Multinational corporation

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Multinational corporation (or transnational corporation) (MNC/TNC) is a corporation or enterprise that manages production establishments or delivers services in at least two countries. Very large multinationals have budgets that exceed those of many countries. Multinational corporations can have a powerful influence in international relations and local economies. Multinational corporations play an important role in globalization; some argue that a new form of MNC is evolving in response to globalization: the 'globally integrated enterprise'.

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[edit] Incentive

There are many reasons for multi-national enterprises to locate to other countries. One reason is to escape trade tariffs. For example, the decision made by Toyota to produce in the UK was almost certainly to gain access to the European markets without having to pay tariffs. Other MNCs may be seeking the lowest cost location for their production facilities, or be attracted by an abundance of skilled or cheap labour. Other businesses may want to reach foreign markets more effectively; for example Marks & Spencer, Laura Ashley and The Body Shop. Avoiding transport cost is not really an incentive because transportation costs, at least on a large scale, are generally relatively cheap relative to the price of the product. Only heavy or large products may need to be produced in the market they are intended to sell in, products such as building materials.

[edit] Ethical issues

Many MNCs are large in relation to the national income of the countries in which they are located. This means that it is not as easy for the host governments to enforce national laws on MNCs. Generally speaking, governments want investment from these MNCs because they generate jobs and incomes. Other benefits include training of local workers in new and potentially transferrable skills. Technology transfer is also an incentive.

In a highly competitive world, companies seek to reduce their costs as much as possible. The prospect of a foreign company setting up in a country where labour is cheap is attractive both for the company and the host country's government.

[edit] Multinational corporate structure

Multinational corporations can be divided into three broad groups according to the configuration of their production facilities:

  • Horizontally integrated multinational corporations manage production establishments located in different countries to produce the same or similar products. (example: McDonald's)
  • Vertically integrated multinational corporations manage production establishment in certain country/countries to produce products that serve as input to its production establishments in other country/countries. (example: Adidas)
  • Diversified multinational corporations manage production establishments located in different countries that are neither horizontally nor vertically nor straight, nor non-straight integrated. (example: Microsoft or Siemens A.G.)

Others argue that a key feature of the multinational is the inclusion of back office functions in each of the countries in which they operate. The globally integrated enterprise, which some see as the next development in the evolution of the multinational, does away with this requirement.

[edit] International power

Large multinational corporations can have a powerful influence in international relations, given their large economic influence in politicians' representative districts, as well as their extensive financial resources available for public relations and political lobbying.

[edit] Tax competition

Multinationals have played an important role in globalization. Countries and sometimes subnational regions must compete against one another for the establishment of MNC facilities, and the subsequent tax revenue, employment, and economic activity. To compete, countries and regional political districts sometimes offer incentives to MNCs such as tax breaks, pledges of governmental assistance or improved infrastructure, or lax environmental and labor standards enforcement. This process of becoming more attractive to foreign investment can be characterized as a race to the bottom, a push towards greater autonomy for corporate bodies, or both.

However, some scholars, for instance the Columbia economist Jagdish Bhagwati, have argued that multinationals are engaged in a 'race to the top.' While multinationals certainly regard a low tax burden or low labor costs as an element of comparative advantage, there is no evidence to suggest that MNCs deliberately avail themselves of lax environmental regulation or poor labour standards. As Bhagwati has pointed out, MNC profits are tied to operational efficiency, which includes a high degree of standardisation. Thus, MNCs are likely to tailor production processes in all of their operations in conformity to those jurisdictions where they operate (which will almost always include one or more of the US, Japan or EU) which has the most rigorous standards. As for labor costs, while MNCs clearly pay workers in, e.g. Vietnam, much less than they would in the US (though it is worth noting that higher American productivity--linked to technology--means that any comparison is tricky, since in America the same company would probably hire far fewer people and automate whatever process they performed in Vietnam with manual labour), it is also the case that they tend to pay a premium of between 10% and 100% on local labor rates.[1] Finally, depending on the nature of the MNC, investment in any country reflects a desire for a long-term return. Costs associated with establishing plant, training workers, etc., can be very high; once established in a jurisdiction, therefore, many MNCs are quite vulnerable to predatory practices such as, e.g., expropriation, sudden contract renegotiation, the arbitrary withdrawal or compulsory purchase of unnecessary 'licenses,' etc. Thus, both the negotiating power of MNCs and the supposed 'race to the bottom' may be overstated, while the substantial benefits which MNCs bring (tax revenues aside) are often understated.

[edit] Market withdrawal

Because of their size, multinationals can have a significant impact on government policy, primarily through the threat of market withdrawal.[2] For example, in an effort to reduce health care costs, some countries have tried to force pharmaceutical companies to license their patented drugs to local competitors for a very low fee, thereby artificially lowering the price. When faced with that threat, multinational pharmaceutical firms have simply withdrawn from the market, which often leads to limited availability of advanced drugs. In these cases, governments have been forced to back down from their efforts. Similar corporate and government confrontations have occurred when governments tried to force MNCs to make their intellectual property public in an effort to gain technology for local entrepreneurs. When companies are faced with the option of losing a core competitive technological advantage or withdrawing from a national market, they may choose the latter. This withdrawal often causes governments to change policy. Countries that have been most successful in this type of confrontation with multinational corporations are large countries such as India and Brazil, which have viable indigenous market competitors.

[edit] Lobbying

Multinational corporate lobbying is directed at a range of business concerns, from tariff structures to environmental regulations. There is no unified multinational perspective on any of these issues. Companies that have invested heavily in pollution control mechanisms may lobby for very tough environmental standards in an effort to force non-compliant competitors into a weaker position. Corporations lobby tarrifs to restrict competitition of foreign industries.[3] For every tariff category that one multinational wants to have reduced, there is another multinational that wants the tariff raised. Even within the U.S. auto industry, the fraction of a company's imported components will vary, so some firms favor tighter import restrictions, while others favor looser ones.Says Ely Oliveira: Manager Director of the MCT/IR This is very serious and is very hard and takes a lot of work for the owner.

Multinational corporations such as Wal-mart and McDonalds benefit from government zoning laws, to prevent competitors from competing.[4]

Many industries such as General Electric and Boeing lobby the government to receive subsidies to preserve their monopoly.[5]

[edit] Patents

Many multinational corporations hold patents to prevent competitors from arising. For example, Adidas holds patents on shoe designs, Siemens A.G. holds many patents on equipment and infrastructure and Microsoft benefit from software patents.[6] The pharmaceutical companies lobby international agreements to enforce patent laws.

[edit] Government power

In addition to efforts by multinational corporations to affect governments, there is much government action intended to affect corporate behavior. The threat of nationalization (forcing a company to sell its local assets to the government or to other local nationals) or changes in local business laws and regulations can limit a multinational's power.

[edit] Micro-multinationals

Enabled by Internet based communication tools, a new breed of multinational companies is growing in numbers."How startups go global". These multinationals start operating in different countries from the very early stages. These companies are being called micro-multinationals. What differentiates micro-multinationals from the large MNCs is the fact that they are small businesses. Some of these micro-multinationals, particularly software development companies, have been hiring employees in multiple countries from the beginning of the Internet era. But more and more micro-multinationals are actively starting to market their products and services in various countries. Internet tools like Google, Yahoo, MSN, Ebay, Skype and Amazon make it easier for the micro-multinationals to reach potential customers in other countries.

Service sector micro-multinationals, like Indigo Design & Engineering Associates Pvt. Ltd.[7], Facebook, Alibaba etc. started as dispersed virtual businesses with employees, clients and resources located in various countries. Their rapid growth is a direct result of being able to use the internet, cheaper telephony and lower traveling costs to create unique business opportunities

[edit] See also

[edit] References

  1. ^ Jagdish Bhagwati, In Defense of Globalization (Oxford: Oxford University Press, 2004), esp. 122-195.
  2. ^ Barnett, Richard, 1974: Global Reach: The Power of the Multinational Corporations.
  3. ^ Murray Rothbard. "The Dangerous Nonsense of Protectionism". Mises Institute.
  4. ^ Thomas DiLorenzo. "The Union Conspiracy Against Wal-Mart Workers".
  5. ^ HOLMAN W. JENKINS. "What Is GM Thinking?". Business World.
  6. ^ Kevin Carson, Tucker‘s Big Four: Patents., A Mutualist FAQ, [[{{{date}}}]].
  7. ^ Investments & Income

[edit] External links

Retrieved from "http://en.wikipedia.org/wiki/Multinational_corporation"