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The Economics of Multinational Corporations

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DFI involves the transfer of a package of assets or intermediate products which ... (2) Balance of payments. Direct flow of capital ... (3) Technology Transfer ... – PowerPoint PPT presentation

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Title: The Economics of Multinational Corporations


1
The Economics of Multinational Corporations
  • Definitions
  • Main types of foreign production- resource
    seekers, market seekers, efficiency seekers,
    strategic asset seekers
  • Advantages and Disadvantages of MNC investment

2
Definitions
  • Multinational enterprise is an enterprise that
    engages in direct foreign investment and owns or
    controls value adding activities.
  • It organises and co-ordinates multiple value
    adding activities across national boundaries.
  • Direct Foreign Investment (DFI) and Foreign
    Portfolio Investment (FPI)

3
Definitions
  • DFI involves the transfer of a package of assets
    or intermediate products which includes money
    capital, management and organisational
    enterprise, technology, entrepreneurship and
    access to markets across national boundaries.
  • FPI involves only the transfer of money capital.

4
Main Types of foreign production
  • Resource seekers - acquire specific resources at
    a lower real cost
  • (1) physical resources
  • (2) cheap labour
  • (3) technological capability, management,
    marketing expertise and organisational skills

5
Main...
  • Market seekers - supply goods or services to new
    markets
  • (1) main suppliers or customers have set up
    foreign producing facilities
  • (2) products need to be adapted to local tastes
    or needs and to indigenous resources and
    capabilities

6
Main.
  • (3) production and transaction cost are less
    than supplying it from a distance
  • (4) part of its global production and marketing
    strategy
  • (5) liberalising policy framework

7
Main...
  • Efficiency seekers - rationalise the structure of
    established resource based or market seeking
    investment in such a way that the investing
    company can gain from the common governance of
    geographically dispersed activities.
  • (1) traditional factor endowments in different
    countries

8
Main..
  • (2) economies of scale and scope, differences in
    consumer tastes and supply capabilities
  • Strategic asset seekers - acquiring assets of
    foreign corporations and to promote long-term
    strategic objectives
  • More than exploiting specific cost or marketing
    advantages, expanding the existing portfolio
    assets.

9
Advantages and Disadvantages of MNC investment
  • Advantages
  • (1) Employment
  • Investment-more economic activity-employment
  • Direct (new production facility) and Indirect
    (impacts that the MNC has on the local economy)

10
Advan.
  • (2) Balance of payments
  • Direct flow of capital
  • Result in both import substitution and export
    promotion
  • (3) Technology Transfer
  • Benefits gained by domestic producers from the
    technology imported by the MNC.

11
Advan..
  • Domestic producers copy the production
    technology and working practices of MNC.
  • Technology might be transferred through training
    of workers
  • (4) Taxation
  • Contribution to Public finances

12
Advant..
  • (5) Gap theories
  • Savings - foreign exchanges
  • Disadvantages
  • (1) Uncertainty
  • foot loose corporations
  • - ability to close down and shift production

13
Advant.
  • (2) Control
  • MNC can shift production locations not only
    gives it economic flexibility, but enables it to
    exert various controls over its host also.
  • (3) Transfer pricing

14
Advant..
  • - enables MNCs to reduce its profits in
    countries with high rates of profit tax and
    increase them in countries with low rates of
    profit tax.
  • - manipulating the internal price structure
  • (4) The environment
  • -natural resources are extracted or used
    irrationally

15
  • (5) Drive out domestic producers
  • (6) Repatriation of profits
  • Combined action, very difficult !!!!
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