THE IMPACT OF THE MULTINATIONAL ENTERPRISE

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THE IMPACT OF THE MULTINATIONAL ENTERPRISE
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Case Foreign Direct Investment in China

• During the 1990s, China has received much more
  FDI than any other LDC, second only to the U.S.
• China has not allowed FDI to enter freely. Each
  investment is examined by the Chinese Ministry of
  Foreign Trade and Economic Cooperation (MOFTEC).
• When considering production within China, a
  foreign company must first find a sponsoring
  Chinese organization
• FDI in China mostly market-seeking (85)
• Large population and increasing purchase power

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• In the period 1995 China is expected to spend
  over US I trillion dollars on infrastructure
  projects.
• Import restrictions major drive for FDI
• Resources labour, oil, coal.
• Motorola US 1.2 billion to manufacture
  semiconductors wafers, pagers, cellular phones,
  and other telecommunications products.
• Export Processing Zones (EPZs)

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• I - INTRODUCTION

Companies allocate resources among countries to
optimize their performance however, this
allocation is constrained and altered by
governmental perceptions of the impact of MNEs.
Through their choice of policies, governments
can both encourage and restrict FDI. The primary
criticism is that MNCs are inadequatedly
concerned about national societal interests
because of their global bases of operations The
rapid growth of MNEs has been controversial. In
fact, powerful pressure groups in both home and
host countries have pushed theur governments to
implement policies either restricting or
enhancing the movement of international business.
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• Criticisms
• a) MNEs are inadequately concerned about national
  societal interests because of their global bases
  of operation
• b) Sheer size of many of these companies
• Political Ideology
• Historically ideology toward FDI has ranged from
  a dogmatic stance that is hostile to all FDI at
  one extreme to an adherence to the
  noninterventionist principle of free market
  economics at the other.
• - The Radical View MNCs keep LDCs relatively
  backward and dependent on advanced capitalist
  nations for investments, jobs, and technology.
  They are not instruments of economic development.

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• - The Free Market View MNC is seen as an
  instrument for dispersing the production of goods
  and servicesto those locations around the globe
  where they can be produced most efficiently.
• - Pragmatic Nationalism The pragmatic
  nationalist view is that FDI has both benefits
  and costs.

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• II - EVALUATING THE IMPACT OF THE MNE

Trade-offs among constituencies to survive, a
company must satisfy different groups, often
referred to collectively as stakeholders.
Conflicting goals handling cross-national
controversies in a manner that will achieve
global business objectives. Management
decisions made in one country have repercussions
elsewhere - Locations of production, decision
making, and RD - Methods of acquisition and
operation - Markets to be served - Prices to
charge - Use of profits
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Trade-offs among Objectives The effects of an
MNEs activities may be simultaneously positive
for one national objective and negative for
another. Like Animals in a Zoo, multinationals
come in various shapes and sizes, perform
distinctive functions, behave differently, and
make their individual impacts on the
environment.
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III - ECONOMIC IMPACT OF THE MNE
Balance-of-Payments Effects
BP(m-m1) (x-x1) (c-c1) a) Net import
change (m-m1) to calculate we would need to know
how much would be imported in the absence of the
plant. b) Net export effect (x-x1) we must
make assumptions about the amount of these
exports that could have materialized had the
subsidiaries not been established.
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c) Net capital flow (c-c1) We need to take
into account short-term and long-term
impacts Home and host countries make policies to
try to improve short or long-term
effects -Home countries establish outflow
restrictions -Host countries impose repatriation
restrictions, asset-valuation controls, and
conversion to debt as opposed to equity.
Home-Country Losses -Jobs moving
overseas -Highly advanced technology transferred
overseas -Outsourcing of production puts downward
pressure on wages in the home country.
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Host-Country Gains -More optimal use of
production factors -Utilization of unemployed
resources -Upgrading of resource quality Host
Country Losses -Replace local Companies -Take
the best resources -Destroy local
entrepreneurship -Decrease local RD undertakings
-Foreign purchase of local companies
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• Circumstances under which FDI is most likely to
  have positive impact on the host country
• -FDI in LDCs tend to have more impact on growth
• -Degree of product sophistication
• -Access to resources
• -Negative impact on growth if FDI merely exploits
  cheap labor that otherwise would be substituting

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IV - POLITICAL AND LEGAL IMPACT OF THE MNE
Countries are concerned that MNEs are
-Foreign-Policy instruments of their
home-country government - Independent of any
government -Paws of their host-country
government Extraterritoriality Governments
apply their laws to companies foreign operations.
Ex Cuba Trade
Restrictions Trading with the Enemy Act

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• Antitrust Laws
• The U.S. government has acted against domestic
  firms foreign investments when there has been
  concern about possible harm to U.S. consumers.
• Key Sector Control
• Political Concerns include fear of
• a) Influence over or disruption of local politics
• b) Foreign control of sensitive sectors of the
  local economy

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Bribery Payments to government officials to
secure contracts In 1977, the U.S. passed the
Foreign Corrupt Practices Act (FCPA) which makes
certain payments to foreign officials
illegal However, payments to officials to
expedite their compliance with the law are legal.
For example, a US 10,000 payment of a customs
official to clear legally permissible merchandise
is legal. Other countries argue that
anticorruption laws might be seen as meddling in
other countriesaffairs.
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V - OPERATIONAL IMPACT OF INTERNATIONAL BUSINESS
ACTIVITIES
The relationship between MNEs and societies a)
Technology b) Perpetuation of neocolonial
dependence c) Introduction of superfluous
products d) MNEs avoid paying taxes e) National
labour interests are undermined because of
MNEsglobal activities.