The Politics of Multinational Corporations I. Mnc terminology



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The Politics of Multinational Corporations

I. MNC Terminology

II. The Evolution of MNCs

III. The Debate over MNCs

IV. The Politics of MNCs

I. MNC Terminology

  1. multinational corporation (MNC)

  2. a corporation with production facilities in 2 or more countries

  3. sometimes called transnational corporations




  1. foreign direct investment (FDI)

  2. foreign investment in businesses that produces a controlling interest in the firm

  3. often called direct foreign investment (DFI)

  4. FDI is how MNCs establish foreign subsidiaries

  5. FDI is different from portfolio investment in which foreign investors place money in banks, bonds, or equities but do not gain controlling ownership of the asset




  1. greenfield investment

  2. FDI that builds new facilities rather than acquires existing facilities via merger or acquisition




  1. home country

  2. the nation-state in which a MNC’s headquarters is located

  3. generally, but not always, the country in which the MNC was founded




  1. host country

  2. a nation-state into which a MNC headquartered abroad establishes operations




  1. intrafirm trade

  2. trade occurring between 2 or more subsidiaries of a single MNC

  3. for example, General Motors makes vehicles in North America with inputs produced by GM subsidiaries in Canada, Mexico, and the U.S.




  1. transfer pricing

  2. MNC practice in which MNC subsidiaries in higher-tax countries underprice their share of intrafirm trade while subsidiaries in lower-tax countries overprice their sales

  3. this is done to reduce the profits earned in higher-tax settings while increasing profits earned in lower-tax settings




  1. labor dumping

  2. the notion that MNCs expand operations into host countries with lower wage (& non-wage) costs &/or less legal protection for workers and labor unions and reduce operations elsewhere




  1. environmental dumping

  2. the notion that MNCs expand operations into host countries with lower environmental standards and/or enforcement and reduce operations elsewhere

II. The Evolution of MNCs

  1. A. Why create MNCs? Why not just produce at home & sell abroad?

  2. maximize firm-specific advantages

  3. use size to reduce cost of financing & to expand R&D edge

  4. keep control of key technologies

  5. exploit marketing edge re: size & brand-name prominence

  6. maximize location-specific advantages

  7. improved access to key natural resources

  8. local presence improves marketing capability in host countries

  9. conduct “end run” around trade barriers by producing locally

  10. lower production costs in low-wage &/or low-tax settings

  11. product life-cycle theory

  12. Northern MNCs develop new technologies

  13. they move production to other Northern countries to block new competitors

  14. as new technologies emerge, they move obsolescing production techniques to industrializing LDCs to lower costs further

II.B. A Capsule History of MNCs

  1. 19th century-1945:

  2. the U.K. as the major source of FDI

  3. well over half in 1800s; over 40% during interwar years

  4. most FDI aimed at controlling natural resources abroad

  5. almost 90% of FDI flowing out of UK, US, France, & Holland

  6. 75% of FDI flowing into LDCs & colonies

  7. 1946-1980:

  8. the U.S. as the major source of FDI

  9. around half from 1950-69; over 40% during 1970s

  10. most FDI aimed at establishing manufacturing facilities in the North

  11. around 80% of FDI flowing out of the G-7 countries

  12. 75% of FDI flowing into Northern countries other than Japan

  13. most of remaining FDI aimed at larger, more industrialized LDCs

  14. 1981-present:

  15. U.S. still largest major source of FDI, but no longer dominant

  16. around 25% during 1980s; around 15% between 1990-2000

  17. most FDI aimed at establishing facilities in the North

  18. manufacturing still dominant, but services (esp. financial) much more visible

  19. around 70% of FDI flowing out of the G-7 countries

  20. 80% of FDI flowing into Northern countries other than Japan

  21. most of remaining FDI aimed at larger, more industrialized LDCs

II. C. The Distribution of FDI by Host Country:

Top 20 Host Countries 1985-95 (countries in italics are not also on the list of top 20 outward FDI

  1. US $478b

  2. UK $200b

  3. France $138b

  4. China $130b

  5. Spain $91b

  6. Bel/Lux $72b

  7. Netherlands $68b

  8. Australia $63b

  9. Canada $61b

  10. Mexico $44b

  11. Singapore $41b

  12. Sweden $38b

  13. Italy $36b

  14. Malaysia $31b

  15. Germany $26b

  16. Switzerland $25b

  17. Argentina $24b

  18. Brazil $20b

  19. Hong Kong $18b

  20. Denmark $16b

III. The Debate over MNCs

  1. A. The Liberal Perspective:

  2. foreign investors should receive national treatment at a minimum &, preferably, a very market-oriented gov’t

  3. major potential liberal worry is that MNCs might engage in monopolistic and oligopolistic practices that disrupt market dynamics

  4. B. The Mercantilist Perspective:

  5. pre-1980 view

  6. use power of government to assist home-country MNCs and to regulate foreign-based MNCs

  7. post-1980 view

  8. concerns about MNC tax avoidance, labor dumping, etc. lead to a more even-handed approach

  9. as in “regulatory arbitrage” in global finance, neomercantilists begin to discuss offering juicy incentives to domestic and foreign MNCs alike
  10. C. The Structuralist Perspective:

  11. the current system harms the position of Southern states

  12. poorer states find it difficult to generate beneficial spillover effects from FDI

  13. the pursuit of investment creates a “bidding war” of government investment incentives that transfers scarce resources from taxpayers to MNCs

  14. D. The Institutionalist Perspective:

  15. states, MNCs, & individuals all try to cut their best deal

  16. states want to attract FDI that will boost their economies

  17. MNCs want to use FDI to improve their bottom lines

  18. citizens are attracted by promise of jobs but concerned about possible negative side effects

IV. The Politics of MNCs




MNC goals

  1. in all FDI:

  2. increase efficiency & profits

  3. reduce taxes

  4. in Northern FDI:

  5. improve position v. host country competitors

  6. use threat of FDI toward South to cut a better deal with Northern states & workers

  7. in Southern FDI:

  8. access to cheaper land & labor

  9. avoid tougher labor and environmental standards

  10. gain market access

  11. squeeze additional profits out of existing technologies

MNC worries

  1. in all FDI:

  2. losses due to exchange rate instability

  3. the possibility of policy instability

  4. in Northern FDI:

  5. fear of favorable treatment for home-country MNCs

  6. in Southern FDI:

  7. fear of major political instability &/or violence

  8. greater perceived risk of nationalization by host government


home country goals

  1. maximize employment

  2. or maximize high-wage employment?

  3. maximize tax revenues

  4. improve technological level of entire economy via aggressive R&D by home MNCs

home country worries

  1. job losses due to

  2. labor dumping

  3. environmental dumping

  4. tax avoidance via transfer pricing & other MNC strategies

  5. potential security risks tied to technologies deemed sensitive


host country goals

  1. maximize employment

  2. technology transfer

  3. made difficult due to serious conflict with the interests of the MNC

  4. help local firms that could serve as suppliers

  5. encourage spinoff investment

  6. improve balance-of-payments

  7. initial inward flow in capital account

  8. the hope that the MNC subsidiary will lower imports & increase exports

  9. again, this could conflict w/ MNC plans

host country worries

  1. in Northern settings, MNC might engage in industrial espionage rather than technology transfer

  2. predatory practices by MNC might damage local firms

  3. profit repatriation could reduce flow of capital available for investment locally

  4. in Southern settings, MNC presence could result in strained relations with Northern home country gov’t




IV.B. The Centrality of Bargaining

  1. At the outset, MNCs tend to have an edge over states in potential host countries in both North and South alike

  2. MNC has the resources to establish viable options across and within countries

  3. states compete to bring in visible flow of new investment and jobs

  4. (for which they will then take credit)


  1. Once the MNC has established its new subsidiary, however, there is the possibility of an “obsolescing bargain”

  2. the host country government insists on new policy conditions designed to:

  3. increase technology spillover

  4. increase exports

  5. increase tax revenues

  6. increase jobs

  7. improve labor and/or environmental conditions


  1. What influences the chances for an “obsolescing bargain”?

  2. the host country government is on stronger ground:

  3. the larger the fixed investment by the MNC

  4. large plants cannot be moved & are costly to build elsewhere
  5. the more important location-specific advantages are to the MNC’s reason for investing

  6. access to commodities
  7. reduced transportation and marketing disadvantages to a crucial market
  8. these conditions are particularly likely in natural resource MNCs

  9. we will look at the politics of oil soon….
  10. the MNC is on stronger ground:

  11. the more important its brand-name loyalty is to its competitive edge

  12. the more the firm has rights to cutting-edge technologies not held by its competitors




IV.C. The International Politics of Investment

  1. bilateral investment treaties:

  2. beginning in the 1960s, Northern governments began to negotiate one-on-one with Southern host states to try to guarantee national treatment & to produce rules for handling disputes

  3. Southern states are concerned that these are too one-sided



  1. the UN response:

  2. Southern states pushed for the creation of a Center on TNCs in 1975 and for a Code of Conduct for MNCs that was drafted by 1982

  3. Northern states objected to the draft vigorously as one-sided

  4. in the 1990s, the UN dropped the Code & dissolved the Center on TNCs



  1. the TRIMs accord:

  2. the Uruguay Round produced an agreement on trade-related investment measures that applied GATT principles of national treatment and trade barrier reduction to certain investment laws

  3. particularly applicable to domestic content requirements



  1. the stalled Multilateral Agreement on Investment:

  2. beginning in 1995 (after TRIMs), Northern states in the OECD began to pursue a much more ambitious, multilateral agreement that would

  3. protect investors from expropriation losses, reduce barriers to investment, reduce or eliminate restrictions on profit repatriation, & provide for binding dispute resolution in which firms could take matters directly to arbitration

  4. the MAI stalled amid a few Northern states’ disagreement and rising criticism from Southern states and NGOs in North & South

  5. the OECD suspended talks after Public Citizen published a copy of the draft agreement on the Internet that spurred additional NGO pressure worldwide


  1. Q: Will the FTAA &/or the Doha Round pursue new multilateral investment rules?

  2. the U.S. already pushed for and received new rules within the NAFTA framework

  3. more on that later when we look at NAFTA

  4. the Doha agenda includes the possibility for new talks but the path to a new accord is murkier



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