening of world wide economic integration has depended increasingly on rising FDI flows, especially in the last two decades. Up to the mid-nineteen eighties, foreign trade was the most dynamic channel of economic integration. Exports grew much stronger than FDI in the 1950s, 60s and 70s. In the 1980s this pattern changed. FDI grew more rapidly than the world output and international trade. (Grimwade 2000.) The development of this impressive rise of FDI after 1985 is showed in Figure 2, where the World real industrial production has risen by 60% over this 24 years period. That is an annual growth rate of 2%. International trade, here shown by the export figures, has increased by 210% over the whole period, or 4.8% annually, more than twice as fast as industrial production. An even more dynamic contribution to economic integration came from FDI. From 1973 to 1997, FDI has increased by 780%. That is an impressive annual growth rate of 9.5%, twice as large as the export growth rate. Reference
Figure 2: World Industrial Production, World Trade and Foreign Direct
Investment, 1973–1997a
Source: Siebert (1999).
As an another important example we could recall the role playes by The UK as being the second most important host for FDI after the US, with an 11 per cent share of the global inward FDI stock, United Nations (1997). As a result, foreign multinationals play an important role in its economy.
Source: Host Country Effects Of Foreign Direct Investment In The UK By: Nuno Sousa
The sudden and strong increase of FDI in the second half of the 1980s has been often noticed and widely discussed in recent years, but its explanation remains to be one of the challenges to economic research (Graham 1996).
Previously, FDI was seen as a way to exploit foreign nations by overseas investors.
Currently, they are seen as an important figure to boost up employment, to acquire new technology, earn foreign currency therefore to get a higher salary, to join together the world economy, and to improve international competitiveness and economic performance. Therefore, FDI is now seen as crucial tool for economic prosperity; hence, many countries are aggressively trying to attract FDI, offering generous incentive packages to MNCs to set up production in certain locations or activities. Journal of Economic Issues June 1998 v32 n2 p333(8)
Another important indicator, which can be mentioned, as a part of the integrated international production, is the intra-firm trade (that is, transactions between related parties as opposed to arm’s-length transactions). Intra-firm trade within the MNC system is impressive and growing rapidly. In 1993, intra-firm exports accounted for 36 percent of total U.S. exports, while intra-firm imports accounted for 43 percent of total U.S. imports. At the same time, for every $100 of exports of foreign affiliates of U.S. MNCs, $64 of exports was intra-firm. And the corresponding figure for imports was $86, making, therefore, the intra-firm trade a truly important key for the development of MNCs. IBID. Similarly, there are a number of theorists, which attempt to explain the reasons that have contributed to the enormous expansion of the MNCs. On this project, I will talk of some of the important ones such as Dunning and Hymer.
So let’s talk first, about the theory given by the father of the theory of multinational firms, Hymer 1976. He argued that the cost of doing business abroad should be measured in reverse, by the advantages national firms have in their home markets relative to foreign-owned firms. First, national firms would have better information about their own country so foreign entrants needed to incur a onetime cost of acquiring this information. Second, national firms could receive differential and superior treatment from the host country government, buyers and suppliers. This “stigma of being foreign” (Hymer, 1976: 35) was expected to persist over time, even after the firm set up operations in the host country. Third, the entrant’s home government could also generate differential treatment; e.g. by prohibiting its firms (both parents and foreign affiliates) from engaging in certain activities or by levying more onerous taxes than apply to host national firms. Lastly, Hymer argued that because receipts and payments of foreign currencies were not synchronized, the MNE subunit faced foreign exchange risks that were not incurred by a national firm in the host country. Because of these costs of doing business abroad, Hymer argued that the MNE needed advantages if it was to go abroad and be successful.
On the other hand, we have another important scholar, called Dunning. He proposed The Eclectic Paradigm, which attempted to draw together a number of related theories explaining MNE activity. This, grew out of a desire to synthesise elements from the transaction cost (internalisation) and market power theories of the individual firm in its relationship to markets with macroeconomic approaches to international production (such as the original product cycle model) at the country level. Therefore, the eclectic paradigm has been the leading explanation for the growth of multinational activity over the past two decades. Though, some business scholars disagree over the value of this paradigm. However, most agree that it is a useful framework.
Dunning's (1973; 1977) theory provided an useful framework, designed to explain the extent and patterns of the foreign-owned production of multinational corporations. This paradigm was focused on three main features: who, where and why; in other words, MNCs must meet three conditions to invest and produce abroad. The first one is related to the ownership advantage, such as a firm owning a patent; the second one makes reference to the localization advantage, for instance a country with low wages; and the third and last one is the internalization, this advantages arise from the greater ease with which an integrated firm is able to appropriate a full return on its ownership of distinctive assets such as its own technology, as well as directly from the coordination of the use of complementary assets, subject to the costs of managing a more complex network. REFERENCE
In the ongoing debate on the role of multinational corporations in globalization, there is a very important issue to be touched and it is the possible effects of multinationals on the host and home countries. I discuss wages, productivity, exports, within other within others. Nowadays, the impact that Transnational Companies cause in the internal economies is especially clear in the less developed countries (LDC). The consequences given by the establishment of MNCs are damaging in general lines for the less favoured nations. Nevertheless, multinationals manage to reduce to the minimum their prices, which is the main purpose that prompts them to be installed beyond the national borders.
Therefore, the arrival of a powerful multinational can destroy the local industry, since they tent to be more competitive. Hence, one of consequence that global corporations bring is an increase of strikes, which reduces the acquisitive power of the citizens giving a negative effect in their economy. On the other hand, there is a replacement of the goods produced by local companies for the ones produced now by multinationals, creating benefits for the host countries, since those profits do not remain in the state, thus they export themselves without any compensation, because the production of those products that generate that capital is national. Therefore, these countries are being slowly undercapitalized, while those losses are transformed into profits in the countries where the matrix houses are found.
Another important consequence produce by MNCs is that they locate their production, more in specific, the labour, in zones or countries of low salaries, due to the location advantages which are supported exactly in the existence of such low salaries. This situation has effects on the employment, affecting, therefore, the local employment of the country’s destiny investment. Moreover, it enlarges the number of wage earners by multinational businesses, which, in spite of perceiving very lower salaries compared with the workers of developed countries; they perceive some remunerations considerably upper average of its own country. They are, therefore, in certain way, privileged.
There are several ways in which the entrance or existence of foreign firms might affect wages in the host countries where they operate. One is if these firms offer higher wages than are paid by domestic firms. Particularly whether foreign firms pay higher prices for labour, in the sense of paying higher wages for workers of the same quality .On the other hand, Findlay model assumes that foreign firms pay a higher wage for labour of the same quality “… for purposes of good public relations” (1978, p. 9). It might be that workers prefer locally- owned firms, and must be compensated to overcome this preference. other scholars stress that foreign firms, because of their limited understanding of local labour markets, pay higher wages to attract better workers, while more knowledgeable local firms can identify and attract better workers without paying them higher wages.
On the other hand, transnational businesses are irreplaceable agents for the introduction of technology in LDC. In many occasions is thanks to the advance of technology that the multinationals carry with themselves, as for example: these countries have access to processes, ideas, organise schemes, etc., that contribute to develop their national industry. Although, this benefit is small compared with the prejudices that multinationals cause, in the internal economies of the less developed countries.
Now looking at the effects of the MNCs on the home countries, one could say that one of the most important aspects of home country effects of globalization has been whether employment in foreign affiliates is a 'replace ' or a 'complement' to home country employment of the parent firms. MNCs may incur in adjustment costs when allocating activities abroad due to the uneven distribution of skills across international locations, i.e. advanced versus developing countries. For example, the creation of new manufacturing plants in less developed countries is likely to require an upgrading of the local labour force, entailing costly searching and training activities. In all such instances, short-run responses to relative wage changes can be different from long-run ones in both size and sign. Thus, some researches state that by creating jobs abroad, therefore expending money overseas, MNCs exacerbate the problems of them balance of trade and payment. In contrast, other argues that wages paid to workers abroad, create for instance demand for import products, therefore there is a increase of money coming from abroad.
Lipsey does not deny that problems, such as job losses at home, can occur when a domestic company invests in foreign production facility. But he notes that critics of globalization often fail to consider the broader picture. For example, in the United States, while there has been considerable attention to jobs lost because of a domestic firm shifting production abroad, less attention has been paid to how this may be offset by foreign firms investing in U.S. facilities. Lipsey notes that U.S.-based manufacturing employment and output provided by U.S.-owned companies indeed declined from 1977 to 1997, but "most of the reduction...was offset" by the increased output and employment resulting from an surge in foreign owned affiliates moving into the United States. "U.S. and foreign firms were both internationalizing," he writes. "Each group was expanding in the other group's home region." http://www.nber.org/digest/may03/w9293.html
Now, regarding the productivity of foreign- owned plants is high in both developed and developing countries. Some of that higher productivity, but not all in most comparisons, can be attributed to higher capital intensity or larger scale of production in the foreign- owned plants.
In final, the action of the transnational businesses today is distant a great deal to be the same as that after the II World War in Europe. It miss the direct investment destined to that its benefits remain in the country where is carried out. Nevertheless, this situation is the most efficient one for the businesses of the rich countries, therefore can reduce its prices al most maximum.
To conclude this research, we have to state that multinationals are the main drivers of the global economic process and without this “ The Global Village” would have not be possible.
