McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter Twelve Multinational Corporations and Government Relationships Part 5 Global Management Issues

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter Twelve Learning Objectives (more) Define the meaning of multinational corporations (MNC). Recognize the power and influence potential of MNCs. Understand where they choose to do business. Recognize the motives and objectives of the MNC. Recognize the motives and objectives of the host country.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter Twelve Learning Objectives (continued) Understand the resentment of LDCs (Lesser Developed Countries) toward MNCs. Review the MNC response to complaints of LDCs. Understand the involvement of governments assisting their MNCs. Look at the pros and cons of free trade versus protectionism. Look at MNCs and corruption.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved Multinational Corporations: Defined An organization engaged in doing business in foreign countries –Not always incorporated or private –Can be a cooperative –Can be a private company –Can be a state-owned entity Must perform one or more of the following functions for foreign operations –Designing –Producing –Marketing –Staffing –Financing

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved MNC Synonymous Titles TRANSNATIONALGLOBALINTERNATIONALMULTINATIONALWORLDWIDE

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved MNC Stages 1.Exports products to foreign countries. 2.Establishes sales organizations abroad. 3.Licenses use of patents and technology to foreign firms that make and sell the MNCs products. 4.Establishes foreign manufacturing facilities, but important decisions about such matters as product design, marketing and finance are made at the home office. 5.Gives foreign production facilities substantial autonomy but still reserves some important decisions for the home office. 6.Decentralizes authority throughout the company so that functions at home and abroad are done by executives from different countries.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved The World’s 10 Largest Transnational Corporations, Ranked by Foreign Assets, 1999 (billions of dollars and number of employees) Table 12.1 Source: United Nations, World Investment Report 2001, p. 90.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved Multinational Corporations: Economic Power Each of the top five companies listed in Table 12.1 has larger sales than the Gross Disposable Product (GDP) of all but seven of the nations of the world!

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved The World's Seven Largest Economies (2000 estimate) Source: UNITED STATES CHINA GERMANY UNITED KINGDOM INDIA JAPAN FRANCE

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved Multinational Corporations: Influence “With the exception of a handful of nation-states, multinationals are alone in possessing the size, technology and economic reach necessary to influence human affairs on a global basis.” Professor Thomas Donaldson Georgetown University

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved Multinational Corporations: Where They Do Business Foreign Direct Investment in % –Developed Nations91.6% 8.1% –Developing Nations (LDC)8.1%.3% –Central and Eastern Europe.3% 100.0%Total 100.0%

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved Motives and Goals of the MNC The fundamental motive of going abroad is, of course, profit. Their goals, among others, include: –Obtain a high and rising return on investment –Achieve greater sales –Hold risks within reasonable limits in relation to profits –Maintain and improve technological and other company strengths

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved Fundamental Goals of the Host Country Achieve economic growth Achieve full employment of people and resources Improve managerial and worker skills Develop a favorable balance of trade Achieve a more equitable distribution of income among the population Retain a fair share of profits made by MNCs in their country Improve technological development Retain hegemony over the economic system Control national security decisions Develop and maintain social and political stability Advance the quality of life of the people of the country

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved LDCs: Resentments Giving up of some power and independence Struggle to meet membership standards of World Trade Organization (WTO) They want tariff reductions in developed countries to admit more of their exports They want cheaper medicines and the right to reproduce them They resent policies made by MNC managers in far-off home countries They deplore “cultural imperialism” of MNCs

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved MNC Response to LDCs Provide employment Improve technical skills Raise standard of living Introduce new technology Provide access to international markets Raise GNP and increase productivity Help build foreign exchange reserves Encourage development of new industries Assume investment risk for projects that might not otherwise be undertaken

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved Multinational Corporations: Whose governments assist their MNCs to succeed? They all do: –United States –Japan –The European Union –People’s Republic of China

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved Free Trade versus Protectionism Major argument for FREE TRADE Law of Comparative Advantage –Maximum gain on a worldwide basis will be realized if there are no impediments to trade, free competition in pricing and capital flows are unrestricted Major arguments for PROTECTIONISM Protect “infant industries” Control trade deficits between nations Protect industries from “unfair” competition React to unfair trade barriers in foreign countries

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved Multinational Corporations: Corruption Cultural differences, practices and laws where MNCs do business create extremely difficult moral, ethical and legal problems for MNCs. –Raises the costs of doing business –Distorts government allocation of expenditures –Can slow the development of a free market –Can have a corrosive impact on both government service and business efficiency –Distorts competition –Can undermine political legitimacy

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved The Corruption Perceptions Index Highest10 Lowest Source: Transparency International, “New Index Highlights Worldwide Corruption Crisis,” Paris, June 27, 2001, Copyright Transparency International. Reprinted with permission.