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ab - multinational corporation

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Dec 11, 2009
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Published: January 31, 2010

Multinational corporation (MNC)

A multinational corporation (MNC) is a firm that operates in more than one country. The common image of an multinational corporation is a giant corporation engaging in business around the world. The Forbes 2000 list of “The World’s Largest Corporations” is led by General Motors, followed by Wal-Mart, ExxonMobil, Ford, and DaimlerChrysler. Of the top 25 multinational corporations on the list, eight are U.S.-based companies, 10 are based in Japan, four are in Germany, and one or two each are from Britain, Netherlands, and France. While each of these companies has its headquarters in the country where it started, they all produce and sell goods and services in almost every country in the world.

Multinational enterprises have existed for hundreds of years but began to flourish in the 19th and early 20th centuries. Until World War II, British, German, and Dutch trading companies were the major multinationals. At the beginning of the 20th century, overproduction by U.S. manufacturers led to development of export markets, and some U.S. businesses, including the powerful United Fruit Company, expanded their control of minerals and agricultural products from Central and South America.

The Marshall Plan, designed to assist in the rebuilding of European economies after World War II, greatly contributed to the evolution of U.S. MNCs. In the 1930s, the United States, in response to the Great Depression, imposed increased protective tariffs (see Smoot-Hawley Tariffs Act) and isolated itself both politically and economically from the world marketplace. The Marshall Plan represented a major reversal from those policies. One result was that a substantial portion of aid was spent in the United States for the purchase of capital goods from U.S. manufacturers. This international activity combined with new U.S. military alliances, and European allies were “encouraged” to buy U.S. military hardware. Foreign accommodation of U.S. multinational corporations thus changed the business strategies of many companies.

In addition to the sale of U.S. capital and military goods, American service, finance, accounting, insurance, and architecture businesses, among others, “followed the flag,” expanding internationally to meet the needs of their corporate customers. By the 1960s, these corporations were “as global as American diplomacy.” Generally, the goals of U.S. multinational corporations were to penetrate foreign markets, avoid tariff and nontariff barriers, access cheap labor, and/or gain direct control of vital resources (often oil). The U.S. press rarely reports the fact that much of OPEC (Organization of Petroleum Exporting Countries) oil was initially developed by U.S. multinationals. During the 1970s and 1980s, U.S. manufacturing multinationals began to lose out to new sources of competition, but American service-based MNCs continue to dominate global trade, contributing to a U.S. trade surplus in services.

The contribution of multinational corporations and their subsidiaries to global economic development is debatable. One controversy centers on the dependencyversus- modernization theory. Dependency theory suggests that market capitalism in the form of large multinational corporations entering small, less-developed countries result in exploitation and dependency on the MNCs and inhibits indigenous entrepreneurship. Dependency theorists argue MNCs monopolize local industrial, capital, and labor markets. economic growth occurs, but largely to the benefit of the “triple alliance”: multinational corporations, government-owned enterprises, and local capital elite.

Modernization theorists, on the other hand, suggest multinational corporations are agents of change, promoting economic growth and development. Multinational corporations bring new technology, managerial training, infrastructure development, and access to modern business practices when they enter a developing country. Management scholar Peter Drucker contends multinational corporations are “the only real hope” for lesser-developed countries (LDCs). They alter traditional value systems, social attitudes, and behavior patterns and encourage responsibility among political leaders of LDCs. Some economists, however, question whether replacing traditional systems with “modern” values is always beneficial to the local population.

Developing countries’ governments may attempt to access the benefits of multinational corporations without creating dependency through the use of joint ventures (JVs). At times both China and Mexico have mandated joint ventures for any company wishing to expand into their country. Often the MNC provides the capital and technology, while the domestic country partner provides labor, local knowledge, and access to domestic distribution systems. With the signing of the North American Free Trade Agreement (NAFTA) (1994), Mexico reduced and agreed to eventual elimination of join-venture requirements. With China’s ascension to the World Trade Organization (WTO) in 2001, joint ventures and other restrictions on international access to Chinese markets are expected to be diminished.

Changes in international trade agreements are critical to the expansion of multinational corporations. In 1995, after eight years of negotiation, the General Agreement on Tariffs and Trade (GATT) was replaced by the WTO. Today over 90 percent of international trade is governed by WTO rules. In addition to efforts to reduce tariffs, the WTO is committed to eliminating nontariff barriers. Critics contend the WTO is an agent of multinational corporations, facilitating their dominance of the global economy.

In today’s economy, global sourcing is a common practice. MNCs purchase materials and components around the world and assemble and produce wherever costs are lowest. With Internet communications, corporations now hold vendor auctions, inviting selected suppliers to bid on production of parts and products. Managers argue this results in increased competition and lower prices. Critics counter that it leads developing countries to cut their prices by ignoring social costs, including pollution, in the race to retain employment and income in their economies.

Generally large MNCs have an advantage over smaller, domestic producers based economies of scale, production efficiencies realized when per-unit costs are reduced as the quantity produced increases. In business, scale is size. In many business situations, as a company produces more output, the average cost of that output declines. Economies of scale are the result of efforts that improve efficiency.
Generally specialization and the use of larger machines allow firms to become more efficient. Greater levels of output allow firms to spread the fixed costs associated with specialized equipment or personnel.

MNCs already producing for large domestic markets (like U.S. multinationals) tend to have an advantage when entering smaller markets. For decades many smaller countries restricted access to their markets in order to protect domestic producers. For example, in the 1890s, Canada imposed the Fielding Tariffs on imported products. In response, U.S. manufacturers established “branch factories” in Canada, and by 1970 they dominated foreign investment in Canada. With the passage of the U.S.-Canada Free Trade Agreement in 1985, Canadian leaders feared U.S. multinationals would “rationalize” that is, consolidate their North American operations, removing factories and jobs from Canada. By that time the branch factories had been integrated into most multinational corporation business strategies and continued to flourish.

In Mexico, multinational corporations expanded greatly even before NAFTA. The maquiladoras program, like Canada’s branch-factory tariffs, attempted to create jobs and income in Mexico while limiting access to Mexican markets. Established in 1965, the maquiladoras (or Border Industrialization Program) allowed foreign firms to import materials and parts into Mexico with no tariff if the resulting products were then exported. Asian and North American companies established maquiladoras, but the program did not take off until a Mexican financial crisis in the early 1980s. With devaluation of the Mexican peso, maquiladora labor became cheaper than in developing Asian countries. Maquiladoras boomed in the mid-1980s and again after the peso crisis in 1994.

In the late 1980s, Mexico relaxed the requirement that all maquiladora production be shipped out of the country, providing access to Mexican markets through maquiladora operations. In the 1990s, with new trade agreements with Chile, Mercursor countries, and the European Union, Mexico became an export platform for U.S.-based multinational corporations. Exports from Mexican plants could enter countries like Chile without tariffs while, exports to Chile from U.S. factories face tariffs. As of November 2000, as part of NAFTA, only parts and materials originating in the three North American countries could enter Mexico tariff-free. In anticipation of this change, multinational corporations, particularly Asian companies, expanded production activities in Mexico, diverting production from other areas of the world.

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