The Economics of Multinational Corporations

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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

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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)

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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.

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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

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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

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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

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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

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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.

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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)

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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.

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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

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Advant..

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

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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

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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

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