1. Multinational Corporations
in the Global Economy
International
Economics - DBA 722(B)
Claro G. Ganac

2. GLOBALIZATION IN THE
WORLD ECONOMY
 Globalization is the opening up of domestic
economies to international trade and commerce.
 Globalization has been expanding since the
emergence of trans-national trade because of the
liberalization of domestic markets.
 Specifically, it has accelerated over the last 20–30
years under the framework of General Agreement
on Tariffs and Trade (GATT) and World Trade
Organization (WTO)

3. GLOBALIZATION IN THE
WORLD ECONOMY
Globalization is the increasing economic integration
and interdependence of national, regional and local
economies across the world through an intensification
of cross-border movement of:
 goods,
 services,
 technologies and
 capital.

4. GLOBALIZATION IN THE
WORLD ECONOMY
 Global Economy
Resources, markets and
competition are worldwide in
scope.
 Globalization
The process of growing
interdependence among
elements of the global economy.
 Global Sourcing
Firms purchase products and
services from around the world
for local use.

5. MULTINATIONAL
COMPANIES (MNC)
 Multinational
corporations (MNC)
are organizations
that own or control
overseas companies
or production or
service facilities in
one or more
countries other than
the home country.

6. MULTINATIONAL
COMPANIES (MNC)

7. MULTINATIONAL
COMPANIES (MNC)
 For example, when a corporation is
registered and has operations in more than
one country or in more than one country, it
may be attributed as MNC.
 Usually, it is a large corporation which both
produces and sells goods or services in
various countries.
 It can also be referred to as an international
corporation, or a "transnational corporation“
which usually connotes headquarter
operations in more than one country.

8. FOREIGN
INVESTMENTS

9. FOREIGN INVESTMENTS
 Foreign Investment (also called
foreign direct investment or FDI)
is the entry of capital and/or
companies into a business
enterprise in one country by an
entity based in another country.
 FDI makes possible the
movement and inflow of
international factors of production
around the world. These factors
basically include capital,
manpower and technology.

10. FOREIGN INVESTMENTS
 FDI is distinguished
from Portfolio Investment, a
passive investment in securities
in a host country (as
stocks and bonds).
 The country of origin or form of
the investment does not impact
the conceptual definition of FDI.
 The investment may be either
"inorganic" by buying a company
or "organic" by expanding
operations in the host country.

11. MNC AND FOREIGN
INVESTMENTS
The economist John Dunning has identified four
primary reasons for corporate foreign investments
(Global Capitalism, FDI and Competitiveness, 2002):
Market seeking: Firms go overseas to expand
markets and find new buyers. A company may take
advantage of a unique or superior product in foreign
markets.
Another motivation is when producers have a
saturated home market, or when they believe
investments overseas will bring higher returns.

12. MNC AND FOREIGN
INVESTMENTS
 Resource seeking: Put simply,
a company may find it cheaper
to produce its product in a
foreign subsidiary- for the
purpose of selling it either at
home or in foreign markets.
The foreign facility may be able
to obtain superior or less costly
access to production (land,
labor, capital, and natural
resources) than at home.

13. MNC AND FOREIGN
INVESTMENTS
 Strategic asset seeking: MNCs
may seek to invest in other
companies abroad to help build
strategic assets, such as a global
brand, distribution networks or new
technology (e.g. Lenovo, Heinz).
This may involve the establishment
of joint venture or partnerships with
other local or foreign firms that
specialize in certain aspects of
production or distribution.

14. MNC AND FOREIGN
INVESTMENTS
 Efficiency seeking: Multinational companies
may also seek to enter new overseas markets in
response to broad developments.
For example, a new free trade agreement among
a group of countries (such as AFTA) may
suddenly make entry into one country to make
access to other countries more available, or
where there is lower tariff rates within the group.
(Bayad Center)
Fluctuations in exchange rates may also change
the profit calculations of a firm, leading the firm to
shift the allocation of its resources.

15. POSITIVE IMPACT OF
FOREIGN INVESTMENTS
 International investment can be vital for developing
countries.
 MNCs produce jobs and provide downstream
opportunities for ancillary businesses (such as
construction, food, housing for expats, etc.).
 MNC factories can produce economic multiplier
effects due to “backward linkages” with suppliers
that provide local content and materials to the
production facility.

16. FOREIGN INVESTMENT
FORMS
 Exporting. Local products are sold abroad
 Importing. The process of acquiring products abroad
and selling them in domestic markets.
 Licensing. one firm pays a fee for rights to make or sell
another company’s products.
 Franchising. a firm pays a fee for rights to use another
company’s name and operating methods.

17. FOREIGN INVESTMENT
FORMS
 Joint Venture. A firm operates in a foreign country
through co-ownership with local parties.
 Strategic Alliance. Long-term partnership with local
entity to develop the local market
 Foreign Subsidiary. A local operation completely
owned by the foreign firm.

18. POSITIVE IMPACT OF
FOREIGN INVESTMENTS
For example, when a firm decides to build a plant
that assembles cars, the firm is also likely to
encourage the development of new local industries
that can supply it with electric motors, fans, and
other parts for its production.
 Thus, MNCs can significantly increase GNP/GDP in
the host countries.
 Developing countries have both the demand for a
good or service, and the labor and natural resources
to supply it. But they lack the knowledge or access
to capital necessary for local production.

19. POSITIVE IMPACT OF
FOREIGN INVESTMENTS
 Large enterprises in the
developed economies (like the
US) have excess capital or may
raise funds in their home
markets to expand overseas.
 Technology transfer: When
companies build plants, they
bring the same production
techniques and technologies with
them that they use in domestic
production. This helps raise the
skill level of the workers
employed in the new plants.

20. POSITIVE IMPACT OF
FOREIGN INVESTMENTS
 Proponents of liberalization point out that essentially
no developing country has managed to achieve
rapid and sustained growth, successfully raising the
prosperity levels, without increasing their openness
to foreign investment (Blustein, 2001).
 Productivity spillovers: Productivity spillovers can
spur growth and raise productivity in developing
economies. For example ”just in time”
manufacturing from Japanese MNCs allowed firms
in the Philippines to learn the technique. This has
reduced the need for warehousing and higher parts
and materials inventories. This innovation has
helped improve Philippine productivity.

21. POSITIVE IMPACT OF
FOREIGN INVESTMENTS
 Productivity spillovers: Productivity spillovers can
spur growth and raise productivity in developing
economies. For example ”just in time”
manufacturing from Japanese MNCs allowed firms
in the Philippines to learn the technique.
This innovation has helped improve Philippine
productivity.
 Increased competitiveness: Competition from
foreign corporations often encourages domestic
companies to become more efficient and globally
competitive.

22. POSITIVE IMPACT OF
FOREIGN INVESTMENTS
 Increased outward orientation:
Multinationals are more outward
market oriented and often seek
out new foreign markets.
In turn, this outward orientation
often helps domestic firms
become more aware of
international opportunities. This
was what happened to South
Korea, which is now a major
producer of consumer
electronics and automobiles (the
technology came from Japan)

23. NEGATIVE ISSUES ABOUT
FOREIGN INVESTMENTS
 Sweatshops
• Employ workers at very low
wages, for long hours.
• Poor working conditions.
 Child labor -- The full-time
employment of children.
 Sustainable Development
• Environmental issues
• Operations should meet the
needs of the present without
hurting future generations.
Foxconn (Apple's main contractors)
recentlyr aised wages by up to 25%
after a spate of suicides last year
and reports of long hours for the
hundreds of thousands of staff.

24. NEGATIVE ISSUES ABOUT
FOREIGN INVESTMENTS
 Protectionism. Liberalization have often earned
the ire of some quarters like farmers who
pressure the government to put up tariff barriers
against imported commodities (e.g. sugar) that
are also produced locally. Retail trade is also
restricted to foreign investors in the Ph.
 Corruption. There is perception of illegal
practices and bribery of local officials to give
preferential treatment to investors especially for
bidded large-scale projects.

25. MYTHS AND REALITIES
Myth: It is only the Least Developed Countries or
Developing countries that receive foreign
investments.
Reality: Until 2012, the US has been the biggest
recipient of FDI in the world. Chinahas increased
considerably in the last decade, reaching $59.1 billion in
the first six months of 2012, making China the largest
recipient of foreign direct investment after the US, which
had $57.4 billion of FDI. In 2013 the FDI flow into China
was $64.1 billion, resulting in a 34.7% market share of
FDI into the Asia-Pacific region. By contrast, FDI out of
China in 2013 was $18.97 billion, 10.7% of the Asia-
Pacific share.

26. MYTHS AND REALITIES
Myth: The “US” has a huge trade deficit with
“China”. In 2004, this amounted to $162 billion.
Reality: There are two basic problems with this
statement: 1) almost half of the “trade deficit” is
accounted for by US multinational corporations (MNC)
in China exporting back to their “home market”.
2) What is called “China” and the “US” is a fiction as the
commercial transaction takes place within a global
supply chain network. China is just a production base
and MNCs such as Apple exports these China-made
products back to the US and the rest of the world.

27. MYTHS AND REALITIES
Myth: It is factor endowment (natural resources,
low labor wages) that determine the economic
growth of a country.
Reality: Michael Porter in his book The Competitive
Advantage of Nations which was supported by cross-sectional
empirical study showed that it is people, the
entrepreneurial and management expertise and capital
that determine the success of a country in achieving
economic performance.

28. MYTHS AND REALITIES
Myth: The most popular myth is that held by ultra-nationalists
who depict MNCs and foreign investment as
capitalistic imperialism. They believe that these
purposely keep Third World countries poor, so that the
MNCs can have ready access to cheap labor.
Reality: The experience of China and the earlier Asian
tigers (Hong Kong, Singapore, Malaysia and Thailand) in
the 1980s and 1990s has shown that export-oriented
foreign investment policies can benefit the host countries
to the extent of accelerating economic growth, GDP and
incomes of the population.

29. MYTHS AND REALITIES
Reality: Simply stated, historians and others have
shown, rather convincingly, that economic expansion—
the search for foreign markets for U.S. surplus
agricultural and industrial production—has played a key
role in American foreign policy, particularly after
President Woodrow Wilson (1913–1921) enunciated his
concept of a new world order predicated on classical
liberal and capitalist principles.
http://www.americanforeignrelations.com/E-N/Multinational-Corporations.

30. FOREIGN INVESTMENT
IN THE PHILIPPINES

31. FOREIGN INVESTMENTS
POLICY IN THE PHILIPPINES
 It is the policy of the State to attract, promote, and
welcome productive investments from foreign
individuals, partnerships, corporations, and
governments.
 The activities should contribute to industrialization
and socioeconomic development to the extent that
foreign investment is allowed in such activity by the
Constitution and relevant laws.
 The law that governs the participation of foreign
entities in economic and commercial activities in the
Philippines is Republic Act No. 7042, as amended,
otherwise known as the Foreign Investments Act of
1991 (“FIA”).

32. FOREIGN INVESTMENTS
POLICY IN THE PHILIPPINES

33. FOREIGN INVESTMENTS
POLICY IN THE PHILIPPINES
 It is supported by the
Omnibus Investments
Code of 1987, also
known as Executive
Order No. 226,
contains the current
investment policies of
the Philippines. The
government
encourages foreign
and domestic
investments.

34. INCENTIVES FOR FOREIGN
INVESTORS
 Foreign-owned
enterprises can register
under the Board of
Investments (BOI) to avail
of fiscal incentives such
as:
 exemption from income
taxes,
 exemption from custom
duties and taxes on
importation of equipment,
supplies and spare parts.

35. INCENTIVES FOR FOREIGN
INVESTORS
 Non-fiscal incentives --
permission to employ
foreign nationals.
 Simplification of custom
procedures.
 Capital gains tax
exemptions
 Protection from
infringement of patents
and trademarks

36. FOREIGN INVESTMENTS
POLICY IN THE PHILIPPINES
 These are the requirements to be qualified for
investment incentives:
• Investing in PIONEER Areas and areas of
investments listed in the Investment Priorities Plan
(IPP).
• at least 50% of production is for exports, if
Filipino-owned.
• at least 70% of production is for exports, if
majority foreign-owned enterprise (more than 40%
foreign equity).

37. RIGHTS OF FOREIGN
INVESTORS
To encourage foreign investments, Philippine laws
expressly recognize various rights of foreign investors in
the Philippines:
Repatriation of investments,
Remittance of earnings
Freedom from expropriation (except for public use or in
the interest of national welfare) of property
Freedom from requisition of capital or investment
Individual freedoms guaranteed under the Constitution

38. INVESTMENT PRIORITY
AREAS
An important legislation is the classification of
industries that the government deems to be in need
of more investments. PIONEER activities can go up
to 100% foreign ownership, subject to constitutional
and/or statutory limitations.
A domestic market enterprise is an enterprise which
produces goods for sale or renders service or
otherwise engages in any business in the
Philippines. An export enterprise is a manufacturer,
processor, or service (including tourism) enterprise
that exports 60 percent or more of its output.
These foreign-owned enterprises should be in at
least one of these industries:

39. NEGATIVE LIST
Excluded Investment Area for Foreign Equity
Mass media, except recording
Except in cases prescribed by law, the practice of all
professions, including, but not limited to, engineering,
medicine, accountancy, architecture, customs brokerage,
geology, and agriculture
Retail trade enterprises with a paid-up capital of less than
US $2.5 million
Private security agencies
Small-scale mining

40. PREFERRED INVESTMENT
PRIORITY
Up to 25 percent Foreign Equity
Private recruitment companies, whether for local or
overseas employment
Construction and repair of locally funded public works
except infrastructure/development projects covered by RA
7718 and projects that are foreign-funded or assisted
Contracts for the construction of defense-related structures

41. PREFERRED INVESTMENT
PRIORITY
Up to 40 percent Foreign Equity
Exploration, development, and utilization of natural
resources
Ownership of private lands
Operation and management of public utilities
Educational institutions
Supply of materials, goods, and commodities to
government-owned or controlled corporations,
companies, agencies or municipal corporations

42. PREFERRED INVESTMENT
PRIORITY
Up to 40 percent Foreign Equity
Culture, production, milling, processing, trading (except
retailing), and acquisition of rice and corn and the
byproducts thereof
Acting as project proponent and facility operator of a build-operate-
transfer project requiring a public utilities franchise
All forms of gambling

43. SPECIAL ECONOMIC
ZONES
 The Subic and Clark Economic
Zones (RA 7227) and Special
Economic Zones (RA 7916)
provide another vehicle for
foreign investors to put up their
business with incentives in the
Philippines.
 During the Ramos
administration, the government
converted the former Clark and
Subic bases into economic
zones for developmental and
export-oriented projects.

44. SPECIAL ECONOMIC
ZONES
 RA 7227 made Subic a
separate customs territory
ensuring free flow or
movement of goods,
equipment and raw materials
into and going out the
economic zone.
 Subic and Clark Special
Economic Zones provide
incentives such as tax and
duty-free importations of raw
materials, capital and
equipment.

45. SPECIAL ECONOMIC
ZONES
 Philippine Economic Zone
Authority (PEZA) was
created to help promote
investments in the export-oriented
manufacturing and
service industries.
 It actively assists investors in
registering and facilitating
their business operations in
service facilities inside
selected areas in the country
(called PEZA Special
Economic Zones).

46. SPECIAL ECONOMIC
ZONES
 SEZ locators such as export oriented
enterprises and manufacturers enjoy
specific privileges. The locations are
equipped with complete
infrastructure facilities, security and
sometimes strike-free provinces.
 Other activities also eligible for PEZA
registration and incentives include
business process and knowledge
outsourcing, tourism, medical
tourism, logistics and warehousing
services, and agro-industry.

47. Multinational Corporations
in the Global Economy
International
Economics - DBA 722(B)
Claro G. Ganac