Privatization, conversion of businesses from government ownership ship to private

property. This can involve the denationalization of industry as well as allowing the
private sector to provide what had been considered government services.

Multinational Corporation (MNC), sometimes called transnational

corporation or international corporation, business that produces or distributes products
or services in one or more foreign countries by establishing a branch or affiliate there.
A branch is a part of a company that is located in another country. An affiliate is a
company partially or entirely owned by another company. MNCs engage in foreign
direct investment (FDI)—that is, investment in one country by citizens of another
country. Sometimes such investment involves acquiring an existing company. In other
cases MNCs undertake what is known as greenfieldinvestment by creating new
facilities or activities.

Before World War II (1939-1945), most MNCs established foreign operations to

secure sources of raw materials, and developing countries were the largest recipients
of worldwide FDI. After World War II the foreign activities of large corporations
increased significantly. In the 1950s and 1960s large numbers of United States
corporations began investing in Europe, mainly in manufacturing. Investment in other
nations by European and Japanese businesses soon followed. During the 1980s and
1990s investment in the service sector by MNCs rose considerably. These postwar
changes in the nature of MNC investment have changed where MNCs operate. Before
World War II the share of FDI going into developing countries was around 60 percent.
In the 1970s and 1980s it dropped to around 25 percent. By the mid-1990s it had risen
to about 40 percent due to improving economic conditions in some developing
countries.

Most MNCs are very large corporations based in developed countries. About half of
the 600 largest MNCs have headquarters in the United States; about a sixth are based
in Japan; and about a tenth are in the United Kingdom. In the 1980s and 1990s an
increasing number of smaller corporations expanded their production activities
abroad. Similarly, an increasing number of MNCs now originate from the newly
industrialized and developing areas, including Hong Kong and South Korea. These
developments have been aided by technological improvements in transportation,
communications, and production processes.

The tremendous growth and spread of MNCs has sparked controversy. Some people
believe that MNCs contribute to unemployment in the country where they are based
by hiring foreign workers for overseas branches or affiliates. Some people also
believe MNCs exploit the people and resources of other countries. However, others
argue that MNCs create more jobs than they eliminate and that MNCs bring capital
and technology to areas that need it.
D. Exchange Rates and the Balance of Payments

U.S. Balance of Payments

Each year the United States spends money overseas on foreign imports and
investments. The nation also acquires capital from overseas by selling exports and
accepting money from foreign investors. At the end of year, the balance of payments
is determined by reconciling money sent overseas with money taken in from foreign
sources.

Currencies from different nations are traded in the foreign exchange market, where
the price of the U.S. dollar, for instance, rises and falls against other currencies with
changes in supply and demand. When firms in the United States want to buy goods
and services made in France, or when U.S. tourists visit France, they have to trade
dollars for French francs. That creates a demand for French francs and a supply of
dollars in the foreign exchange market. When people or firms in France want to buy
goods and services made in the United States they supply French francs to the foreign
exchange market and create a demand for U.S. dollars.

Changes in people’s preferences for goods and services from other countries result in
changes in the supply and demand for different national currencies. Other factors also
affect the supply and demand for a national currency. These include the prices of
goods and services in a country, the country’s national inflation rate, its interest rates,
and its investment opportunities. If people in other countries want to make
investments in the United States, they will demand more dollars. When the demand
for dollars increases faster than the supply of dollars on the exchange markets, the
price of the dollar will rise against other national currencies. The dollar will fall, or
depreciate, against other currencies when the supply of dollars on the exchange
market increases faster than the demand.

All international transactions made by U.S. citizens, firms, and the government are
recorded in the U.S. annual balance of payments account. This account has two basic
sections. The first is the current account, which records transactions involving the
purchase (imports) and sale (exports) of goods and services, interest payments paid to
and received from people and firms in other nations, and net transfers (gifts and aid)
paid to other nations. The second section is the capital account, which records
investments in the United States made by people and firms from other countries, and
investments that U.S. citizens and firms make in other nations.

These two accounts must balance. When the United States runs a deficit on its current
account, often because it imports more that it exports, that deficit must be offset by a
surplus on its capital account. If foreign investments in the United States do not create
a large enough surplus to cover the deficit on the current account, the U.S.
government must transfer currency and other financial reserves to the governments of
the countries that have the current account surplus. In recent decades, the United
States has usually had annual deficits in its current account, with most of that deficit
offset by a surplus of foreign investments in the U.S. economy.

Economists offer divergent views on the persistent surpluses in the U.S. capital
account. Some analysts view these surpluses as evidence that the United States must
borrow from foreigners to pay for importing more than it exports. Other analysts
attribute the surpluses to a strong desire by foreigners to invest their funds in the U.S.
economy. Both interpretations have some validity. But either way, it is clear that
foreign investors have a claim on future production and income generated in the U.S.
economy. Whether that situation is good or bad depends how the foreign funds are
used. If they are used mainly to finance current consumption, they will prove
detrimental to the long-term health of the U.S. economy. On the other hand, their
effect will be positive if they are used primarily to fund investments that increase
future levels of U.S. output and income.