Multi-national Corporations & Global Production

Multi-national Corporations Facts about Multi-national Corporations (MNCs) By the end of 1990s, produced a quarter of the global products By the end of 1990s, produced a quarter of the global products Top 100 MNCs controlled 16% of world’s productive assets Top 100 MNCs controlled 16% of world’s productive assets Increase in number in the last 20 years (tripled bteween ’88 and ‘97 ) Increase in number in the last 20 years (tripled bteween ’88 and ‘97 ) Political prominent and influential Political prominent and influential MNCs are not free from domestic/foreign regulations MNCs are not free from domestic/foreign regulations MNCs decide locations of investment based on: MNCs decide locations of investment based on: Local government regulations Local government regulations Tax incentives Tax incentives Political stability Political stability Infrastructure Infrastructure Skilled, young and cost-effective labor force Skilled, young and cost-effective labor force Local market potential Local market potential 75% FDI goes to DCs 75% FDI goes to DCs

Multi-national Corporations Facts about Multi-national Corporations (MNCs) Job creation in LDCs Job creation in LDCs 19 million jobs in LDCs 19 million jobs in LDCs MNCs also called “transnational firms” MNCs also called “transnational firms” Operate in two or more countries Operate in two or more countries at least one FDI project it has management rights or control at least one FDI project it has management rights or control Ethnocentric in decision-making Ethnocentric in decision-making D&R in home country D&R in home country Geo-centric or stateless Geo-centric or stateless Several MNCs entering into production alliance Several MNCs entering into production alliance Entry into foreign countries via joint-ventures Entry into foreign countries via joint-ventures

Multi-national Corporations Rationale to Become Transnational Corporations Establish, increase and defend market share Establish, increase and defend market share More competitive with local firms More competitive with local firms Overcome trade barriers Overcome trade barriers Lower production costs Lower production costs Avoid uncertainty Avoid uncertainty Limit competition Limit competition Avoid government scrutiny of business activities Avoid government scrutiny of business activities Methods of Operation Horizontal integration Horizontal integration Production of same products in different subsidiaries overseas Production of same products in different subsidiaries overseas

Multi-national Corporations Methods of Operation Horizontal integration Horizontal integration Production of same products in different subsidiaries overseas Production of same products in different subsidiaries overseas Vertical integration Vertical integration Distribution of different production functions in different subsidiaries Distribution of different production functions in different subsidiaries R&D in home country R&D in home country Technologically challenging assembly in NICs Technologically challenging assembly in NICs Labor-intensive in LDCs Labor-intensive in LDCs

Multi-national Corporations Factors Impacting MNCs Growth Breakthroughs in communications, transportation, and technology Breakthroughs in communications, transportation, and technology Rapid economic growth Rapid economic growth International economic system and states welcoming MNCs activities International economic system and states welcoming MNCs activities Increased global capital flow due to relaxation of capital control resulting in greater amount of FDI Increased global capital flow due to relaxation of capital control resulting in greater amount of FDI Trade protectionism encourages MNCs expansion Trade protectionism encourages MNCs expansion

Multi-national Corporations MNCs and Foreign Direct Investment (FDI) FDI traditionally concentrated in N America, Europe & Japan FDI traditionally concentrated in N America, Europe & Japan DCs absorbed 80% of DFI as of 1995 DCs absorbed 80% of DFI as of 1995 China, the only country absorbing large amounts of FDI China, the only country absorbing large amounts of FDI Leading FDI Host Economies (1995) USA USA UK UK France France China China Spain Spain Belgium Belgium Netherlands Netherlands Australia Australia Canada Canada

Multi-national Corporations MNCs and Foreign Direct Investment (FDI) Leading FDI Host Economies (2004) China China USA USA UK UK France France

MNCs and Development Perceived Benefits of MNCs Provision of diversity of high-quality and low-priced products Provision of diversity of high-quality and low-priced products Win-win gains for both MNCs and host nations Win-win gains for both MNCs and host nations Serving the interest of the world community as a whole and against ultra-nationalism Serving the interest of the world community as a whole and against ultra-nationalism Thus promoting world peace Thus promoting world peace Contributing to poverty in LDCs Contributing to poverty in LDCs Child labor in South Asia, a major problem where MNCs are insignificant in number Child labor in South Asia, a major problem where MNCs are insignificant in number Child labor in East Asia, no longer a problem, where MNCs have a huge presence Child labor in East Asia, no longer a problem, where MNCs have a huge presence