MNCs in the new world -- How much do developing countries gain?

Abhimanyu THERE was a time when the developing world had little regard for multinationals and foreign investment. This was during the 1960s and the 1970s. Once castigated as the brightest beacons of modern imperialism, MNCs are now considered messiahs for the reso urce-starved Third World. So much so that poor countries are making furious efforts to outdo one another in the incentives offered to foreign investors. The restoration of faith in MNCs and their ability to contribute to economic development occurred over the last two decades. China, despite retaining its socialist state character, began reforming aggressively. The reverses suffered by communism diluted the credibility and effectiveness of state institutions in fostering economic growth. The result was a huge shot in the arm for the market mechanism in mobilising and allocating resources. Controlled economies began shedding their protective trappings at lightning speed. At the same time, information and computer technology expanded by moving into communication science and signalling the onset of the digital era. The advent of democratic capitalism, accompanied by the digital revolution, gave rise to integration in the world economy, commonly referred to as globalisation. With production controls and trade barriers obliterating fast, foreign investment gained gre ater sanctity, and the MNCs' utility in supplementing indigenous development efforts increased manifold. A multi-domestic firm crosses borders and taps new locations for extracting greater rent. It has undisputed advantages, compared to its domestic counterparts. These relate to its abilities to innovate, better marketing techniques and superior managerial skills. Its choice of investment locations are guided by the encouraging attributes in the host economies. These include large markets, availability of cheap but skilled labour, welldeveloped infrastructure and favourable monetary and exchange rate cond itions. What do MNCs offer host countries? Capital-scarce countries look up to MNCs as harbingers of capital, technology and best practice systems. But they have often to accept them with generous pinches of salt. The rent-extracting objectives of multinational organisations would certainly vary with the aspirations of host countries. With expectations working at cross-purposes, multinational investment may translate into undesirable forms. The advent of globalisation seems to have queered the pitch in this regard. On paper, the process should help the poorer nations secure access to multinationality. Dismantling of trade barriers, coupled with transition of countries to outward-looking pol icy regimes, has led to a more powerful MNC presence in the developing world. This should, ideally, help the poorer nations in development efforts. But recent experience suggests otherwise. An emerging trend, prominent in contemporary cross-border MNC activity, has been the tendency to forge collaborations. Multinational enterprises are displaying a marked tendency to fuse cross-border networks and strategic alliances. These arrangements ar e conspicuous by their non-equity nature. Moderation of controls on international factor movements has increased the scope of country collaborations. MNCs now have much wider vocational options for both horizontal and vertical investments. Besides, remarkable technological advancements have sign ificantly reduced the costs of business across borders. The outcome has been

a proliferation of loan-licensing arrangements in the form of flexible franchises, contracts and purely technical, non-equity forms of collaboration. As a result, the incentives to internalise production technology by setting up whollyowned subsidiary operations have also reduced. The choice of setting up affiliate units, in the place of licensing arrangements, was often guided by the informational a symmetry between agents operating in various developing countries and the MNCs concerned. To avoid the functionally rigid contracts arising out of such information gaps, the MNCs often prefer to avoid external arm's-length market transactions and rely mo re on internal operations. However, the advancement of communications technology has led to availability of greater information on the investing locations for the interested companies. The informational asymmetry has been reduced to a large extent. As a result, collaborative arrangements have begun proliferating in volume. Networks and strategic alliances have also been helped by the more stringent patent regime brought about by globalisation. Right now, the world is adding the final touches to a concrete architecture for intellectual property protection. What does all this imply for the developing world? Would more collaborative arrangements, essentially in form of non-equity tie-ups, help its long-term development objectives? Equity arrangements in foreign ventures, particularly those relating to produc tion, underline lasting interests in the investments undertaken in the economy concerned. If an MNC commits to wholly-owned subsidiaries, or joint ventures with equity stakes (irrespective of majority or minority holdings), it is certain the MNC hopes to acquire managerial control. Non-equity arrangements normally indicate pursuit of specific gains and do not relate to lasting interests. India would ideally welcome MNC presence in areas lacking in maximum investment shortage. But the sectoral spread of investment in the host locations would depend heavily on the multinationals' own perceptions and the rules of the game prevailing in each country. However, even if the preferred sectors lag behind in terms of actual inflows of foreign funds (for a variety of reasons comprising both internal and external factors), the `committed' nature of MNC investment in other areas would be cause for c omfort. That would indicate the positive MNC response to the vocational attributes offered by the country and the willingness to exploit the advantages in the long term. The problem with non-equity types of arrangement, particularly for developing countries, is in the easy exploitation of country attributes, without actually getting to share the benefits. India, for instance, has a huge pool of technically skilled manpow er in such areas as IT, computers and biotechnology. If MNCs enter into non-equity type strategic alliances for product development with Indian partners, it is difficult to say how much of the benefits would actually accrue to the country of investment. The vocational advantage, in the form of skilled labour, would be well-utilised by the MNCs by adding greater value to their output. If the product is technologically sensitive, it may not be marketed in India at all, and may be destined for high-income markets. Strict patenting may also prevent the Indian partner from any parallel innovations, thereby, blocking possible spillovers. Globalisation has certainly made the market for foreign capital more of a seller's market, particularly for the capital-deficient countries. It is difficult for them to dictate terms in this regard. At the same time, MNCs possibly never had it so good. O n the one hand, strict patents are providing them safe custody of precious production secrets. On the other, a more liberal and technologically advanced world is enabling them to enhance

skills without bothering about tied clauses. There cannot be a bett er way of having the cake and eating it too!

Global Challenges For Exxon-Mobil

Running head: RESTORING A TARNISHED IMAGE Restoring A Tarnished Image- Global Challenges for Exxon-Mobil Case Study

What should be done to improve the image of a company whose name is synonymous with environmental disaster and bribery? Exxon-Mobils C.E.O. Rex Tillerson faces this challenge. As C.E.O. of the largest publicly traded oil company in the world with the highest posted record profit ever in 2006 ( $39.5 billion) and revenues in excess of #377 billion, (www.boston.com) Tillerson faces constant scrutiny from environmental groups, and high expectations for profit from shareholders. Not to mention the looming memory that he is now the head of a company that caused the single worst oil spill in United States history and almost destroyed a previously pristine environment. Rex Tillerson brings with him to this position experience in an area that his predecessors had little or no exposure to at allglobal management. The Exxon Valdez At the Is this Essay helpful? Join OPPapers to read more and access more than 325,000 just like it! get better grades center of Exxon-Mobils poor image are its questionable ethical performance record and a history of poor social responsibility performance, the most notable of these being the Exxon Valdez disaster. Exxon attempted to displace blame for this event on to third parties instead of accepting responsibility for the tragedy and taking immediate action to contain and clean up the spill. Exxon also wasted precious time in responding to the severity of the spill and did nothing in the first ten days following to aid in protecting the surrounding environment from being effected by the spill. Exxon-Mobils attempt to dodge blame for the incident and its response, or lack thereof, did not go unnoticed by the public, environmental organizations, or law makers, drawing a literal hornets nest of bad publicity, governmental fines, and legal action.