2- Globalization and MNCs 2

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After finishing this chapter, you will be

able to explain:

The operations and global expansions ofMultinational Corporations (MNCs) Different Activities of MNCsThe relationship between MNCs and

Globalization How MNC activities can create positive

changes as well as tensions in a societyThe social responsibilities of MNCs

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A Multinational Corporation (MNC) is anybusiness that owns and controls productionor service facilities in two or more countries.Examples include Ford, Wal-Mart, Cemex,Nokia, Sony, etc.

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The overwhelming U.S. presence has been eclipsed by theemergence of large non-US multinationals. Whereas US

companies used to represent 48.5% of the worlds largestMNCs in 1973, this share was down to 26% by the year2000, while the share of Japanese multinationals increasedfrom 3.5% to 17% in the same period.

There has been a sharp increase in the participation of

medium and small MNCs in global business activities

MNCs from developing countries e.g., Whampoa of HongKong (part of China), Petroleos de Venezuela, Cemex ofMexico are now among the top 100 largest MNCs .

After the end of the Cold War in 1989, MNCs have investedheavily in China and in former socialist countries of SovietUnion and East Europe. It is expected that in the comingyears these countries would have their own MNCs thatwould expand to other countries.

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Category IndustryUS$ trillion

Shares of Global GDP

Fully Globalized Industries

1. Physical commoditiesPetroleum, mineral ores, timber

2.0

Scale-driven business goods and servicesAircraft engines, construction equipment, semiconductors, airframes, shipping, refineries, machine tools.

1.0

Manufactured commoditiesRefined petroleum products, aluminum, specialty steel, bulk pharmaceuticals, pulp, specialty chemicals

2.8

Total shares of global GDP 5.8 trillion 23%

Semi-Globalized Industries

Labor skill-/productivity-driven consumer goodsConsumer electronics, personal computers, cameras, automobiles, televisions

0.9

5. Brandable, largely deregulated consumer goodsSoft drinks, shoes, luxury goods, pharmaceuticals, movie production 0.5

6. Professional business servicesInvestment banking, legal services, accounting services, consulting services

2.5

Total shares of global GDP 3.9 trillion 15%

Early Stage Globalized Industries

7. Hard to brand globally, largely deregulated consumer goods and services such as food, personalfinancial services, television production, retail distribution channels6.3

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Companies go abroad for two mainreasons: For Market Seeking

For Resource Seeking Lately, companies are also venturing into

other markets for Knowledge Seeking

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The recent trend of outsourcing back office work in other countries has createda lot of

uproar in US politics. Some questions that re frequently asked are:

Can or will the US MNCs continue to innovate and increase productivity inorder to keep the supply of higher paid jobs in the United States?

Where will the US comparative advantages be in the future?

How the trends toward outsourcing affect the living standard of theAmerican middle class?

How will the insecurity, stress and impoverishment afflicting the core ofAmerican society-its influential middle class, reflect on its political choices?

What would be the impact of current changes on the world economy andwhat implications will they have on the rest of the world, especially thedeveloping world?

How would the on-going socio-economic upheaval affect the relationsbetween the US and the developing countries?

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Rank MNCs/Countries Revenue/GDP

(In US$ Billion)

1 Wal-Mart 288

2 BP 285

3 Columbia 281

4 Bangladesh 275

5 Exxon-Mobil 271

6 Royal Dutch Shell 267

7 Austria 256

8 Sweden

9 Switzerland 251

10 General Motors 194

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Rank Companies Market values(in billion $)

1 Microsoft 264

2 GE 259

3 Exxon Mobil 241

4 Wal-Mart 234

5 Pfizer 195

6 Citigroup 184

7 Johnson & Johnson 170

8 Royal Dutch/Shell 149

9 BP 144

10 IBM 139

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Rank Companies Value added

(in US$ billion)

Country with compatible size

measured by value added

1 Exxon Mobil 63

62 Pakistan

2 GM 56

53 Peru

3 Ford Motors 44

4 Daimler Chrysler 42

41 Nigeria

5 GE 39

6 Toyota 38

38 Kuwait

7 Royal Dutch/Shell 36 He et al.


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MNCsHQ in USA

Sub-1

Sub-1

Sub-1

Funds: stocks, bonds

Intra-firm

Arms length trade

world export: $ . T ($ . T, )1111 11 11 1111

1111MNCs foreign local sales: $ T11

($ T, )1 1 1 1 1 1

Intra-firm trade: % of world trade11

FDI inflow: $ B ($ B, )1111 111 111 1111

by ,11111MNCs and , affiliates (sub.)11 111 1

(UNCTAD, & )11111111

Money: , , , $

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Growth of FDI, World Trade and World OutputIndex= in1111111

1

111

111

111

111

111

111

11 11 11 11 11 11 11 11 11 111111

World Exports

World GDP

World FDI

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MNC as Knowledge Seeker:

A Three -Stage Model

Initial Motivation:

Search for cheaperLabors, raw materials

Second Stage:

Going After Consumer Market

Tape into emerging

consumer market

Third Stage:

Search for emerging

Knowledge & ideas

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Fig. . Estimated Percentage of11 FCCs and USCCs

Reporting No Tax Liability

1

11

11

11

11

11

11

11

1111 1111 1111 1111 1111

FCC

USCC

Large FCC

Large USCC

Tax Year

%

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Mergers and Acquisitions (M&A) have become quite

common in the last few decades. Although some people

are critical of M&As of local firms by foreign firms, in the

long run, M&As is helpful at the global level because they:

Rationalize the limited resources to reduce duplication

and combine limited resources which will increase

firms speed and effectiveness to react to global

business opportunity.

May bring efficiency and higher productivity for firms

overall global operation.


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However, in the short term, M&A maybe problematic, especially at the locallevel, for several reasons:

They do not add new capital and capacity toan economy but simply reflect a change ofownership. They do not create job, they arerather often accompanied by massive layoffsand the closing down of plants.

They reduce competition and increaseindustry concentration, further reducing local

job creation.

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Ratio of CEO to Worker's Pay

111

111

11

1

111

111

111

111

111

111

1111 1111 1111 1111

Year

Ratio

Ratio of CEO to Worker's Pay

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U.S. CEOs Pay versus Workers Pay

(Average hourly worker to CEO pay ratios)


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Ratio of Workers' Pay

1

.11

1

.11

1

.111

.11

1

.11

1

Australia

Can

ada

Finlan

d

Germany

Irela

ndItaly

Swed

enU

.K. US

Rati

mid- s11 mid- s11

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GDP per Capita in Poor vs. Rich nations(in constant US$)1111

11 111

11111

11111

1

1111

11111

11111

11111

11111

11111

-111111 -111111

Poorest Countris11 Richest Countries11

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In assessing the impact of market-seeking activities ofMNCs,

we need to address the following questions:

Are MNC marketing practices and sustainable

development compatible or are they mutuallyexclusive?

What are the consequences of global consumerism andmaterialism on our natural environment?

What risks, dangers and benefits arise when MNCsfrom advanced economies market an identical range ofproducts in the developed world and in less developedmarkets?

What are the cultural impacts of global marketing?

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Socially beneficial goods or services include public education

programs, recycling programs, and public health programs. Sociallybeneficial products are culturally or socially defined and vary with acountrys conditions. For example, consumption of fatty or oil-richfoods may be considered as harmful in many developed countrieswhere too much of oil and fat is consumed. However, in someAfrican countries where the diet is poor in fats, consumption ofthese foods may be, in fact, quite desirable.

Products targeted at a specific segment of a market, such asdisposable diapers, disposable dishes or other time-saving goods.Although these products are highly beneficial for working mothers,they have a negative impact on the environment.

Products that could be harmful if abused, such as alcoholicbeverages or firearms. Buyers often do not have a good knowledgeof the potential dangers of these goods. Sellers, on the other hand,are aware, or should be aware of the risks and consequences of themisuse of these products. For example, marketing powdered milk incountries where water is not safe to drink, can endanger the lives ofconsumers.

Inherently harmful products, such as cigarettes or opium.

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Sophisticated consumers are those who areeducated and have developed adequate defense andjudgment to deflect high-pressure promotiontechniques.

At-risk consumers include two groups: sophisticated

but psychologically fragile consumers who may fallvictim to compulsive behaviors or addictions; andsocially or economically disadvantaged and lesseducated consumers who have little or no access toconsumer information.

Vulnerable consumers are illiterates, as far asprocessing marketing information is concerned.Examples include children across the world andadults, mostly in developing or newly emergingmarkets that have yet to develop marketplacesophistication.

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Structural market failure Structural market failure results from the

actions of the participants in the market

such as monopolies actions that hinderthe efficiency of the market mechanism.

Endemic market failure Endemic market failures are not due to

anyones actions. They result from theintrinsic attributes of some goods andservices as well as the characteristics ofthe market.

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The first view holds that under conditions of endemic marketfailure, MNCs deserve, at least partially, the blame for the resultingproblems.

The second view argues that MNCs should be held responsible onlywhen undesirable outcomes are the consequences of their own

activities, in other words, when structural market failures exist.

The third view considers MNCs should not be targeted for criticismfor issues that are beyond their control. Indeed, marketdysfunctions and its resulting problems are due to external factorsand inadequate policies, social institutions, the immaturity of civicvalues, and the business environment.

The fourth view points the social consequences of technology andthe responsibilities of MNCs as creators and users of technology.Here the MNC is neither culprit nor victim, but rather an importantplayer that has responsibilities commensurate with its role in thespreading of technology.

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A threat to national sovereignty anddemocratic accountability

Accused of neutralizing anything thatstands in the way of profits

MNCs accentuate social inequalities

MNCs destroy jobs

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Despite the criticisms against the MNCs, weneed to remember that:

MNCs are engines of growth

MNCs are social institutions In addition to being profit agents, MNCs can also

be good corporate citizens.

Therefore, MNC should not be destroyed,

but rather channeled and harnessed forthe benefit of the global human society.

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Some people argue that MNCs Should HaveSocialResponsibilities, because: Firms activities occur within different cultural,

social, and historical contexts. Firms perform as a central hub of economic

activities that links consumers, suppliers,manufacturers, labor, managers, governments,and the natural environment.

Firms are governed by an invisible socialcontract.

Firms have no choice but to confront cultural,social, and ethical issues. Corporations are social institutions. If they do

not serve society, they have no businessexisting.

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Some people argue that MNCs Should notbe burdened with Social Responsibilities,because

Firms only social responsibility is to pursue profitwherever possible.

The free enterprise has made wealth creation possible.So far, no other system has duplicated this success. If we make firms socially responsible, it would be bad

for both business and poor communities. Social responsibilities reduce shareholder returns and

distract business from what they can do best.

Making firms socially responsible will have the oppositeeffect of what is intended, e.g., many companies arebeginning to feel that it is better to pull their factoriesout of poor countries rather than risk being seenoperating below accepted standards or abusing foreignlabor.

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2- Globalization and MNCs 2

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