CHAPTER 11

THE IMPACT OF THE MULTINATIONAL ENTERPRISE


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
- 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)



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.

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.

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

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 R&D
- Methods of acquisition and operation
- Markets to be served
- Prices to charge
- Use of profits

Trade-offs among Objectives

The effects of an MNE's 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."

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.

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.

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 R&D undertakings
- Foreign purchase of local companies


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

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"
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


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 countries'affairs.



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 MNEs'global activities.


Chapter 5

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