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After finishing this chapter, you will be able to explain:

The operations and global expansions of Multinational Corporations (MNCs) Different Activities of MNCs The relationship between MNCs and Globalization How MNC activities can create positive changes as well as tensions in a society The social responsibilities of MNCs

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A Multinational Corporation (MNC) is any business that owns and controls production or service facilities in two or more countries. Examples include Ford, Wal-Mart, Cemex, Nokia, Sony, etc.

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The overwhelming U.S. presence has been eclipsed by the emergence of large non-US multinationals. Whereas US companies used to represent 48.5% of the worlds largest MNCs in 1973, this share was down to 26% by the year 2000, while the share of Japanese multinationals increased from 3.5% to 17% in the same period. There has been a sharp increase in the participation of medium and small MNCs in global business activities MNCs from developing countries e.g., Whampoa of Hong Kong (part of China), Petroleos de Venezuela, Cemex of Mexico are now among the top 100 largest MNCs . After the end of the Cold War in 1989, MNCs have invested heavily in China and in former socialist countries of Soviet Union and East Europe. It is expected that in the coming years these countries would have their own MNCs that would expand to other countries.
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Category Fully Globalized Industries

Industry US$ trillion

Shares of Global GDP

1. Physical commodities Petroleum, mineral ores, timber Scale-driven business goods and services Aircraft engines, construction equipment, semiconductors, airframes, shipping, refineries, machine tools. Manufactured commodities Refined petroleum products, aluminum, specialty steel, bulk pharmaceuticals, pulp, specialty chemicals Total shares of global GDP Semi-Globalized Industries

2.0

1.0

2.8

5.8 trillion

23%

Labor skill-/productivity-driven consumer goods Consumer electronics, personal computers, cameras, automobiles, televisions 5. Brandable, largely deregulated consumer goods Soft drinks, shoes, luxury goods, pharmaceuticals, movie production 6. Professional business services Investment banking, legal services, accounting services, consulting services Total shares of global GDP Early Stage Globalized Industries

0.9

0.5

2.5

3.9 trillion

15%

7. Hard to brand globally, largely deregulated consumer goods and services such as food, personal financial services, television production, retail distribution channels

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Companies go abroad for two main reasons:

For Market Seeking For Resource Seeking

Lately, companies are also venturing into other markets for

Knowledge Seeking

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The recent trend of outsourcing back office work in other countries has created a lot of uproar in US politics. Some questions that re frequently asked are:

Can or will the US MNCs continue to innovate and increase productivity in order to keep the supply of higher paid jobs in the United States? Where will the US comparative advantages be in the future? How the trends toward outsourcing affect the living standard of the American middle class? How will the insecurity, stress and impoverishment afflicting the core of American society-its influential middle class, reflect on its political choices? What would be the impact of current changes on the world economy and what implications will they have on the rest of the world, especially the developing world? How would the on-going socio-economic upheaval affect the relations between the US and the developing countries?
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Rank
1 2 3 4 5 6 7 8 9 10

MNCs/Countries
Wal-Mart BP Columbia Bangladesh Exxon-Mobil Royal Dutch Shell Austria Sweden Switzerland General Motors

Revenue/GDP (In US$ Billion)

288 285 281 275 271 267 256

251 194
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Rank

Companies

Market values (in billion $) 264 259 241 234 195 184 170 149 144 139

1 2 3 4 5 6 7 8 9 10

Microsoft GE Exxon Mobil Wal-Mart Pfizer Citigroup Johnson & Johnson Royal Dutch/Shell BP IBM

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Rank

Companies

Value added (in US$ billion) 63 62

Country with compatible size measured by value added

Exxon Mobil

Pakistan

GM

56 53 Peru

3 4

Ford Motors Daimler Chrysler

44 42 41 Nigeria

5 6

GE Toyota

39 38 38 Kuwait
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Royal Dutch/Shell

36

MNCs
HQ in USA

11 world export: $1 T ($1 T,11) 11 .1 .1 11 11 MNCs foreign local sales: $11 11 T ($111111 T, ) Intra-firm trade: 11 of world trade % 11 FDI inflow: $11 ($11 11) 11 1B 1B, 11 by 11 MNCs and 111 affiliates (sub.) ,111 ,111 (UNCTAD, 1111 ) &1111

Sub-1 Money: , , , $ Intra-firm Funds: stocks, bonds Sub-1

Arms length trade

Sub-1

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Growth of FDI, World Trade and World Output

Index=1111111 in

11 1 11 1 11 1 11 1 11 1 11 1 1
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

World Exports World GDP World FDI

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MNC as Knowledge Seeker: A Three -Stage Model

Third Stage: Search for emerging Knowledge & ideas

Second Stage: Going After Consumer Market Tape into emerging consumer market

Initial Motivation: Search for cheaper Labors, raw materials

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Fig. 1 Estimated Percentage of FCCs and USCCs .1 Reporting No Tax Liability

%

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 11 11 11 11 11 11 11 11 11 11
Tax Year

FCC USCC Large FCC Large USCC

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Mergers and Acquisitions (M&A) have become quite common in the last few decades. Although some people are critical of M&As of local firms by foreign firms, in the long run, M&As is helpful at the global level because they: Rationalize the limited resources to reduce duplication and combine limited resources which will increase firms speed and effectiveness to react to global business opportunity. May bring efficiency and higher productivity for firms overall global operation.
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However, in the short term, M&A may be problematic, especially at the local level, for several reasons:
They do not add new capital and capacity to an economy but simply reflect a change of ownership. They do not create job, they are rather often accompanied by massive layoffs and the closing down of plants. They reduce competition and increase industry concentration, further reducing local job creation.
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U.S. CEOs Pay versus Workers Pay (Average hourly worker to CEO pay ratios)
RatioofCEOtoWorker'sPay
11 1 11 1

11 1 11 1 11 1 Ratio 11 1 11 1 11 1

1 1 11 11

1 1

1 11 11 Year Ratio of CEO to Worker's Pay 11 11 11 11

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Ratio of Workers' Pay

1 1 .1 1 1 .1 1 1 .1 1 1 .1 1 1 .1 1
in la nd G er m an y Ir el an d ly S w ed en al ia ad a U .K . A us tr C an Ita U S

Ratio

mid- 11 s

mid- 11 s

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GDP per Capita in Poor vs. Rich nations

(in constant 1111 US$)
111 11 111 11 111 11 111 11 111 11 111 11 11 11 1 11 1 11- 1 1 11 1 Poorest Countris 1 11 1 11- 1 1 11 1 Richest Countries 1 111 11

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In assessing the impact of market-seeking activities of MNCs, we need to address the following questions:

Are MNC marketing practices and sustainable development compatible or are they mutually exclusive? What are the consequences of global consumerism and materialism on our natural environment? What risks, dangers and benefits arise when MNCs from advanced economies market an identical range of products in the developed world and in less developed markets? What are the cultural impacts of global marketing?
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Socially beneficial goods or services include public education programs, recycling programs, and public health programs. Socially beneficial products are culturally or socially defined and vary with a countrys conditions. For example, consumption of fatty or oil-rich foods may be considered as harmful in many developed countries where too much of oil and fat is consumed. However, in some African countries where the diet is poor in fats, consumption of these foods may be, in fact, quite desirable. Products targeted at a specific segment of a market, such as disposable diapers, disposable dishes or other time-saving goods. Although these products are highly beneficial for working mothers, they have a negative impact on the environment. Products that could be harmful if abused, such as alcoholic beverages or firearms. Buyers often do not have a good knowledge of the potential dangers of these goods. Sellers, on the other hand, are aware, or should be aware of the risks and consequences of the misuse of these products. For example, marketing powdered milk in countries where water is not safe to drink, can endanger the lives of consumers. Inherently harmful products, such as cigarettes or opium.
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Sophisticated consumers are those who are educated and have developed adequate defense and judgment to deflect high-pressure promotion techniques. At-risk consumers include two groups: sophisticated but psychologically fragile consumers who may fall victim to compulsive behaviors or addictions; and socially or economically disadvantaged and less educated consumers who have little or no access to consumer information. Vulnerable consumers are illiterates, as far as processing marketing information is concerned. Examples include children across the world and adults, mostly in developing or newly emerging markets that have yet to develop marketplace sophistication.
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Structural market failure

Structural market failure results from the actions of the participants in the market such as monopolies actions that hinder the efficiency of the market mechanism.

Endemic market failure

Endemic market failures are not due to anyones actions. They result from the intrinsic attributes of some goods and services as well as the characteristics of the market.
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The first view holds that under conditions of endemic market failure, MNCs deserve, at least partially, the blame for the resulting problems. The second view argues that MNCs should be held responsible only when undesirable outcomes are the consequences of their own activities, in other words, when structural market failures exist. The third view considers MNCs should not be targeted for criticism for issues that are beyond their control. Indeed, market dysfunctions and its resulting problems are due to external factors and inadequate policies, social institutions, the immaturity of civic values, and the business environment. The fourth view points the social consequences of technology and the responsibilities of MNCs as creators and users of technology. Here the MNC is neither culprit nor victim, but rather an important player that has responsibilities commensurate with its role in the spreading of technology.
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A threat to national sovereignty and democratic accountability Accused of neutralizing anything that stands in the way of profits MNCs accentuate social inequalities MNCs destroy jobs

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Despite the criticisms against the MNCs, we need to remember that:

MNCs are engines of growth MNCs are social institutions In addition to being profit agents, MNCs can also be good corporate citizens.

Therefore, MNC should not be destroyed, but rather channeled and harnessed for the benefit of the global human society.

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Some people argue that MNCs Should Have Social Responsibilities, because: Firms activities occur within different cultural, social, and historical contexts. Firms perform as a central hub of economic activities that links consumers, suppliers, manufacturers, labor, managers, governments, and the natural environment. Firms are governed by an invisible social contract. Firms have no choice but to confront cultural, social, and ethical issues. Corporations are social institutions. If they do not serve society, they have no business existing.
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Some people argue that MNCs Should not be burdened with Social Responsibilities, because

Firms only social responsibility is to pursue profit wherever possible. The free enterprise has made wealth creation possible. So far, no other system has duplicated this success. If we make firms socially responsible, it would be bad for both business and poor communities. Social responsibilities reduce shareholder returns and distract business from what they can do best. Making firms socially responsible will have the opposite effect of what is intended, e.g., many companies are beginning to feel that it is better to pull their factories out of poor countries rather than risk being seen operating below accepted standards or abusing foreign labor.
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