McGraw-Hill/Irwin

Chapter 11 Multinational Corporations

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 11-2

The Coca-Cola Company Opening Case o The company has transformed itself from a single product 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 11-3

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 11-4

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 11-5

Figure 11.1 - Five Tiers of Internationalization 11-6

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 11-7

Figure 11.2 - The Dominance of the Largest Transnational Corporations 11-8

Table 11.1 - Three Top 10 Rankings 11-9

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 11-10

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 11-11

Table 11.2 – Calculating the Transnationality Index (TNI) for General Electric and Philips Electronics

11-12

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 11-13

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 11-14

Figure 11.6 – Where Foreign Direct Investment Flows 11-15

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 11-16

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 11-17

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 11-18

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 11-19

Negative effects of FDI o There have been lawsuits against corporations that alleged human rights abuses, labor abuses, and environmental crimes 11-20

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 11-21

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 11-22

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 11-23

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 11-24

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 11-25

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 11-26

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 11-27

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 11-28

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 11-29