The Basic Characteristics Of Multinational Corporations Economics Essay

A multinational corporation is a corporation or an enterprise that manages production or delivers services in more than one country. MNC is a corporation that has its management headquarters in one country known as the home country and operates in several other countries known as host countries. A multinational corporation (MNC) is an enterprise that engages in foreign direct investment (FDI) and that owns or controls value-added activities in more than one country. A firm is not really multinational if it just engages in overseas trade or serves as a contractor to foreign firms. Firms are considered to be more multinational if they have many foreign affiliates or subsidiaries in foreign countries, they operate in a wide variety of countries around the globe, the proportion of assets, revenues or profits accounted for by overseas operations relative to total assets, revenues, or profits is high; their employees, stockholders, owners and managers are from many different countries; and their overseas operations are much more ambitious than just sales offices, including a full range of manufacturing and research and development activities.

Multinational corporations are firms engaged in productive activities in several countries. The majority of them are rich and developed countries and much of their investment goes to other rich nations. They go overseas because they have some special advantages they want to exploit.

Multinational corporations finance some portion of their overseas operations by transfering funds from the country of the parent firm to the country of host firm. This transfer is called foreign direct investment. The purpose of the transfer is to own or control overseas assets.

Foreign direct investment is not new phenomenon. Foreign commercial investment reached high level with the development of large mercantilist companies like British East India Company. In eighteenth century, foreign direct investment occur in agriculture, mining, manufacturing etc. In 1890, large US manufacturing firms are Singer Sewing Machines, American Bell, General Electric and Standard Oil had large investments abroad.

On the other hand, foreign direct investment is a new phenomenon. The nature of international business changed after 1945. After WWII, the investments of U.S. firms abroad experienced a major expansion. After WWII, manufacturing corporations like GM, Ford, Siemens, Sony, and Philips Electronics dominated FDI. And, business became more globalized in the 1980s and 1990s. By 2001, over 60,000 MNCs had 820,000 overseas affiliates in fifty-five host countries. Even the communist countries promoted inflows of FDI after 1989.

Multinational corporations are among the world’s largest firms. In 2000, the top fifty multinationals had revenues over 50 billion dollars and Exxon Mobile had revenues over 210 billion dollars. MNCs were firms that sent abroad a package of capital, technology, managerial talent, and marketing skills to carry out production in foreign countries. Their production is worldwide with different stages of production carried out in different countries. Marketing also is international. Goods produced in one or more countries and sold throughout the world. And 80 percent of all foreign subsidiaries are US corporations.

Moreover, joint ventures, licensing and strategic alliances are options available to multinationals who wanted to do business abroad without being the sole owner of a foreign subsidiary. In a joint venture, the various partners owned less than 100 percent of equity of the joint venture firm. Licensing involved the granting of usage rights for intellectual property like patents, copyrights, and trademarks. And, strategic alliances are partnerships between separate, sometimes competing companies. The companies are drawn together because each needs the complementary technology, skills, or facilities of the other.

Finally, some powerful MNCs can significantly influence political economy of small and poor countries. Although US MNCs still dominate international economic activity because they have accumulated a large stock of foreign assets over many decades of FDI.

There are two disputing view about the effects of MNCs. Firstly, I will examine the positive view of MNCs, after than I will continue with the negative effects.

THE POSITIVE VIEW

HOST COUNTRY EFFECTS

Arguments in support of MNCs are usually made by liberal political economists and by the business community. Since MNCs tend to be successful companies that possess a variety of competitive advantages, much of the positive case for them rests on the things they bring into host countries. MNCs transfer technology, products, finance capital, and sophisticated management techniques to countries lack these. This infusion of resources into host nations would tend to create jobs and raise the skill level of the workforce.

MNCss invest overseas because they think they can utilize the other nation’s assests and its workers beter than that nation’s investors and managers can rendering the assests and workers more producitive than before.

In addition to the direct positive effects of MNCs, there may also be spillover effects on to other companies and sectors in the economy of the host nation

MNCs are also credited with helping to improve a nation’s balance of payments. On the capital side of the account, there is a flow of capital into the economy when the MNC builds a new subsidiary or acquires an existing one.

HOME COUNTRY EFFECTS

Proponents of MNCs, argue that these companies make economically rational decisions. They transfer production overseas or open new factories in foreign countires as a defensive measure in response to competitive pressures. Moreover, proponents argue that foreign direct investment can actually stimulate economic activity in the home country.

BENEFITS OF MNC

Proponents of MNCs make a series of political and cultural claims about the benefits of MNCs. At the systemic level, MNCs are viewed as forces integrating the world’s economies, thereby reducing nationalism and international tensions. By increasing trade between nations, by connecting workers from different countires into one MNC network and by spreading similar consumer products to all of the world they undermine national differences and help create a world citizen with modern tastes and habits.

Also MNCs compel governments to collaborate politically so they can regulate and control these new international forces.

THE NEGATIVE VIEW

The case against MNCs has been spearheaded by radical-structuralists. At the most general level, they argue that MNCs integrate poor nations into an unequally structured world system, with poor countries languishing on the periphery, heavily dependent for their development on the decisions and actions of capitalists ensconced in MNC headquarters in rich core nations. The policy implications of the most radical of the dependency school arguments is for poor countries to cut their dependence by closing their doors to MNCs.

We examine at a lower level of analysis, some of the possible specific negative effects of MNC investment on, first, the host, and then the home countries.

HOST COUNTRY EFFECT

In several caces, MNCs may borrow the Money for foreign investment in the local host market rather than transfer it from its home base. MNCs may squeeze out young, potentially viable local firms from the local market and retard the independent development of indigenous businessess.

Doubts have also been raised about the benefits of the transferred technology, especially for poorer developing countires. First the vast bulk of the research and development capability of MNCs remains at home in the parent company. Very little is carried out in developing countires. Therefore, MNCs, it is argued, do not help develop an independent capacity to generate new technology in the host countries. Since locals receive little training and experience developing new products and processess, when the MNCs leave, little that was of lasting benefit remains. This would be particularly true for MNCs producing for export in low labor-cost locations, fort hey are likely to be short-term residents in these countires.

Second, there is the question of the appropriateness or suitability of the transferred technology fort he host nation. MNCs that set up subsidiaries in host countries primarily to service the local market, as is often the case with FDI in developed nations, are likely to develoıp contractual linkages with local firms. Those primarily interested in outsourcing-that is, producing in overseas locations for export, usually back to the home market then not to develop extensive lingages with local firms.

Critics charge that MNCs tend to exploit workers in developing countries by paying them low wages and by providing them with inadequate benefits and unsafe working conditions. Some MNCs have also been accused of transferring enviromentally unsafe production processes to poorer countries to escape strict U.S. or European environmental regulations.

Finally, we need to consider briefly the effects of MNCs on the political conditions in host countries. What is certainly the case is that MNCs are not in the business of promoting democracy or any other human rights. MNCs have operated quite happily in countires ruled by left-wing and right-wing authoritarian regimes.

Sometimes, when their interest were threatened, some MNCs have pressed their home governments to intervene in the internal political affiars of other nations. It is only fair to point out that MNCs are also subject to political pressures.

HOME COUNTRY EFFECTS

Foreign direct investment means a loss of jobs in the home country and the gradual deindustrialization of the nations economy.

Governments of both home and host countires are also interested in the tax revenues MNCs generate. An MNC operating in several countries typically should pay taces to each government on the profits it earns doing business in that country.

Given that many countires have different tax rates, one can see why MNCs might be tempted to manipulate transfer prices so as to minimize their total tax burden.

CONCLUSION

Firstly we gave basic informations about the MNCs then we explained both negative and positive effects of MNCs on the home and host countries in the light of basic proponents of the MNCs such as liberal and radical structuralist view.