MULTINATIONAL CORPORATIONS
ECO212
LECTURE 5
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? Question ?
What does the words ‘Multinational
Corporations’ make you think of?
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MNCs in 2021 by market value (in billion US $)
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Learning Objectives
In this chapter, we learn to
• understand the role of MNCs in development
and poverty alleviation;
• distinguish between types of MNCs and their
strategies
• Understand the theoretical approaches that
underlie different accounts of MNCs;
• Understand the factors that affect how MNCs
relate to host-country governments.
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What is a Multinational Corporation?
• Various terms reflect disciplinary and
institutional divides and practices:
• MNCs: Preferred by social scientists/media (also
prevalent in this class)
o transnational corporation (TNCs): term preferred
by the United Nations
o multinational enterprise (MNEs): term preferred
by international business
o foreign direct investment (FDI) – as opposed to
“hot capital flows”: term preferred by economists
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What is a Multinational Corporation?
• A MNC is an enterprise that
1. engages in foreign direct investment
2. and owns or controls value-adding activities
3. in more than one country (John Dunning).
• Foreign direct investment (FDI) is investment
made across borders in physical and
productive assets, such as branch plants.
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What is a Multinational Corporation?
• Note
• The physical and productive activity means a
long-lasting interest of the investing subject in
the hosting country
• We will see how many ‘FDIs’ might risk not to be
physical and productive later
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What is a Multinational Corporation?
• MNCs bring together inputs from different parts of
the world to create a product.
• The inputs used in the production process are
internalized: obtained within the firm itself and not
in the open market.
• What are the characteristics of MNCs?
o MNCs are mainly from the developed world.
o MNCs are highly concentrated.
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What is a Multinational Corporation?
o Top 100 MNCs control most foreign assets.
o They control most of employment.
o MNCs invest more on developed countries.
o MNCs investment concentrates on a handful of
dynamic industrialized developing countries.
o MNCs prefer mergers and acquisitions (M&As)
over productive (“green field”) investments.
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Foreign direct investment
inflows, top 20 host
economies 2017 and 2018
(Billions of dollars)
Source: UNCTAD
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Foreign direct investment
outflows, top 20 home
economies 2017 and 2018
(Billions of dollars)
Source: UNCTAD
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What Motivates Multinational
Corporations to Go Abroad?
• Two important questions here:
o Why do MNCs establish branch plants or
subsidiaries rather than just trade?
o How do MNCs effect politics, economy, and
society of the host country?
• Three different approaches:
1. Dependency Theory
2. The Mercantile Approach
3. The Liberal or International Business
Approach
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Dependency and Critical Approaches
• These approaches claim that MNCs
o represent the global capitalist system;
o are negative for the host countries;
o International division of labor è high-value
manu vs resource extraction & agriculture
o keep the periphery underdeveloped;
o make autonomous local development
impossible.
• Exception: a specific kind of development
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The Mercantile Approach and the National
Interest
• This approach claims that MNCs
o represent economic interests of home country.
o In the case of the US: access to oil and natural
resources, foster liberal policies, and fund military
expenses;
o represent the home country s political interests and
foreign policy objectives, including overthrow of
unfriendly governments (Guatemala 1954, United
Fruit Corp).
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The Mercantile Approach and the National
Interest
o Other examples: China National Petroleum
Company
o Airbus vs Boeing
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International Business Perspective
• MNCs= differentiate actors with diverse
strategies (finally !)
• è This perspective sees MNCs as different
firms with different strategies, but all motivated
by business motivations.
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International Business Perspective
• Why do MNCs exist? Why do they go abroad?
• John Dunning s OLI paradigm distinguishes
MNCs based on:
o O: Ownership advantages (patents, management,
marketing, access to capital)
o L: Location-specific advantages (political stability,
geographical advantage, market access, etc.)
o I: Internalization advantages (coordination of
production within the firm rather than exposing to
market competition) è internal transfer price
o (between divisions of the same company in different
countries to minimize the tax costs)
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International Business Perspective
• Notes on Internal transfer pricing: why a
favorable tax treatment in a developing country
can overstate the value created by the MNC?
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International Business Perspective
• Notes on Internal transfer pricing: why a
favorable tax treatment in a developing country
can overstate the value created by the MNC?
• The MNC can transfer the internal pricing load into the
manufacturing (example) executed in the developing
country.
• This would show a greater value of production in the
developing host country than it is.
• This would also generate a loss of tax receipts on the
part of the home country.
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International Business Perspective
• John Dunning’s OLI paradigm
• Location-specific assets can have four different
strategies:
1. Resource-seeking strategy
2. Market-seeking strategy – e.g. to go over
trade barriers
3. Cost-reducing strategy
4. Strategic asset-seeking strategy
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International Business Perspective
Greenfield Entry: In this special type of FDI, the
investing company refers to an investing organization
starting assembling from scratch.
Brownfield Entry: Brownfield investments, on the other
hand, occur when an entity purchases or leases an
existing facility to begin new production. Companies may
consider this approach a great time and money saver
since there is no need to go through the motions of
building a brand new building.
Foreign Takeover: This type of FDI takes the form of a
foreign merger & acquisition (M&A) or Takeover of an
existing foreign company.
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Do MNCs help Development?
• Different theories have different focuses
• Their explanations of why MNCs exist already
indicate their perceptions of the role of MNCs in
development
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Do MNCs help Development?
1. FDIs (especially Green and Brownfield) can
increase the level of investments and the capital
accumulation of the hosting country (+).
• Other types, like some M&A, are more debatable, as often
restructure capital and ownership but do not extend it right away.
• In defense of M&A it can be argued that the restructuring could
improve productivity and efficiency.
2. FDIs can also bring know-how and knowledge
(+)
• improving the HUMAN CAPITAL of the labor force of the hosting
country and increasing the marginal productivity of labor
• Transferring TECHNOLOGY and R&D by increasing both the
productivity of capital and labor, ultimately being conducive to
innovation
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Do MNCs help Development?
3. MNCs can exacerbate the political dependency
of the hosting country (-).
• Powerful MNCs might be able to impose an economic structure
which does not promote development in the long-run and, in
extreme cases also in the short one.
• MNCs represent the home country’s political interests and
foreign policy objectives, including overthrow of ‘unfriendly’
governments (Guatemala 1954) –United Fruit Corp.
4. Strong MNCs operating with exceptionally
favorable rules and policies may weaken the
legitimacy of the hosting state (-). Examples of
MNCs capturing a weak and corruptible
bureaucracy and political class. (-)
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Do MNCs help Development?
5. Differential regulatory treatments might be unfair
from the domestic economic actors and this can
create social demands and protests which can
weaken the legitimacy of the state (-)
• Note the opposite is true when considering external legitimacy
issues
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Do MNCs help Development?
• The strategies of multinationals alone do not
determine their effect on development.
• A crucial part of the impact of MNCs on
development is how governments mediate this
relationship.
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Relationship Between States and
Multinationals
• Host countries interested in attracting FDIs (investment,
employment, tech transfer, etc…)
• MNCs in finding opportunities to invest and make profits
and expand their market opportunities
• NOTE ->these two interest do not have to be necessarily
misaligned->to some extent a win-win situation
• •However perfect alignment might be not the standard
case and bargaining for geo-political & economic
reasons to protect own interests happens. Relationship
is not static.
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Relationship Between States and
Multinationals
• Obsolescing Bargaining Model
• (OBM–RaymondVernon,1971)
• A model of interaction between a multinational
enterprise and a host country government.
States and MNCs bargain over assumed
benefits.
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Relationship Between States and
Multinationals
The interaction is modeled in two-steps:
• STEP 1: Initially, the host country tries to
attract the MNC and reach a bargain that
usually favors the MNC. For example special
exemptions on labor regulations or tax cuts.
• STEP 2: over time as the MNC's fixed assets
in the country increase through FDIs, the
bargaining power shifts to the government,
which can change the favorable policies to less
favorable ones.
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Relationship Between States and
Multinationals
The interaction is modeled in two-steps:
• This shows that the host government policy of
attraction might change over time and can be a
major concern for the MNC. à Reputation of the
host country matters!
• It is not only about the interaction between host
and MNC. Home countries and host
companies matter have been playing an
important role.
• Think about the recent US policy, aimed at repatriating
US MNCs capitals from abroad.
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Relationship Between States and
Multinationals
• The 1990s saw more cooperation and
complementarity è OBM obsolete?
• Collaboration: repeated games
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Relationship Between States and
Multinationals
• However, later trends show that national
investment policies have been increasing
restrictions and regulations
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Relationship Between States and
Multinationals
• Recent development according to UNCTAD
2019 show a more cautious approach of both
home and host countries towards FDIs
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Conclusion
• MNCs are not monolithic and homogenous actors
• MNCs have been primary drivers of the worldwide
economic globalization and their investments
activities have certainly contributed to the
development of several countries
• MNCs effects are not easily characterized as
good or bad.
• MNCs, local firms, and governments
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THANK YOU !
Next week:
Lecture 6
Civil Society and Development
