Chapter 11
Multinational
Corporations
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
The Coca-Cola Company Opening Case
o Asa Candler formed the Coca-Cola Company in 1882
o The Coca-Cola Company today is the world’s largest
manufacturer, distributor, and marketer of soft-drink
concentrates and syrups
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The Coca-Cola Company Opening Case
o 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
o Although the company has millions of satisfied
customers in foreign lands it sometimes is confronted
with violent critics who resent American influence
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The Multinational Corporation
o Multinational corporation: An entity headquartered
in one country that does business in one or more
foreign countries
o Many MNCs progress through the following stages:
o Export sales to foreign countries
o Establish foreign sales offices
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The Multinational Corporation
o License franchises, brands, the use of patents, or
technology to foreign firms that make or sell the
MNC’s products
o Buy or create facilities in another country for
producing in local markets
o Practice global production in which a value chain
spans two or more countries
o Liberalization: The economic policy of lowering
tariffs and other barriers to encourage trade and
investment
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Figure 11.1 - Five Tiers of
Internationalization
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A Look at Multinational Corporations
o The United Nations calculated that in 2008 there were
82,000 transnational corporations (TNCs)
o Most of the parent firms of the largest TNCs are
based in the developed economies of the United
States, Europe, and Japan
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Figure 11.2 - The Dominance of the Largest
Transnational Corporations
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Table 11.1 - Three Top 10 Rankings
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How Transnational is a Corporation?
o Corporations vary in range of international
dimensions
o Ratio of domestic to foreign operations
o The number of foreign countries entered
o The size of foreign direct investment
o The geographic span of operations
o The extent of global integration in the production
chain
o The extent of national diversity among shareholders,
employees, managers, and directors
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How Transnational is a Corporation?
o Transnationality index (TNI): The average of three
ratios: foreign assets to total assets, foreign sales to
total sales, and foreign employment to total
employment
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Table 11.2 – Calculating the Transnationality Index
(TNI) for General Electric and Philips Electronics
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Breaking the Bonds of Country:
Weatherford International
o Weatherford makes machinery used for oil and
natural gas drilling
o Provides services to energy companies ranging from
flushing pipes on drill rigs to cooking meals for crews
o It was founded in 1972 in Texas and until the 1990s it
operated in the United States
o It decided to expand into oil fields around the world
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Foreign Direct Investment (FDI)
o Foreign direct investment: Funds invested by a
parent MNC for starting, acquiring, or expanding an
affiliate in a foreign nation
o Portfolio investment: The limited, speculative
purchase of stocks and bonds in a foreign company
by individuals or equity funds
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Figure 11.6 – Where Foreign Direct
Investment Flows
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Foreign Direct Investment (FDI)
o Three reasons corporations make foreign direct
investments:
o To seek access to new markets
o To grow beyond a small domestic market
o To create efficiencies and lower costs by moving
production across borders
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FDI in Less Developed Countries
o MNCs are for-profit entities and seek an adequate
return on the capital invested in LDCs
o These investments can be significant within local
economies
o Many LDCs have altered their trade and investment
policies to become more attractive to MNCs
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FDI in Less Developed Countries
o Other elements in the international community have
moved from a hostile attitude toward MNCs to
embrace a new pragmatism about the promise of FDI
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Negative effects of FDI
o Competition from a new foreign affiliate can
overwhelm local firms and come to monopolize the
domestic market
o MNCs have been criticized as for repatriating profits
back to home countries, so that local residents get
limited benefit from the MNCs’ presence
o The economic impact of multinational corporations is
accompanied by social impacts, which can be
negative
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Negative effects of FDI
o There have been lawsuits against corporations that
alleged human rights abuses, labor abuses, and
environmental crimes
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International Codes of Conduct
o International codes of conduct: Voluntary,
aspirational statements by MNCs that set forth
standards for foreign operations
o Sullivan Principles: A 1977 code of conduct that
required multinational corporations in South Africa to
do business in a nondiscriminatory way
o Code making exploded in the 1990s as a response to
expanding FDI
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The OECD Guidelines for Multinational
Enterprises
o The Organisation for Economic Co-operation and
Development (OECD) is a group of 33 nations that
works to further economic growth by expanding trade
o The Guidelines for Multinational Enterprises are
“recommendations” from OECD governments to
multinational corporations that operate within or from
their borders
o The Guidelines are an extensive, detailed code of
conduct
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How the OECD Guidelines Work
o Each government that joins in the guidelines sets up
an office, called a “national contact point”
o Any individual or group can file a complaint at one of
these offices alleging violations by a corporation
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How the OECD Guidelines Work
o The office then goes through a three-step process
o It assesses the complaint
o If there is merit, it offers to mediate the dispute
between the parties
o If mediation is rejected or fails, it can issue a “final
statement” about the matter, including
recommendations to the disputants
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The United Nations Global Compact
o A set of ten principals based on rights and norms in
international agreements made under the UN auspices
over the years
o The principles cover four areas: human rights, labor
standards, the environment, and anti-corruption
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The United Nations Global Compact
o Communication on progress: The required annual
report of a company participating in the Global
Compact
o It must have three elements:
o The top executive of the company must endorse the
Global Compact
o The company describes its actions
o It must measure results using appropriate yardsticks
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Criticism of the Global Compact
o Bluewashing: The act of a corporation cloaking its
lack of social responsibility by insincere membership
in the UN Global Compact
o A perceived shortcoming of both the OECD
Guidelines and the Global Compact is the lack of a
hard fist behind their normative codes
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The Alien Tort Claims Act
o Alien Tort Claims Act: A 1789 law permitting
foreign citizens to litigate, in a federal court,
wrongful actions occurring anywhere in the world
that violate international law or U.S. treaties
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Concluding Observations
o Making generalizations about MNCs behavior is
difficult
o MNCs are entities reacting to forces of globalization
along with governments, NGOs, and international
agencies
o 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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