MNC’s & FDI
What is MNC’s ?
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The multinational corporation (MNC) is the agent of international
production. (Sometimes the MNC is called a transnational
corporation or TNC.)
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International production is defined as “that production which is
located in one country but controlled by a multinational
corporation (MNC) based in another country”. (Cantwell, 1994).
Thus, an MNC is a corporation that carries out production activities
in more than one country. In particular, it controls the assets and
manages the production activities in one or more foreign countries.
To do this, a corporation based in the home country must own and
operate plants in one or more foreign host countries.
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Foreign Direct Investment
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To obtain plant and other production facilities in
a foreign countries, an MNC must invest. Thus
an MNC has to be a foreign investor. These
investment activities show up in the annual
statistics of the home country and the host
countries as “foreign direct investment”.
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Government regulation of MNCs as such is
carried out mainly through regulation of foreign
investment activities at the time the MNC seeks
to make a foreign investment.
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Foreign direct investment is the acquisition of
assets in which the foreigner has a controlling
interest.
Portfolio investment is the acquisition of assets
in which the foreign investor does not have a
controlling interest.
The US convention, followed by Australia and a
number of other countries, defines “foreign direct
investment” as ownership of 10 per cent or more
of the ordinary shares of voting stock in the
corporation. This known as the “10 per cent
rule”. It is a rule of thumb.
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Foreign direct investments may be divided into two
principal types :
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greenfield investments, i.e. the construction of new plant and
facilities
Mergers and acquisitions, i.e. the acquisition of foreign assets by
means of purchasing existing plants and facilities previously
operated by other corporations
In recent years, FDI is about equally divided between
these two forms
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There are other forms of cross-border investments, for
example,direct acquisition of plant and facilities of stateowned enterprises when these are privatised
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Joint ventures
Strategic alliances – these are agreements with other corporate
partners (either from the host economy or a foreign country) that
do not involve money transfers on the part of the foreign
partner(s)
Infrastructure build-own-operate-transfer (BOOT) agreements in
which a foreign partner builds and operates infrastructure
facilities for a limited period, with ownership and control
returning to the government of the host economy. Eg the CityLink
highway project in Melbourne.
Public-private partnerships (PPPs) where one or more of
the private partners are foreign investors.
FDI statistics are recorded in two
forms:
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Flow statistics. These are the annual values of
new foreign direct investment
Stock statistics. These are the accumulated
value of all past investments. Here one needs to
include the value of all of the earnings of the
foreign subsidiary or affiliate which are
reinvested in plant, facilities and other assets,
rather than being distributed as dividends to the
parent corporation(s).
Global distribution of FDI
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UNCTAD estimates that there are about 77,000
MNCs with about 770,000 foreign affiliates.
Slides on UNCTAD statistics
The World’s top 100 non-financial TNCs
Many of these have production activities in many
countries eg Royal Dutch/Shell has operations in
more than 130 countries
Transnationality indices for individual
corporations,
and aggregates for host economies
Modes of Entry into Foreign
Markets
When a corporation based in one country
wishes to enter or expand its corporate
sales in another country, there are
alternative modes of entry:
 exporting from the home country, i.e. the
production facilities remain in the home
country
 international production via FDI
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There are other ways
joint ventures, strategic alliances and
other agreements in which the parent
company is a partner in production but does
not have a controlling interest
 licensing agreements, franchising and other
contracts in which a foreign partner (s) or
franchisee is the producer
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Choice of Mode
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There is a large management literature on the
factors which determine the choice of mode.
This the subject matter of Business Strategy
courses.
As a part of this, there is a sub-literature on the
theory of FDI. There is no universally-agreed
theory of FDI. Obviously, the decision to enter a
foreign market by the mode of FDI is affected by
many things: commercial and sovereign risks,
technologies, market access, tax liabilities, etc.
Dunning’s OLI paradigm
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The basic rationale for all FDI is to increase or protect their
profitability, that is, to increase the capital value of the firm.
The most popular model is that of John Dunning. This is known as
the “eclectic” paradigm as it is a composite model.
The OLI paradigm argues that a corporation uses direct entry via
FDI as the preferred mode if it
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It has an Ownership Advantage, e.g. a patent or other intellectual
property, and
It has a Location Advantage in the host economy, eg large domestic
market or low production costs, and
An Internalisation Advantage, i.e. it is better to undertake production
itself
Such FDI will increase the capital value of the foreign-investing
corporation.
Other theories of FDI
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The Dunning model is an example of what are
sometimes called “asset-exploiting” theories.
There are other theories which emphasis “assetaugmenting” FDI. In contrast to asset-exploiting
strategies, these models emphasize that firms may
undertake FDI in order to acquire created assets such as
technology, brand names, distribution networks, etc
which other foreign firms have already build up.
We will not pursue further the theory of FDI as we are
chiefly interested in the role of government in permitting
or regulating international business
Are International Production and
Trade Complements or Substitute?
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We should not regard the modes as simple alternatives
as the relationships may be more complex.
These two modes of supply may be complements rather
than substitutes, i.e. an increase in FDI may lead to an
increase in trade in goods or vice versa. This can
happen in a number of ways. For example, establishing
a foreign affiliate may lead to new trade in parts,
components and intermediate and capital goods
between the parent investing corporation and the
affiliate.
In fact, there are complex links between the investing
and trading activities of a corporate group, eg global
production chains.
How Governments Regulate FDI
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National government regulate the entry and the production activities
of foreign investors (MNCs) in many ways:
1.
Restrictions on Market Access
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2.
Rights of establishment notification/screening estricted/closed/priority
sectors conditions eg joint ventures, minimum domestic
shareholding/maximum foreign shareholding
Investment protection
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Host country obligations
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3.
expropriation – circumstances, compensation
transfer and repatriation of funds
Intellectual property protection
source country actions
investment guarantees
Controls on the Movement of natural persons entry, residence and work
permits for foreign workers
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How Governments Regulate FDI Continued
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II National Treatment
domestic laws, regulations, policies
performance requirements – labour training, trade-related
requirements (TRIMS)
III FDI Incentives
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Most governments today have few controls on the exit of capital to
other countries, except for some attempts to regulate bribery and
corruption involving home country investors and host economy
governments and, in developing countries, foreign exchange limits
on foreign investments. Hence, most of the controls or restrictions
are imposed by the host country governments
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Views of MNCs
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Whereas 30 or 40 year ago many countries, Developed as well as Developing, were
suspicious of FDI and regulated it heavily, FDI has, especially since about 1985,
come to be regarded as a positive factor in the host economies. In particular, foreign
investors are seen today by economists and governments as agents of technology
transfer and business organisational improvements.
One should not fall into the opposite trap and regard all FDI as benign. One senior
executive of GM in the USA once famously remarked that “ What is good for GM is
good for the country.” This is palpably wrong. Host economies must guard against
anti-competitive behaviour, tax evasion, adverse effects of production on the
environment and other harmful effects of some MNC actions.
There has been a recent counter-movement among NGOs which is highly critical of
MNCs on particular issues such as
the need for codes relating to labor standards (“sweatshops”), corporate governance,
actions that affect the environment
attacks on biotechnology, eg.movements to ban GM technologies
criticisms of pharmaceutical corporations and patented drugseg compulsory
licensing in the WTO