The Role of Transnational Corporations
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MNC's
What extent transnational corporations are truly global entities, and to what extent they are still, in some sense, ‘national’ companies (American, or Japanese, or Chinese, etc) which are operating across countries? What sort of policies should be applied to transnational corporations, and who is best placed to pursue such policies – national governments, international institutions, or some combination?
From the strategic perspective at least, MNC’s companies are attempting to differentiate themselves by marketing their brand with a regional flavor. The ‘multinational corporation (MNC) is not homogeneous throughout the organization, but is systematically differentiated so as to ‘fit’ the different environmental and resource contingencies faced by the different national subsidiaries”[i]. A famous example of this type of branding is HSBC’s ‘the world’s local bank’ I also have personal experience of this differentiation strategy when working for a global consulting company where each country did a video essay that encompassed both the values of the company and the culture of the country. However it is difficult to know if this is an authentic attempt to take on the cultures of the countries they work in or just marketing.
In the economic sense I believe most are still national companies that are owned by the shareholders predominantly of the home country and governed by the regulations of where they are incorporated. Despite the different ways that you can measure the globalization of MNC, Sutcliffe and Glynn[ii] argue that only Unilever and Shell have dual-nationality and that a truly stateless MNC does not yet exist. I agree. Looking at a list of the Forbes Top 500 Global Companies[iii], almost of the companies on the list you associate with a country rather than a global entity.
Foreign Direct Investment
Consider what role foreign direct investment has on the global economy. Although there is debate as to the extent to which FDI contributes to the global economy, its role is to provide investment in host countries that
- Is more stable than portfolio investments
- Provides new employment
- Allows for the transfer of technology
- Encourages so called ‘crowding in’ through additional domestic investment in the home country
- Also provides other spill-over effects such as local sourcing of materials, educational, cultural, infrastructural and democratic institutions leading to a ‘race to the top’.
But these benefits should not be seen as automatic outcomes of FDI as competition for investment can cause a ‘race to the bottom’ between developing countries that leads to
- Low wages and poor benefits
- Environmental damage
- “Crowding out” other domestic investment opportunities
- Skewed tax policies favoring MNC’s
- Authoritarian governments where benefits are shared only by elites
Implications for policy
A good argument for regulating capital for flows for portfolio investments can be made. The benefits to regulating these flows can be targeted to avoid excessive volatility in inflows and outflows, avoiding speculation and bidding up assets and deterring risky investments by banks looking to make large profits for international shareholders. An argument for regulating FDI as it relates to MNC’s is less clear and the policies of host countries needs to more subtle. It seems obvious that host governments and MNC’s and should have a shared interest in making FDI successful by providing an environment in to which MNC’s want to invest but also ensuring the benefits are equally shared by MNC and the host country. Subtle ways of regulating flows could include host countries insisting on more Joint ventures, public private partnerships, franchising, local management representation and restrictions/conditions on the repatriation of profits to the home country rather than blanket regulation that cannot distinguish between good and bad FDI.
At an international level regulation could be achieved through regionalized political/trading blocs like ASEAN or international bodies such as the WTO, World Bank or G20 where FDI regulation needs to be tackled at a global level to ensure consistent application of policies across all host countries, such as tax harmonization. However, I am skeptical that successful global regulation can be achievable when host countries have wildly different industries and markets and economic cycles which might call for different policies. Hoinaru makes the point the regulation can also be a proxy for corruption in some states and many of the commentators seem to conclude that regulation is needed but are unsure what form it should take
The United States is the largest recipient of Fdi.More than 325.3billion dollars flowed into the United State in 2008.The benefits of FDI includes the creation of new projects(4000 new projects were created in the US in 2008)The creation of new jobs-(630,000 new jobs were created by foreign Companies).Other benefits of FDI include an increase in exports,an increase in manufacturing jobs for the manufacturing Sector.
In terms of developing Nations,China has continued to be a favoured destination of foreign Investors.Countries like India is the second most important destination for FDI attracting high investment inflows to various sectors such as telecommunications,construction,manufacturing to mention a few.Countries can only benefit from foreign investment inflows if they have the appropriate local government regulations and Institutions in place.Excessive regulations atimes are likely to restrict growth if human and capital resources are prevented from reallocation.More regulated economies are usually less able to take advantage of the presence of transnational companies.
The role of foreign direct investments in the global economy is both redistribution of available assets and return on capital beyond the national borders that creates more choices for the allocation of resources.
Because of the lack of appropriate technology or skills, particular purposes within the national economy could stay unengaged.
On the other hand globally, they could manage to attract the necessary interest.
(b)
Governments should find a strategic angle for the arrival of foreign direct investments in order to steer the flow of foreign capital in the most needed projects and avoid conflict with national interests.
For example for a country with a trade deficit it would be important to promote export orientated ventures in order to accelerate economic growth.
In this way, foreign direct investments would enable countries to develop products for exports and access the foreign markets. However that could be difficult to achieve for smaller countries with reduced negotiating power towards multinational companies.
Further on, multinational companies could be focusing only on harvesting countries labour force and raw materials and in some degree disable domestic businesses to become strong exporters.
It should also not be forgotten that businesses have obligation to their foreign owners in the sense of profit. In order to avoid revenue taxation, multinational companies could tend to present some non-existent or exaggerated intangible services provided from the parent company to its subsidiary in order to extract untaxed profits.
In this area an increased government monitoring of foreign direct investments repatriation is needed.
About the role of FDI – some facts:
- FDI has risen from 8% of World GDP in 1990 to 26% in 2006.(1)
- FDI flows into developing countries have increased from 22% of GDP in 1990 to 32% in 2005(1)
- “Since the mid-1990s, inward FDI has become the main source of external finance for developing countries and is more than twice as large as official development aid.”(1)
- Developing countries are becoming significant FDI investors themselves. Outward FDI from non-OECD countries has risen from 10% in 1990 to 17% in 2005.(1)
- Benefits domestic industry by promoting strong business links, competition as well as transferring knowledge through skilled worker mobility.(1)
- May increase wages in developing countries, although how this increase is distributed across a workforce is unclear.(1) – We will discuss this further in Unit 7
- Creates new jobs and demand for skills.(1)
Nonetheless, it is important to consider that the intensity of cross border transaction and movement of people is not as absolute as one might believe given the trends reflected above. In fact, as argued by Ghemawat (2007), “intra-regional trade has had more influence than interregional trade on the large increases in international trade.” This statement was not only supported at the macro level with the evaluation of UN international trade statistics in the last five decades but also at the micro level with the analysis by Rugman and Verbeke which showed that of the 366 companies in the Fortune Global 500 (for which such data was available), 88% derived at least 50% of their sales in 2001 from their home regions. (As some of you have correctly pointed out in some posts most top TNC´s maintain their headquarters in the US, Europe or Japan.) Lastly, when considering the role of TCN´s it is also important to bear in mind that, in countries such as Spain, about 98% of jobs are still created within firms of less than 20 workers.
Moreover, it is important to reflect that the factors driving investment decisions by TCN´s are changing. When seeking business opportunities, companies are now more concerned about financial and political risks, with a focus on stable and predictable business environments. In response, governments everywhere recognize that their chances of attracting more foreign investment depend on making their investment climates more competitive. At the same, it is paramount that certain basic labour regulations/conditions are equally promoted and exercised worldwide. (World Bank 2010)
References:
- (1) The Social Impact of Foreign Direct Investment, OECD Policy Brief
http://www.oecd.org/dataoecd/53/8/40940418.pdf
- (2) Ghemawat, P. (2007). Redefining Global Strategy, Crossing Borders in a World where differences still matter. Harvard Business School Press.
- (3) World Bank (2010) Investing Acroos Borders. The World Bank Group. Washington D.C
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