Multinational Corporations in the Global Economy

1. Multinational Corporations in the Global Economy Lecture 19

2. What are Multi-National Corporations? • The Agents of Economic Globalization • An “enterprise that controls and manages production establishments—plants—in at least two countries” • Corporations that Extend Managerial Control From One Country into Another.

3. How Many MNCs? • 63,459 Parent Corporations • 689,520 Foreign Affiliates of these Parent Corporations Source: United Nations Conference on Trade and Development, 1998. World Investment Report: Trends and Determinants. Geneva.

4. The 20 Largest MNCs(By Foreign Assets) Source: UNCTAD, World Investment Report, 1999

5. What Type of Activity? Of the 50 Largest MNCs • 10 are Auto Producers • 10 are Electronics and Computers • 9 are Oil Companies • 8 are Chemical and Pharmaceutical Firms • 5 are Food and Beverages

6. How Big Are MNCs?

7. National Income and MNC Sales, 1992($US Billions) Source: Lairson and Skidmore, 1997, 12-4.

8. More Broadly • Out of the World’s 150 Largest Economic Entities—countries and MNCs • More than half are corporations—63 countries, 87 MNCs. • 30 of these 63 Countries are Advanced Industrialized Countries. • The largest MNCs are larger than most developing countries

9. How Important are MNCs? • Produce About 25% of Total World Economic Output • Employ About 86 Million People Worldwide. • Two-thirds of the world’s exports of goods and services are accounted for by MNCs • 30-40 percent of this trade takes place between Affiliates of the Same MNC • For Example, American-owned affiliates based in Mexico account for about 40 percent of Mexico’s trade with the United States

10. Foreign Direct Investment • How Much FDI? • Between 1986 and 1991, $160 billion per year • In 1997, $400.5 Billion • More than 80% of MNC Activity Takes Place within the Advanced Industrialized Economies • Advanced Industrialized Countries are the Main Sources of FDI • Advanced Industrialized Countries are the Main Recipients of FDI • Remaining 20% Goes to Developing Countries.

11. Where in the World? Source: UNCTAD, World Investment Report, 1999

12. The Stock of Foreign Direct Investment

13. Why MNCs? Three Types of MNC Investment

14. 1. Market Oriented • Investment for the purpose of selling to consumers in that market. • Market Orientation is the single largest motivation for MNCs. • Automotive Industry is a Prominent Example. • 14 of the 100 Largest MNCs are Auto Producers • BMW, Mercedes, Honda, Toyota All Produce in the U.S. for the U.S. Market; Ford, GM, Nissan, in Europe Producing for European Market. • Don’t Move to Exploit Low Costs, But to Jump Over Protectionist Barriers

15. 2. Natural Resource Oriented • Investment undertaken in order to acquire raw materials. • Second most important motivation for FDI and MNC • Oil and Mining Companies are Most Prominent Example of This Type—11 of the top 100 MNCs are Engaged in these Activities.

16. 3. Efficiency Oriented • Investment undertaken in order to reduce the costs of production—less costly labor, less intrusive environmental regulations, tax breaks, etc. • Historically this has not been a primary motivation for FDI by MNCs. Of growing importance Over Last 20 Years. • Electronics/Computers are a Prominent Example of this Type. • 17 of the Largest 100 MNCs are Firms Engaged in These Activities. • Labor Intensive Aspects of Production Are Moved into Labor Abundant Countries • Capital Intensive Aspects Retained in Advanced Industrialized Countries

17. Are MNCs Benign or Malign? • Debate Between People Who Concentrate on One Side or the Other of the Equation. • More Complicated—MNCs Carry Costs and Provide Benefits. • Answer Depends upon How One Balances the Two, which is Not Easy to Do.

18. MNCs are Benign • Transfer Savings From Advanced Industrialized Countries to the Developing World. • Bring Capital Goods and Technology to Countries Where Both are Scarce. • Create Jobs in Developing Countries that Would Not Exist Otherwise. • Provide Management Expertise. • Provide Links to International Marketing Networks.

19. MNCs are Malign • MNCs “Crowd Out” Local Investment and Earn Rents; Both Reduce the Amount of Local Investment. • Can Drive Local Firms Out of Business • Often Have Proprietary Control Over Technology (Pharmaceutical Industry), and Thus Do Not Transfer Technology or Managerial Expertise.

20. MNCs “Exploit” Third World Workers • Pay Low Wages • Engage in Sub-Standard Workplace Practices

21. Labor Compensation By MNCs(thousands of US dollars)

22. Labor CompensationMNCs vs. Local Firms(thousands of US dollars) Source: Edward Graham. 2000. Fighting the Wrong Enemy. Washington, D.C.: Institute for International Economics

23. Sweatshops • Excessive Overtime • Required to Work Long Hours without overtime bonus. • Abusive Treatment of Workers • Exposed to Hazardous Working Conditions; Physical Punishment of Violating Rules; Sexual Harassment • Bonded Labor • Pledge your Labor for Length of Time in Exchange for a Loan. Parents Often Pledge their Children • Child Labor • ILO: 250 Million Children Under Age of 14 Working, Half work Part time. • MNCs or Local Firms?

24. Do MNCs Treat Labor Poorly? • Cases of Such Abuses Do Exist. However: • Working Conditions in MNCs “are not less favorable than those of comparable national employers; often they rate better than the average in local firms.” • “Large well-established and visible MNCs are likely to comply with international standards and not to undercut the labor standards of their host (and home) countries…They adhere to minimum wage, working hours, overtime, and compensation regulations… Source: UNCTAD. 1999. World Investment Report

25. Do MNCs Export American Jobs? • Answer Depends Upon Two Factors: • How Many Jobs Stay in the Absence of FDI? • How Many Jobs Created by FDI? • Example: Maquiladora Program in Mexico • American Labor Claims this Program has Cost the United States “Hundreds of Thousands” of Jobs. Most of these Jobs Would Have Disappeared Anyway. • American Firms in Mexico Directly Support 154,000 jobs in the United States. These Jobs Would Not Exist Without the Maquiladora Program. • MNCs Destroy and Create Jobs in the U.S.; On Balance, Number of Jobs Created is Greater than Number Destroyed • FDI Transfers Jobs; Fewer Low Skill Jobs and More High Skill Jobs.

26. Balancing Costs and Benefits • Very Little Systematic Evidence That MNCs Make Things Worse in Developing Countries or in Advanced Industrialized Countries. • Does This Mean One Can’t Find Examples of Egregious MNC Practices? • Some Evidence that MNCs Make Things Better. • Does This Mean There is No Room For Improvement? Absolutely Not. • Does This Mean That MNCs Exploit Local Conditions to their Advantage? Of Course.

27. Are MNCs Good or Bad? • On Balance, Positive Economic Consequences Outweigh the Negative Economic Consequences. • Create Jobs and Raise Wages in Developing Countries. Some Sweatshop Aspects, But Not Prevalent. • Destroy Low Wage, Low Skill Jobs and Create High Wage, High Skill Jobs in Industrialized Countries. • The Non-Economic Consequences are More Difficult to Evaluate. • Displace Traditional Modes and Substitute Technology-Intensive Modes • Disrupts Peoples’ Lives; Disrupts Entire Communities.

28. Where’s the Politics? • MNCs are Challenging the Nation State’s Pre-eminent Role in the International System? • Rising Conflict within Domestic Political Systems in Advanced Industrialized Countries between Labor and Capital. • Rising Labor Challenge to the World Trading System. • Likely to Fuel Conflict Between the Industrialized World and the Developing World.