Multinational Corporations Multinational Corporations This chapter Defines the

Multinational Corporations

Multinational Corporations This chapter: § Defines the multinational corporation (MNC). § Examines the use of foreign direct investment by multinational corporations. § Describes how various types of codes are used to guide corporate behavior.

The Coca-Cola Company Opening Case § Asa Candler formed the Coca-Cola Company in 1882. § The Coca-Cola Company today is the world’s largest manufacturer, distributor, and marketer of soft-drink concentrates and syrups. § 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. § Although the company has millions of satisfied customers in foreign lands it sometimes is confronted with violent critics who resent American influence. The Coca-Cola story illustrates the development, strategy, and unique problems of a large multinational corporation.

Multinational Corporation Defined § A multinational corporation is an entity headquartered in one country that does business in one or more foreign countries. § Many MNCs progress through the following stages: 1. Exports products to foreign countries. 2. Establishes sales organizations abroad. 3. Licenses use of patents and technology to foreign firms that make and sell the MNCs products. 4. Establishes foreign manufacturing facilities, but control remains at the home office.

A Look at Multinational Corporations § The United Nations calculates there are 77, 000 transnational corporations (TNCs) in the world and they have 770, 000 affiliates. § Most of the parent firms of the largest TNCs are based in the developed economies of the United States, Europe, and Japan. § The top 100 transnational firms operate, on average, in 40 countries.

How Transnational is a Corporation? § Corporations vary in range of international dimensions such as ratio of domestic to foreign operations, the number of foreign countries entered, etc. § No single measure can capture the definitive meaning of “multinational. ” § The transnationality index is one measure used by the United Nations to rank corporations based on the relative importance of their domestic and foreign operations. § The economic and political clout of TNCs is not defined solely by numbers on any dimension.

Foreign Direct Investment (FDI) § Foreign Direct Investment (FDI): Funds invested by an MNC and one nation for starting, acquiring, or expanding an enterprise in another nation. § Annual foes of FDI have increased dramatically, rising from $202 billion in 1990 to $916 billion in 2005. § Three reasons corporations make foreign direct investments: § To seek access to new markets § To grow beyond a small domestic market § To achieve cost and other competitive advantages over competitors

FDI in Less Developed Countries § MNCs are for-profit entities and seek an adequate return on the capital invested in LDCs. § These investments can be significant within local economies. § Many LDCs have altered their trade and investment policies become more attractive to MNCs. § Other elements in the international community have moved from a hostile attitude toward MNCs to embrace a new pragmatism about the promise of FDI. § The alien tort claims act has been used to bring civil actions in the US courts against corporations for violating international law anywhere in the world.

Negative effects of FDI § Competition from a new foreign affiliate can overwhelm local firms and come to monopolize the domestic market. § MNCs have been criticized as for repatriating profits back to home countries, so that local residents get limited benefit from the MNCs’ presence. § The economic impact of multinational corporations is often accompanied by social impacts, which can be negative. § There have been lawsuits against corporations that alleged human rights abuses, labor abuses, and environmental crimes. Mc. Graw-Hill/Irwin © 2008 The Mc. Graw-Hill Companies, Inc. All rights reserved

International Codes of Conduct § International Codes of Conduct: Aspirational statements of principles, policies, and rules foreign operations that multinational corporations voluntarily agree to follow. § The Sullivan Principles required multinational corporations and South America to do business in a nondiscriminatory way. § Code making exploded in the 1990 s as a response to the expanding activity MNCs. § Codes of conduct includes corporate codes, industry codes, and many other international social responsibility codes.

Corporate Codes § Usually adopted in response to activists attacks, critical review reports, or general concern for maintaining an MMC’s legitimacy. § Their contents promised behavior that overcomes the charges of critics and so they very in focus. § Some codes contain a snowball clause, the requirement that contractors use their power over firms in their own supply chains. § Most companies reject rigorous monitoring by outsiders simply check on themselves.

Industry Codes § When an industry is besieged by critics, it sometimes creates an industrywide code. § An unspoken advantage is the industry-backed organization that executes the code will be lenient with member companies. § Industry codes are attacked as loose and relaxed compared with traditional government regulation. Mc. Graw-Hill/Irwin © 2008 The Mc. Graw-Hill Companies, Inc. All rights reserved

Other Codes § The Caux Round Table Principles for Business § A Code of Ethics on International Business for Christians, Muslims, and Jews § The business charter for sustainable development § The OECD guidelines for multinational enterprises § The Free Labor Association Workplace Code of Conduct

United Nations Global Compact § A set of ten principals based on rights and norms in international agreements made under the UN auspices over the years. § The principles cover four areas: human rights, labor standards, the environment, an anticorruption. § Two central purposes: § To promote corporate responsibility and MNCs § To form cooperative networks of its participants for solving the problems of economic globalization

Concluding Observations § Making generalizations about MNCs behavior is difficult. § MNCs are entities reacting to forces of globalization along with governments, NGOs, and international agencies. § 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.