Reading: Multinational Firms

With the advent of improved communication and technology, corporations have been able to expand into multiple countries.

KEY Points

  • Multinational corporations operate in multiple countries.
  • MNCs have considerable bargaining power and may negotiate business or trade policies with success.
  • A corporation may choose to locate in a special economic zone, a geographical region that has economic and other laws that are more free-market-oriented than a country’s typical or national laws.

Term

  • Multinational corporation:  A corporation or enterprise that operates in multiple countries.

Example

  • McDonalds operates in over 119 different countries, making it a fairly large MNC by any standard

A multinational corporation (MNC) or multinational enterprise (MNE) is a corporation registered in more than one country or has operations in more than one country. It is a large corporation which both produces and sells goods or services in various countries . It can also be referred to as an international corporation. The first multinational corporation was the Dutch East India Company, founded March 20, 1602.

Ford Motor Corp.
Ford is a MNC with operations throughout the world.

 

Corporations may make a foreign direct investment. Foreign direct investment is direct investment into one country by a company located in another country. Investors buy a company in the country or expand operations of an existing business in the country.

A corporation may choose to locate in a special economic zone, a geographical region with economic and other laws that are more free-market-oriented than a country’s typical or national laws.

Multinational corporations are important factors in the processes of globalization. National and local governments often compete against one another to attract MNC facilities, with the expectation of increased tax revenue, employment and economic activity. To compete, political powers push toward greater autonomy for corporations. MNCs play an important role in developing economies of developing countries.

Many economists argue that in countries with comparatively low labor costs and weak environmental and social protection, multinationals actually bring about a “race to the top.” While multinationals will see a low tax burden or low labor costs as an element of comparative advantage, MNC profits are tied to operationalefficiency, which includes a high degree of standardization. Thus, MNCs are likely to adapt production processes in many of their operations to conform to the standards of the most rigorous jurisdiction in which they operate.

As for labor costs, while MNCs pay workers in developing countries far below levels in countries where labor productivity is high (and accordingly, will adopt more labor-intensive production processes), they also tend to pay a premium over local labor rates of 10% to 100%.

Finally, depending on the nature of the MNC, investment in any country reflects a desire for a medium- to long-term return, as establishing a plant, training workers and so on can be costly. Therefore, once established in a jurisdiction, MNCs are potentially vulnerable to arbitrary government intervention like expropriation, sudden contract renegotiation and the arbitrary withdrawal or compulsory purchase of licenses. Thus both the negotiating power of MNCs and the “race to the bottom” critique may be overstated while understating the benefits (besides tax revenue) of MNCs becoming established in a jurisdiction.

GLOSSARY

Autonomy

The capacity to make an informed, uncoerced decision. Self-government; freedom to act or function independently.

Benefit

An advantage, help or aid from something Employee benefits and (especially in British English) benefits in kind (also called fringe benefits, perquisites, perqs or perks) are various non-wage compensations provided to employees in addition to their normal wages or salaries. An advantage, help, or aid from something.

Communication

The concept or state of exchanging information between entities. an instance of information transfer; a conversation or discourse the concept or state of exchanging data or information between entities.

Comparative advantage

The ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another. The concept that a certain good can be produced more efficiently than others due to a number of factors, including productive skills, climate, natural resource availability, and so forth. The ability of a party to produce a particular good or service at a lower margin and opportunity cost over another.

Corporation

A group of individuals, created by law or under authority of law, having a continuous existence independent of the existences of its members, and powers and liabilities distinct from those of its members. a group of individuals, created by law or under authority of law, having a continuous existence independent of the existences of its members, and powers and liabilities distinct from those of its members.

Developing

Of a country: becoming economically more mature or advanced; becoming industrialized.

Economy

Collective focus of the study of money, currency and trade, and the efficient use of resources. The system of production and distribution and consumption. The overall measure of a currency system; as the national economy. The system of production and distribution and consumption. The overall measure of a currency system.

Efficiency

The extent to which a resource, such as electricity, is used for the intended purpose; the ratio of useful work to energy expended. The extent to which time is well used for the intended task. Improved efficiency was a principle goal of progressives, one they thought attainable by the application of scientific and rational thought to social problems.

Employment

The work or occupation for which one is used, and often paid.

Enterprise

A company, business, organization, or other purposeful endeavor.

Facility

The physical means or contrivances to make something (especially a service) possible; the required equipment, infrastructure, location etc.

Foreign direct investment 

Investment into production or business in a country by an individual or company of another country. Foreign direct investment is investment directly into production in a country by a company located in another country, either by buying a company in the target country or by expanding operations of an existing business in that country.

Globalization

A common term for processes of international integration arising from increasing human connectivity and interchange of worldviews, products, ideas, and other cultural phenomena. In particular, advances in transportation and telecommunications infrastructure, including the rise of the Internet, represent major driving factors in globalization and precipitate the further interdependence of economic and cultural activities.

Good

An object produced for market.

Investment

A placement of capital in expectation of deriving income or profit from its use. The expenditure of capital in expectation of deriving income or profit from its use.

Jurisdiction

The limits or territory within which authority may be exercised The limits or territory within which authority may be exercised. the power, right, or authority to interpret and apply the law.

License

The legal terms under which a person is allowed to use a product.

Operation

The method or practice by which actions are done. A procedure for generating a value from one or more other values.

Premium

A bonus paid in addition to normal payments. the price above par value at which a security is sold Something offered at a reduced price as an inducement to buy something else. something offered at a reduced price as an incentive to buy something else. The premium is the amount a policy-holder or his sponsor must pay to a health plan to purchase health coverage.

Process

A series of events to produce a result, especially as contrasted to product. in reference to capabilities, a process is how the capability is executed. An outgrowth of tissue or cell.

Productivity

Productivity is a measure of the efficiency of production and is defined as total output per one unit of a total input. The rate at which goods or services are produced by a standard population of workers. A ratio of production output to what is required to produce it (inputs). The state of being productive, fertile, or efficient; the rate at which goods or services are produced by a standard population of workers. the rate at which goods or services are produced by a standard population of workers. The rate at which products and services are produced relative to a particular workforce.

Profits

Collective form of profit.

Revenue

Income that a company receives from its normal business activities, usually from the sale of goods and services to customers. The total income received from a given source.

Revenues

In business, revenue or turnover is income that a company receives from its normal business activities, usually from the sale of goods and services to customers.

Services

That which is produced, then traded, bought or sold, then finally consumed and consists of an action or work.

Standard

Something used as a measure for comparative evaluations. A level of quality or attainment. Standardization the process of setting certain norms or standards for a product with regard to shape, size, color, quantity, quality, weight etc.

Standardization

The process of setting certain norms or standards for a product with regard to shape, size, color, quantity, quality, weight etc.