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MNCs & FDI

Group -6

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What is MNCs ?

The multinationalcorporation (MNC) is the agent ofinternational production. (Sometimes the MNC is called atransnational corporation or TNC.)

International production is defined as that productionwhich is located in one country but controlled by amultinationalcorporation (MNC) based in anothercountry. (Cantwell, 1994).

Thus, an MNC is a corporation that carries outproduction activities in more than one country. Inparticular, it controls the assets and manages theproduction activities in one or more foreign countries.

To do this, a corporation based in the home countrymust own and operate plants in one or more foreign hostcountries.

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Foreign Direct Investment

To obtain plant and other production facilities ina foreign countries, an MNC must invest. Thusan MNC has to be a foreign investor. Theseinvestment activities show up in the annualstatistics of the home country and the hostcountries as foreign direct investment.

Government regulation of MNCs as such iscarried out mainly through regulation of foreigninvestment activities at the time the MNC seeksto make a foreign investment.

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Foreign directinvestment is the acquisition ofassets in which the foreigner has a controllinginterest.

Portfolioinvestment is the acquisition of assetsin which the foreign investor does not have acontrolling interest.

The US convention, followed by Australia and anumber of other countries, defines foreign directinvestment as ownership of 10 per cent or moreof the ordinary shares of voting stock in thecorporation. This known as the 10 per centrule. It is a rule of thumb.

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Foreign direct investments may be divided

into two principal types : Greenfieldinvestments, i.e. the construction

of new plant and facilities

Mergers and acquisitions, i.e. the acquisition

of foreign assets by means of purchasingexisting plants and facilities previouslyoperated by other corporations

In recent years, FDI is about equallydivided between these two forms

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Global distribution of FDI

UNCTAD estimates that there are about 77,000MNCs with about 770,000 foreign affiliates.

Many of these have production activities in many

countries eg Royal Dutch/Shell has operations inmore than 130 countries

Transnationality indices for individualcorporations, and aggregates for host

economies.

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Modes of Entry into ForeignMarkets

When a corporation based in one countrywishes to enter or expand its corporatesales in another country, there are

alternative modes of entry:

exporting from the home country, i.e. theproduction facilities remain in the home

country

international production via FDI

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There are other ways

joint ventures, strategic alliances andother agreements in which the parentcompany is a partner in production but

does not have a controlling interest

licensing agreements, franchising andother contracts in which a foreign

partner (s) or franchisee is the producer

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Other theories of FDI

The Dunning model is an example of what aresometimes called asset-exploiting theories.

There are other theories which emphasis asset-augmenting FDI. In contrast to asset-exploiting

strategies, these models emphasize that firmsmay undertake FDI in order to acquire createdassets such as technology, brand names,distribution networks, etc which other foreignfirms have already build up.

We will not pursue further the theory of FDI aswe are chiefly interested in the role ofgovernment in permitting or regulatinginternational business

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How Governments Regulate FDI

National government regulate the entry and theproduction activities of foreign investors (MNCs)in many ways:1. Restrictions on Market Access

Rights of establishment notification/screeningrestricted/closed/priority sectors conditions eg joint ventures,minimum domestic shareholding/maximum foreignshareholding

2. Investment protection Host country obligations

expropriation circumstances, compensation transfer and repatriation of funds Intellectual property protection source country actions investment guarantees

3. Controls on the Movement of natural persons entry,residence and work permits for foreign workers

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Views of MNCs Whereas 30 or 40 year ago many countries, Developed as well as

Developing, were suspicious of FDI and regulated it heavily, FDIhas, especially since about 1985, come to be regarded as a positivefactor in the host economies. In particular, foreign investors areseen today by economists and governments as agents oftechnology transfer and business organizational improvements.

One should not fall into the opposite trap and regard all FDI as

benign. One senior executive of GM in the USA once famouslyremarked that What is good for GM is good for the country. This ispalpably wrong. Host economies must guard against anti-competitive behavior, tax evasion, adverse effects of production onthe environment and other harmful effects of some MNC actions.

There has been a recent counter-movement among NGOs which ishighly critical of MNCs on particular issues such as

the need for codes relating to labor standards (sweatshops),corporate governance, actions that affect the environment

attacks on biotechnology, eg. movements to ban GM technologiescriticisms of pharmaceutical corporations and patented drugs egcompulsory licensing in the WTO .

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Thank you