2- globalization and mncs 2
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After finishing this chapter, you will be
able to explain:
The operations and global expansions ofMultinational Corporations (MNCs) Different Activities of MNCsThe relationship between MNCs and
Globalization How MNC activities can create positive
changes as well as tensions in a societyThe social responsibilities of MNCs
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A Multinational Corporation (MNC) is anybusiness that owns and controls productionor service facilities in two or more countries.Examples include Ford, Wal-Mart, Cemex,Nokia, Sony, etc.
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The overwhelming U.S. presence has been eclipsed by theemergence of large non-US multinationals. Whereas US
companies used to represent 48.5% of the worlds largestMNCs in 1973, this share was down to 26% by the year2000, while the share of Japanese multinationals increasedfrom 3.5% to 17% in the same period.
There has been a sharp increase in the participation of
medium and small MNCs in global business activities
MNCs from developing countries e.g., Whampoa of HongKong (part of China), Petroleos de Venezuela, Cemex ofMexico are now among the top 100 largest MNCs .
After the end of the Cold War in 1989, MNCs have investedheavily in China and in former socialist countries of SovietUnion and East Europe. It is expected that in the comingyears these countries would have their own MNCs thatwould expand to other countries.
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Category IndustryUS$ trillion
Shares of Global GDP
Fully Globalized Industries
1. Physical commoditiesPetroleum, mineral ores, timber
2.0
Scale-driven business goods and servicesAircraft engines, construction equipment, semiconductors, airframes, shipping, refineries, machine tools.
1.0
Manufactured commoditiesRefined petroleum products, aluminum, specialty steel, bulk pharmaceuticals, pulp, specialty chemicals
2.8
Total shares of global GDP 5.8 trillion 23%
Semi-Globalized Industries
Labor skill-/productivity-driven consumer goodsConsumer electronics, personal computers, cameras, automobiles, televisions
0.9
5. Brandable, largely deregulated consumer goodsSoft drinks, shoes, luxury goods, pharmaceuticals, movie production 0.5
6. Professional business servicesInvestment banking, legal services, accounting services, consulting services
2.5
Total shares of global GDP 3.9 trillion 15%
Early Stage Globalized Industries
7. Hard to brand globally, largely deregulated consumer goods and services such as food, personalfinancial services, television production, retail distribution channels6.3
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Companies go abroad for two mainreasons: For Market Seeking
For Resource Seeking Lately, companies are also venturing into
other markets for Knowledge Seeking
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The recent trend of outsourcing back office work in other countries has createda lot of
uproar in US politics. Some questions that re frequently asked are:
Can or will the US MNCs continue to innovate and increase productivity inorder to keep the supply of higher paid jobs in the United States?
Where will the US comparative advantages be in the future?
How the trends toward outsourcing affect the living standard of theAmerican middle class?
How will the insecurity, stress and impoverishment afflicting the core ofAmerican society-its influential middle class, reflect on its political choices?
What would be the impact of current changes on the world economy andwhat implications will they have on the rest of the world, especially thedeveloping world?
How would the on-going socio-economic upheaval affect the relationsbetween the US and the developing countries?
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Rank MNCs/Countries Revenue/GDP
(In US$ Billion)
1 Wal-Mart 288
2 BP 285
3 Columbia 281
4 Bangladesh 275
5 Exxon-Mobil 271
6 Royal Dutch Shell 267
7 Austria 256
8 Sweden
9 Switzerland 251
10 General Motors 194
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Rank Companies Market values(in billion $)
1 Microsoft 264
2 GE 259
3 Exxon Mobil 241
4 Wal-Mart 234
5 Pfizer 195
6 Citigroup 184
7 Johnson & Johnson 170
8 Royal Dutch/Shell 149
9 BP 144
10 IBM 139
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Rank Companies Value added
(in US$ billion)
Country with compatible size
measured by value added
1 Exxon Mobil 63
62 Pakistan
2 GM 56
53 Peru
3 Ford Motors 44
4 Daimler Chrysler 42
41 Nigeria
5 GE 39
6 Toyota 38
38 Kuwait
7 Royal Dutch/Shell 36 He et al.
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MNCsHQ in USA
Sub-1
Sub-1
Sub-1
Funds: stocks, bonds
Intra-firm
Arms length trade
world export: $ . T ($ . T, )1111 11 11 1111
1111MNCs foreign local sales: $ T11
($ T, )1 1 1 1 1 1
Intra-firm trade: % of world trade11
FDI inflow: $ B ($ B, )1111 111 111 1111
by ,11111MNCs and , affiliates (sub.)11 111 1
(UNCTAD, & )11111111
Money: , , , $
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Growth of FDI, World Trade and World OutputIndex= in1111111
1
111
111
111
111
111
111
11 11 11 11 11 11 11 11 11 111111
World Exports
World GDP
World FDI
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MNC as Knowledge Seeker:
A Three -Stage Model
Initial Motivation:
Search for cheaperLabors, raw materials
Second Stage:
Going After Consumer Market
Tape into emerging
consumer market
Third Stage:
Search for emerging
Knowledge & ideas
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Fig. . Estimated Percentage of11 FCCs and USCCs
Reporting No Tax Liability
1
11
11
11
11
11
11
11
1111 1111 1111 1111 1111
FCC
USCC
Large FCC
Large USCC
Tax Year
%
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He et al.
Mergers and Acquisitions (M&A) have become quite
common in the last few decades. Although some people
are critical of M&As of local firms by foreign firms, in the
long run, M&As is helpful at the global level because they:
Rationalize the limited resources to reduce duplication
and combine limited resources which will increase
firms speed and effectiveness to react to global
business opportunity.
May bring efficiency and higher productivity for firms
overall global operation.
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However, in the short term, M&A maybe problematic, especially at the locallevel, for several reasons:
They do not add new capital and capacity toan economy but simply reflect a change ofownership. They do not create job, they arerather often accompanied by massive layoffsand the closing down of plants.
They reduce competition and increaseindustry concentration, further reducing local
job creation.
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Ratio of CEO to Worker's Pay
111
111
11
1
111
111
111
111
111
111
1111 1111 1111 1111
Year
Ratio
Ratio of CEO to Worker's Pay
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U.S. CEOs Pay versus Workers Pay
(Average hourly worker to CEO pay ratios)
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Ratio of Workers' Pay
1
.11
1
.11
1
.111
.11
1
.11
1
Australia
Can
ada
Finlan
d
Germany
Irela
ndItaly
Swed
enU
.K. US
Rati
mid- s11 mid- s11
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GDP per Capita in Poor vs. Rich nations(in constant US$)1111
11 111
11111
11111
1
1111
11111
11111
11111
11111
11111
-111111 -111111
Poorest Countris11 Richest Countries11
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In assessing the impact of market-seeking activities ofMNCs,
we need to address the following questions:
Are MNC marketing practices and sustainable
development compatible or are they mutuallyexclusive?
What are the consequences of global consumerism andmaterialism on our natural environment?
What risks, dangers and benefits arise when MNCsfrom advanced economies market an identical range ofproducts in the developed world and in less developedmarkets?
What are the cultural impacts of global marketing?
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Socially beneficial goods or services include public education
programs, recycling programs, and public health programs. Sociallybeneficial products are culturally or socially defined and vary with acountrys conditions. For example, consumption of fatty or oil-richfoods may be considered as harmful in many developed countrieswhere too much of oil and fat is consumed. However, in someAfrican countries where the diet is poor in fats, consumption ofthese foods may be, in fact, quite desirable.
Products targeted at a specific segment of a market, such asdisposable diapers, disposable dishes or other time-saving goods.Although these products are highly beneficial for working mothers,they have a negative impact on the environment.
Products that could be harmful if abused, such as alcoholicbeverages or firearms. Buyers often do not have a good knowledgeof the potential dangers of these goods. Sellers, on the other hand,are aware, or should be aware of the risks and consequences of themisuse of these products. For example, marketing powdered milk incountries where water is not safe to drink, can endanger the lives ofconsumers.
Inherently harmful products, such as cigarettes or opium.
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Sophisticated consumers are those who areeducated and have developed adequate defense andjudgment to deflect high-pressure promotiontechniques.
At-risk consumers include two groups: sophisticated
but psychologically fragile consumers who may fallvictim to compulsive behaviors or addictions; andsocially or economically disadvantaged and lesseducated consumers who have little or no access toconsumer information.
Vulnerable consumers are illiterates, as far asprocessing marketing information is concerned.Examples include children across the world andadults, mostly in developing or newly emergingmarkets that have yet to develop marketplacesophistication.
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Structural market failure Structural market failure results from the
actions of the participants in the market
such as monopolies actions that hinderthe efficiency of the market mechanism.
Endemic market failure Endemic market failures are not due to
anyones actions. They result from theintrinsic attributes of some goods andservices as well as the characteristics ofthe market.
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The first view holds that under conditions of endemic marketfailure, MNCs deserve, at least partially, the blame for the resultingproblems.
The second view argues that MNCs should be held responsible onlywhen undesirable outcomes are the consequences of their own
activities, in other words, when structural market failures exist.
The third view considers MNCs should not be targeted for criticismfor issues that are beyond their control. Indeed, marketdysfunctions and its resulting problems are due to external factorsand inadequate policies, social institutions, the immaturity of civicvalues, and the business environment.
The fourth view points the social consequences of technology andthe responsibilities of MNCs as creators and users of technology.Here the MNC is neither culprit nor victim, but rather an importantplayer that has responsibilities commensurate with its role in thespreading of technology.
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A threat to national sovereignty anddemocratic accountability
Accused of neutralizing anything thatstands in the way of profits
MNCs accentuate social inequalities
MNCs destroy jobs
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Despite the criticisms against the MNCs, weneed to remember that:
MNCs are engines of growth
MNCs are social institutions In addition to being profit agents, MNCs can also
be good corporate citizens.
Therefore, MNC should not be destroyed,
but rather channeled and harnessed forthe benefit of the global human society.
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Some people argue that MNCs Should HaveSocialResponsibilities, because: Firms activities occur within different cultural,
social, and historical contexts. Firms perform as a central hub of economic
activities that links consumers, suppliers,manufacturers, labor, managers, governments,and the natural environment.
Firms are governed by an invisible socialcontract.
Firms have no choice but to confront cultural,social, and ethical issues. Corporations are social institutions. If they do
not serve society, they have no businessexisting.
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Some people argue that MNCs Should notbe burdened with Social Responsibilities,because
Firms only social responsibility is to pursue profitwherever possible.
The free enterprise has made wealth creation possible.So far, no other system has duplicated this success. If we make firms socially responsible, it would be bad
for both business and poor communities. Social responsibilities reduce shareholder returns and
distract business from what they can do best.
Making firms socially responsible will have the oppositeeffect of what is intended, e.g., many companies arebeginning to feel that it is better to pull their factoriesout of poor countries rather than risk being seenoperating below accepted standards or abusing foreignlabor.
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