Multinational Corporations (MNCs)

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• The Multinational Corporation (MNC) is probably the most
important type of non-state actor to emerge in the last 2 or 3
decades.
• The MNCs
1. produce and distribute goods and services across national
boundaries
2. spread ideas, tastes, and technology throughout the world
3. plan their operations on a global scale
Definition: MNCs are firms that control productive assets in more
than one country
=>MNCs acquire their foreign assets by investing in affiliate or
subsidiary firms in host countries
= foreign direct investment (FDI) (management rights and
control)
6 industrial countries accounted for about 75% of the total FDI in
the early 1990s -USA, Britain, Germany, France, Japan, 2and
the Netherlands.
Remember: Liberals, realists and marxists have different
views regarding the power of MNCs
Liberals: maintain that the mobility of MNCs gives them a
major advantage over national governments, which are
bound to specific territories => MNCs have become “the
major weavers of the world economy.”
Marxists: argue that corporate managers constitute a
transnational class that maintains and defends the capitalist
system => managers of major corporations have a
predominant influence over the conduct of US foreign
policy.
Realists: argue that the power of states over multinationals
has not decrease and that MNCs retain close ties with their
home governments => MNCs would not have be able to
expand their activities without the support of the most
powerful states.
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• MNCs are of 5 organizational types
1. Vertically integrated MNC: produces goods and services
at different stages of the production process = the outputs of
some affiliates serve as inputs to other affiliates of the
MNC
⇒ Avoid uncertainty and reduce transaction costs; limit
competition..
Example: in petroleum, they are often involved in the extraction
and distributive stages ie., owning many petrol stations.
2. Horizontally integrated MNC: extends its operations
abroad by producing the same product or product line in its
affiliates in different countries = has the same sort of plant
in many countries
⇒ Defend and increase their market shares; “get behind”
external barriers imposed by national governments
Example: Union Carbide which has many chemical subsidiaries 4
around the globe.
3. Conglomerate firms: have interests in many sectors.
4. Joint ventures: MNCs gain entry into a foreign country only
by agreeing to form joint ventures with local firms = the
various partners own less than 100% of the equity of the joint
venture firm
Example: automobile industry, telecommunications equipment
and aircraft
5. Strategic alliances: are partnerships between separate,
sometimes competing companies = they are drawn together
because each needs the complementary technology, skills or
facilities of the other; but the scope of the relationship is
strictly defined, leaving the companies free to compete
outside the relationship

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 Explaining the rapid growth in MNC activity
1. Changes in technology and organizational sophistication
created the possibility of expansion = new communications
technologies, cheaper and more reliable transportation
networks.
2. Government policies that actively encourage multinational
expansion = elimination of restraints on capital flows, the
reduction of tariffs.
3. The product cycle theory: every technology product evolves
through 3 phases in its life history
a. the introductory or innovative phase: production is located in
most advanced industrial country(ies)
b. the maturing or process-development phase: production shifts
to other advanced countries
c. the standardized or mature phase: production shifts to LDCs,
whose comparative advantage is their lower wages rates. From
these export platforms either the product itself or component
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parts are shipped toward markets.
4. Internalization theory contends that firms expand abroad
in order to “internalize” activities in the presence of market
imperfections which are represented in the idea of
transaction costs
5. Oligopoly theory contends that firms move abroad to
exploit the monopoly power they possess through such
factors as unique products, marketing expertise, control of
technology and managerial skills, or access to capital.
6. The tariff-jumping hypothesis deals with the attempt by
MNCs to jump over tariff or non-tariff barriers by
establishing foreign subsidiaries.
7. Obsolescing bargain theory contends that a firm invested
in a host country starts with a good bargaining position with
the host country’s government because of firm-specific
advantages (superior technology); later on the bargaining
leverage shifts towards the host state because the MNC
commits itself to immobile resources. 7
Note: Liberals and Marxists have different views regarding MNCs
impact on states and societies
Liberals: believe that
1. FDI contributes to increased efficiency in the use of the
world’s resources by stimulating innovation, competition,
economic growth, and employment
2. MNCs provide countries with numerous benefits, such as
capital, technology, managerial skills, and marketing
networks.
Marxists: view MNCs
1. as predatory monopolists that overcharge for their goods and
services, limit the flow of technology, and create dependency
relationships with host countries in the Third World
2. as having a negative impact on home countries by exporting
jobs and imposing downward pressures on labor and on
environmental standards. 8
 MNCs in their home countries
Relationship of MNCs and their home governments
Home country policies towards their MNCs have been
generally favorable, but they also marked by
ambivalence
⇒Home countries often give their MNCs favorable
treatment and protect them from hostile actions of
foreigners
But
home governments also sometimes view their MNCs as
tools of foreign policy and are willing to coerce the
MNCs if necessary to affect their behavior.

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 Relationship of MNCs and their home society
The effects of MNCs on labor groups is one of the most
contentious issues in home countries
a. Liberals argue that the impact of MNCs on labor groups is
generally positive = MNCs have better record than
domestic firms with regard to job creation, export
performance and technological innovations in the home
country; MNCs pay higher wages than domestic firms
(inconclusive evidence)
b. Labor groups are unconvinced by this evidence = in their
view the mobility of capital and MNCs puts immobile
workers at a distinct disadvantage = the transfer of MNC
activities to affiliates in LDCs with lower wages and
standards produce a deterioration of working conditions in
the home country + de-industrialization. 10
 The MNCs and host countries
MNCs economic impact on host countries (LDCs)
a. Proponents argue that MNCs and their foreign investment
have a positive effect on Southern economic development
because they fill resources gaps in developing countries and
improve the quality of factors of production.
b. The positive view of the role of the MNCs in growth,
efficiency and welfare has been challenge by critics of the
MNCs
Empirical studies examining the economic impact of MNCs
on LDCs appear to indicate that while the inflows of
foreign investment have a generally positive effect on
economic growth, the extent of the impact depends on other
variables especially the policies pursued by host
governments. 11
 MNCs political impact on host countries (LDCs)
Evidence suggests that MNCs have at times intervened in political
processes in their host states in the Third World by taking
actions that are
a. legal (contribution to political parties, lobby with local elites,
carry out public relations campaign) and/or
b. illegal (illegal contributions to political parties, bribe to local
officials, refusals to comply with host laws and regulations)
actions within host states
Comment: What the MNCs want the most is political stability rather
than a particular form of government.
MNCs cultural impact on LDCs
The presence of MNCs is characterized as constituting a form of
cultural imperialism or Coca-Cola-ization of the society, through
which the developing country loses control over its culture and
its social development= it receives partial support 12