MNCs & FDI

Group -6

What is MNCs ?

The multinational corporation (MNC) is the agent of international production. (Sometimes the MNC is called a transnational corporation or TNC.) International production is defined as that production which is located in one country but controlled by a multinational corporation (MNC) based in another country. (Cantwell, 1994). Thus, an MNC is a corporation that carries out production activities in more than one country. In particular, it controls the assets and manages the production activities in one or more foreign countries. To do this, a corporation based in the home country must own and operate plants in one or more foreign host countries.

Foreign Direct Investment

To obtain plant and other production facilities in a foreign countries, an MNC must invest. Thus an MNC has to be a foreign investor. These investment activities show up in the annual statistics of the home country and the host countries as foreign direct investment. Government regulation of MNCs as such is carried out mainly through regulation of foreign investment activities at the time the MNC seeks to make a foreign investment.

Foreign direct investment is the acquisition of assets in which the foreigner has a controlling interest. Portfolio investment is the acquisition of assets in which the foreign investor does not have a controlling interest. The US convention, followed by Australia and a number of other countries, defines foreign direct investment as ownership of 10 per cent or more of the ordinary shares of voting stock in the corporation. This known as the 10 per cent rule. It is a rule of thumb.

Foreign direct investments may be divided into two principal types :

Greenfield investments, i.e. the construction of new plant and facilities Mergers and acquisitions, i.e. the acquisition of foreign assets by means of purchasing existing plants and facilities previously operated by other corporations

In recent years, FDI is about equally divided between these two forms

Global distribution of FDI

UNCTAD estimates that there are about 77,000 MNCs with about 770,000 foreign affiliates. Many of these have production activities in many countries eg Royal Dutch/Shell has operations in more than 130 countries Transnationality indices for individual corporations, and aggregates for host economies.

Modes of Entry into Foreign Markets

When a corporation based in one country wishes to enter or expand its corporate sales in another country, there are alternative modes of entry: exporting from the home country, i.e. the production facilities remain in the home country international production via FDI

 There
joint

are other ways

ventures, strategic alliances and other agreements in which the parent company is a partner in production but does not have a controlling interest licensing agreements, franchising and other contracts in which a foreign partner (s) or franchisee is the producer

Other theories of FDI

The Dunning model is an example of what are sometimes called asset-exploiting theories. There are other theories which emphasis assetaugmenting FDI. In contrast to asset-exploiting strategies, these models emphasize that firms may undertake FDI in order to acquire created assets such as technology, brand names, distribution networks, etc which other foreign firms have already build up. We will not pursue further the theory of FDI as we are chiefly interested in the role of government in permitting or regulating international business

How Governments Regulate FDI

National government regulate the entry and the production activities of foreign investors (MNCs) in many ways:
1.

Restrictions on Market Access

Rights of establishment notification/screening restricted/closed/priority sectors conditions eg joint ventures, minimum domestic shareholding/maximum foreign shareholding Host country obligations

2.

Investment protection

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

Views of MNCs

Whereas 30 or 40 year ago many countries, Developed as well as Developing, were suspicious of FDI and regulated it heavily, FDI has, especially since about 1985, come to be regarded as a positive factor in the host economies. In particular, foreign investors are seen today by economists and governments as agents of technology 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 famously remarked that What is good for GM is good for the country. This is palpably wrong. Host economies must guard against anticompetitive behavior, tax evasion, adverse effects of production on the environment and other harmful effects of some MNC actions. There has been a recent counter-movement among NGOs which is highly 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 technologies criticisms of pharmaceutical corporations and patented drugs eg compulsory licensing in the WTO .

Thank you