McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 11

Multinational Corporations
This chapter:
Defines the multinational corporation (MNC).
Examines the use of foreign direct investment
by multinational corporations.
Describes how various types of codes are used
to guide corporate behavior.
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The Coca-Cola Company

Opening Case
Asa Candler formed the Coca-Cola Company in 1882.
The Coca-Cola Company today is the worlds largest
manufacturer, distributor, and marketer of soft-drink
concentrates and syrups.
The company has transformed itself from a singleproduct firm into a producer and marketer of a
beverage portfolio which encompasses 400 brands
and 2,600 beverage products.
Although the company has millions of satisfied
customers in foreign lands it sometimes is confronted
with violent critics who resent American influence.
The Coca-Cola story illustrates the development, strategy,
and unique problems of a large multinational corporation.
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Multinational Corporation
Defined
A multinational corporation is an entity
headquartered in one country that does business in
one or more foreign countries.
Many MNCs progress through the following stages:
1. Exports products to foreign countries.
2. Establishes sales organizations abroad.
3. Licenses use of patents and technology to
foreign firms that make and sell the MNCs
products.
4. Establishes foreign manufacturing facilities, but
control remains at the home office.

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A Look at Multinational
Corporations
The United Nations calculates there are
77,000 transnational corporations (TNCs)
in the world and they have 770,000
affiliates.
Most of the parent firms of the largest TNCs
are based in the developed economies of
the United States, Europe, and Japan.
The top 100 transnational firms operate, on
average, in 40 countries.

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How Transnational is a
Corporation?
Corporations vary in range of international
dimensions such as ratio of domestic to foreign
operations, the number of foreign countries
entered, etc.
No single measure can capture the definitive
meaning of multinational.
The transnationality index is one measure used
by the United Nations to rank corporations
based on the relative importance of their
domestic and foreign operations.
The economic and political clout of TNCs is not
defined solely by numbers on any dimension.
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Foreign Direct Investment

(FDI)
Foreign Direct Investment (FDI): Funds invested by
an MNC and one nation for starting, acquiring, or
expanding an enterprise in another nation.
Annual foes of FDI have increased dramatically,
rising from $202 billion in 1990 to $916 billion in 2005.
Three reasons corporations make foreign direct
investments:
To seek access to new markets
To grow beyond a small domestic market
To achieve cost and other competitive advantages
over competitors

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Figure 11.3: The

Distribution of FDI

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FDI in Less
Developed Countries
MNCs are for-profit entities and seek an adequate
return on the capital invested in LDCs.
These investments can be significant within local
economies.
Many LDCs have altered their trade and investment
policies become more attractive to MNCs.
Other elements in the international community have
moved from a hostile attitude toward MNCs to
embrace a new pragmatism about the promise of FDI.
The alien tort claims act has been used to bring civil
actions in the US courts against corporations for
violating international law anywhere in the world.
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Negative effects of FDI

Competition from a new foreign affiliate can
overwhelm local firms and come to monopolize the
domestic market.
MNCs have been criticized as for repatriating profits
back to home countries, so that local residents get
limited benefit from the MNCs presence.
The economic impact of multinational corporations is
often accompanied by social impacts, which can be
negative.
There have been lawsuits against corporations that
alleged human rights abuses, labor abuses, and
environmental crimes.

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International Codes
of Conduct
International Codes of Conduct: Aspirational
statements of principles, policies, and rules for
foreign operations that multinational corporations
voluntarily agree to follow.
The Sullivan Principles required multinational
corporations and South America to do business in a
nondiscriminatory way.
Code making exploded in the 1990s as a response
to the expanding activity MNCs.
Codes of conduct includes corporate codes, industry
codes, and many other international social
responsibility codes.
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Corporate Codes
Usually adopted in response to activists attacks,
critical review reports, or general concern for
maintaining an MMCs legitimacy.
Their contents promised behavior that overcomes
the charges of critics and so they very in focus.
Some codes contain a snowball clause, the
requirement that contractors use their power over
firms in their own supply chains.
Most companies reject rigorous monitoring by
outsiders simply check on themselves.

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Industry Codes
When an industry is besieged by critics, it
sometimes creates an industrywide code.
An unspoken advantage is the industrybacked organization that executes the
code will be lenient with member
companies.
Industry codes are attacked as loose
and relaxed compared with traditional
government regulation.
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Other Codes
The Caux Round Table Principles for Business
A Code of Ethics on International Business
for Christians, Muslims, and Jews
The business charter for sustainable
development
The OECD guidelines for multinational
enterprises
The Free Labor Association Workplace Code
of Conduct

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United Nations Global

Compact
A set of ten principals based on rights and
norms in international agreements made
under the UN auspices over the years.
The principles cover four areas: human
rights, labor standards, the environment, an
anticorruption.
Two central purposes:
To promote corporate responsibility and MNCs
To form cooperative networks of its participants
for solving the problems of economic globalization
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Concluding Observations
Making generalizations about MNCs
behavior is difficult.
MNCs are entities reacting to forces of
globalization along with governments,
NGOs, and international agencies.
The progressive community now has more
appreciation of the need to bring MNCs into
the full of corporation with governments and
NGOs to fight evils such as poverty, climate
warming, and terrorism.
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