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CHAPTER 12 of IPE by Balaam and Veseth

THE IPE OF MULTINATIONAL CORPORATIONS


by
Professor Leon Grunberg

Overview:

Multinational corporations (MNCs) are key agents transforming the international


political and economic landscape. Because they are highly visible organizations with
great power and mobility, they inspire both awe and fear. It is the purpose of this
chapter to layout, dispassionately, what these organizations are, where they come
from and where they go, and assess the impact they have on countries and workers
around the globe.

Multinational corporations are firms engaged in productive activities in several


countries. The vast majority originate in rich developed countries and much of their
foreign investment goes to other rich nations

Typically, MNCs go overseas because they possess some special advantage they
want to exploit fully and because there are benefits to locating their activities abroad.
These benefits may range from avoiding barriers to imports to employing cheaper,
foreign labor.

While most political economists will agree with the above summary, there is far
more debate as to the kinds of effects MNCs have. Economic liberals see them as
forces for positive change, spreading good things, like technology and efficiency
around the world. Economic nationalists see them as threatening the sovereignty of
nation-states. Marxists and structuralists worry that they are helping to create a world
marked by inequality and dependency.

This chapter does not take sides. Rather, it presents each side's case so that the
reader can reach his or her own conclusion about MNCs.

Learning Objectives:

 Characterize the nature of multinational corporations.

 What is the geographical pattern of foreign direct investment and what factors
account for this pattern?

 Which are the most important home and host countries for MNCs?

 What specific reasons and theories account for the fact of foreign direct
investment?

 What advantages and disadvantages do MNCs experience when they do business


abroad?

 What are the positive and negative views of MNC effects on host countries?

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 What are the positive and negative views about MNC effects on home countries?

 What is the role of the state in home and host countries with respect to MNCs?

Chapter Outline:

1. Introduction
a) MNCs are now an integral part of the IPE.
b) MNCs arouse fears and suspicions, especially in home countries but also in
host countries.

2. The Nature of Multinational Corporations


a) MNCs are firms that have engaged in foreign direct investment building or
acquiring affiliates in other nations.
b) Foreign Direct Investment (FDI) is different from portfolio investment,
where firms in one country simply acquire financial stakes in firms in other
countries to spread risk and diversify their investment portfolios; portfolio
investment is not discussed here.

3. Where do they come from and where do they go?


a) There are many misconceptions about MNCs; many people believe they are
mainly a vehicle for North investment in the South.
b) MNCs are mainly a North-North phenomenon.
c) The U.S. was the most important country for MNC investment in the 1980s.
d) Japan is unique in that it is a home for MNCs but not a very significant host
country for MNCs (foreign firms export to Japanese firms or arrange for
Japanese firms to produce their goods under license; at this time relatively
little FDI goes into Japan).

4. Reasons for Foreign Direct Investment or Why Do Firms Invest Overseas?


a) Foreign firms have many inherent disadvantages when they operate abroad,
including a lack of knowledge of local tastes, markets, and the labor force.
MNCs must have some compensating advantage if they are to engage in
successful FDI.
b) Firm-specific advantages include marketing expertise, economies of scale
and scope, and proprietary processes or products. Firms fear that they might
lose these advantages if they do not engage in FDI but rather export directly
to other firms or license their products or processes to other firms.
c) FDI is therefore a way to internalize the firm-specific advantage (retain
control and benefit within the firm).
d) FDI may also be driven by the desire to take advantage of location specific
advantages, such as the ability to understand more clearly local tastes or
product needs and, therefore, to produce products that more directly address
local market factors.
e) The product life cycle hypothesis explains why firms initially produce based
on local specific advantages and then engage in FDI in order to take
internalize £inn specific advantages.

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5. The Impact of Multinational Corporations
a) Since MNCs are a fact of life, the existence of MNCs is not in question.
b) It is rather the behavior of MNCs and their impacts on home and host
countries that should be evaluated.

6. The Positive View


a) Liberals argue that MNCs benefit host countries by transferring technology,
products, capital, and management techniques to them.
b) It is also argued that local firms in the host country benefit from spillover
effects, as the technology, business training, etc. of the MNC creates a
favorable environment for host country businesses.
c) Liberals argue that MNCs also benefit home countries.

7. The Negative View


a) Structuralists argue that MNCs integrate LDCs into an unequally structured
economy, leading to dependency and underdevelopment.
b) Structuralists argue that technology transfer is not effective, leaving host
countries uncompetitive on their own and therefore dependent on MNCs.
c) It is also argued that MNCs ignore the real needs of LDCs instead market to
them the same products that they sell in home countries, an market to them,
where unmet needs are much less.
d) It is also argued that MNCs have relatively few links to the host countries
economy, employ few host country managers and executives, etc.
e) MNCs are so said to have negative impacts of host country political systems.

8. Negative Effects on Home Countries


a) How does the outflow of capital, jobs, and technology affect the home
country?
b) It is also argued that MNCs may be able to manipulate internal (transfer)
pricing practices so as to avoid taxation by home countries.

9. The Impact of MNCs: A Summing Up


a) Malaysia and China seem to have employed MNC successful development
strategies based on MNC investment.
b) There are few examples of nations that have developed in the postwar era
without FDI.
c) Working with MNCs is therefore a fact of life.

10. Bargaining Relations Between MNCs and Governments and Workers


a) MNCs have two advantages in bargaining with host countries: Mobility and
control of scarce resources.
b) Host country governments have engaged in bidding wars for MNC
investment (see box below).
c) Host countries have bargaining clout based on their ability to provide
infrastructure, trained workers, and access to their own markets.
d) Host country governments can successfully negotiate with MNCs on equal
terms if they adopt policies that can give them bargaining power.

11. Box: Wooing Multinational Corporation: The Case of Mercedes

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12. Box: When Countries have the Upper Hand: Boeing and China
a) In this case China seems to have the upper hand over Boeing. Boeing wants
to secure a majority of the Chinese market in order to maintain in leadership
in aerospace.
b) China realizes this and can playoff Boeing against Airbus.
c) China has manipulated its trading relationship with Boeing and other U.S.
MNCs for political purpose

13. Conclusion
a) Following strictly economic logic, MNCs are likely to continue to grow at a
rapid pace in the near future.
b) For shelter and respite from economic battles, MNCs can be expected to
form alliances and partnerships across borders.
c) This could eventually weaken state authority.
d) Counterforces promise to generate demands for measures by the state to
control the effects of MNCs.

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