MNCs and globalization go hand-in-hand. After reading this weeks.docx

MNCs and globalization go hand-in-hand. After reading this
week's lesson, find an MNC and describe ways it has been a
good citizen or a bad citizen. Don't use Nestle since it is
described in the lesson.
Instructions: Your initial post should be at least 350 words.
Please respond to more than 2 other students. Responses should
be a minimum of 150 words and include direct questions,
evidence from the literature, alternative points of view or
additional insight. For more information, please review the
forum discussion rubric attached below. This is the rubric that
will be used for all of the forums in this class.
In this lesson we will discuss another type of non-state actor in
the international system. Multinational corporations (MNCs),
broadly defined, are business entities that have facilities—
whether production, administrative, or distribution-related—in
two or more different countries. The influence of MNCs in the
international system demonstrates how foreign relations and
economics are intertwined. MNCs are a relatively recent
development, and although they do not have the political
sovereignty or military strength possessed by states, they still
exert considerable influence over the international system.
MNCs also have a mixed reputation in terms of the benefits they
provide and the harm they can cause, especially in the poor
countries where they often locate production.
· Defining multinational corporations (MNCs)
· Types of MNCs and their characteristics
· Why MNCs exist
· How MNCs influence the international system: benefits and
disadvantages
Multinational corporations are some of the most powerful non-
state actors in the international system. Some researchers
distinguish between a multinational corporation (MNC), which
has headquarters in multiple countries, and a transnational

corporation (TNC), which is headquartered in one country by
operates in others as well. Because these terms are often used
interchangeably in common usage, for the purposes of this
lesson we will just use the term MNC to mean any company
operating in multiple countries.
LOCATED IN MULTIPLE COUNTRIES
There is actually no agreed-upon definition of what constitutes
a multinational corporation. Generally speaking, an MNC hosts
some part of its operations in a country other than the one
where it is legally headquartered. In that sense, it is literally
multi-national.
CORPORATION
A corporation is a group of people, such as a company, that is
legally authorized to act as a single entity. It may be privately
owned, or publicly traded—meaning that stockholders are
legally the corporation’s owners. Economists and legal scholars
continue to debate, however, whether there should be more
narrow criteria for categorizing MNCs, and what these criteria
should be.
OWNERSHIP
Some argue that ownership is the key feature that defines
whether a company is an MNC or not. By this narrow definition,
a firm is only a multinational if it is owned by nationals of
multiple countries. For example, Royal Dutch Shell (the owner
of Shell Oil in the US) is multinational by this criteria, because
it has mixed Dutch and British ownership. Shell would certainly
be considered a multinational by other standards as well, since
it operates in some form on all seven continents. By the
ownership criteria, relatively few large companies are actually
multinationals, since many operate as separate legal entities in
different countries, thus making the ownership of each national
arm uni-national.
PARENT COMPANY MANAGERS
Similarly, a few scholars suggest that the nationality of holding
company, or “parent company,” managers should be part of the

criteria for determining whether a corporation is an MNC or
not. Because most managers in corporate headquarters are from
the country where the headquarters are located, and because this
feature can change based on a single individual, this is not a
widely recognized criterion for identifying MNCs. By this
benchmark, very few firms are MNCs.
PRODUCTION
A more widely accepted criterion for narrowing what companies
are considered MNCs is production: in short, having
distribution facilities in more than one country is not enough; a
firm must produce in at least one country other than the one in
which it is headquartered. This view is advanced by Harvard
University economist Richard Caves. His definition requires
production to take place in at least two countries, in facilities
owned by the same firm (Caves, 1982).
DISTRIBUTION
Distribution, even direct distribution, without a production
presence in a country is considered to be essentially a form of
export by this definition. This criterion excludes, for instance,
many Chinese companies that only distribute in the US.
An example of an MNC is Shandong Tranlin Paper, which is
constructing a production facility near Richmond, Virginia
(Wee, 2015). This is an example of a practice known as foreign
direct investment (FDI) or investment made by an entity based
in one country, into an entity based in another country. All
MNCs engage in FDI by one method or another.
There are two primary forms of FDI. The investment can be
“vertical” or “horizontal.” Horizontal FDI occurs when a firm
makes an investment abroad in the same industry in which it
operates where it is headquartered. For instance, Subaru, a
Japanese carmaker, sets up a production facility in the United
States to produce vehicles for American buyers.
A firm might choose to do this because tariffs (taxes on

imported goods) make it cheaper to locate production in
individual countries rather than exporting around the world.
Vertical FDI occurs when a firm invests in part of its production
chain abroad. For example, Intel conducts high-skilled, labor-
intensive production for pieces of microchips in facilities it
owns in Malaysia, where skilled labor is available but relatively
cheap, but keeps lower-skilled assembly processes in other
countries. Vertical FDI is often chosen because of labor costs or
regulations that make it cheaper to conduct certain steps of the
production process in different countries.
These practices are both considered offshoring, because they
shift (part of) production overseas. Note that when a firm shifts
production to a third-party entity, this is commonly referred to
as outsourcing. Thus, contracting with a third-party firm to
conduct production overseas would be both offshoring and
outsourcing.
This lesson will not assume any narrow criteria for considering
a firm to be an MNC. As you will see, the forms of corporate
organization presented in the next section may or may not meet
the criteria set forward by some of the views above. What do
you think the criteria for considering a business to be an MNC
should be? Why?
MNCs, including those that fit Richard Caves’ robust criteria
(production in at least two countries in facilities owned by the
same firm) may be organized in a number of different ways. The
way a firm is organized shapes both its economic impact and the
political leverage it has in individual states and in the
international system as a whole.
Licensing occurs when a corporation allows a firm (or multiple
firms) in foreign countries to use its name, brand elements,
patents and trademarks, and other elements if its business. The
firms get the right or license to operate their business according

to terms agreed upon in their licensing agreement. They pay a
royalty or license fee to the multinational corporation that owns
the brand. If the licensee violates the terms and conditions of
the agreement, the license may be cancelled. This system is
generally used for products that are popular in the countries
where licenses are purchased. For example, the Disney brand is
licensed to producers of clothing, toys, and other items
worldwide.
Subsidiaries are also foreign entities granted rights to a
company’s brand, trademarks, etc. They are different from
licensing arrangements, however, in that franchisees are usually
licensed to operate in a particular location, so that they do not
compete with each other.
Subsidiaries may be wholly- or partly-owned by the parent
company, but are legally separate. They are registered in the
host country, and in the case of partly-owned subsidiaries, their
ownership may be partly acquired by people or other entities in
the host country. McDonald’s is a good example of a
multinational franchise. More than 80 percent of McDonald’s
restaurants worldwide are operated by franchisees (McDonald’s,
2016).
The difference between most branches and subsidiaries is also
very slight, and largely based on legal distinctions rather than
major differences in the ways the entities operate. Whereas a
subsidiary is a legally separate entity from its parent company,
a branch is not separate. The Santander Group, a banking
holding company, has both subsidiaries (such as Santander
Holdings USA) and thousands of branches. Very large financial
institutions are among the most likely MNCs to use the branch
model. Often, however, financial regulations mean that holding
companies must create legally separate subsidiaries for their
operations in each country. The European Union is an exception
to this.

In a joint venture, an MNC establishes a company in a foreign
country in partnership a local firm or multiple local firms. The
MNC and local firm(s) share ownership and management of the
new entity. In many cases, the MNC contributes technology not
already employed in the host country, and may take a leading
management role, but the running of day-to-day operations is
left to the local partner(s).
Fuji Xerox Co. is a long-running joint venture between the
Japanese photographic supplies firm Fujifilm Holdings and
American document management company Xerox. It has sold
photo and document products and services in the Asia-Pacific
region since 1962. It is legally registered as a joint venture
partnership, with headquarters in Tokyo.
A “turn-key” or “green field” project is a form of foreign direct
investment in which an MNC parent company constructs new
facilities in a foreign country, rather than purchasing or
partnering with an already existing entity in the host country.
These projects may involve building new production or
distribution facilities, but can also involve the construction of
offices and or even housing for employees. This is the form of
FDI that provides the most control over operations in the host
country for the MNC. Facilities are built to the firm’s preferred
specifications, employees are trained to company standards, and
production processes are engineered from the beginning to fit
the MNC’s products and methods.
This type of investment can be risky for the host country,
especially if the national economy is weak. If the MNC pulls
out of the country for any reason, the facilities the firm
constructed may end up sitting idle, and the economic benefits
from the trade it would have generated will be lost.
Sometimes firms build turn-key facilities and then sell them to
subsidiaries or local firms. In the latter case, the facility is no

longer part of the MNC. MNCs in the automotive industry often
use this method of expansion. For example, Audi recently
finished a new production facility in San Jose Chiapa, Mexico.
Mexico’s many free-trade pacts have made it a prime location
for green field investments by carmakers that plan to sell to
consumers throughout North America (WSJ, 2015). This is an
example of horizontal FDI.
Why become an MNC?
The explanation of vertical and horizontal FDI, and the forms of
MNC expansion above, hinted at why a company might want to
become an MNC, or why existing MNCs might want to expand
into new locations. There are four basic reasons for this.
INCREASED MARKET SHARE
First, a company may expand to increase market share. In other
words, a company may have found that they are nearing a
“saturation point” (the point at which they cannot sell any
more) in the markets where they already sell, and so they
choose to expand into new markets. This may begin with just
exporting to new foreign markets, but then become true MNC
expansion when production is expanded to locations within the
geographic bounds of the new market. Essentially, the
motivation is increased profits through greater sales volume.
For example, the sporting goods company Nike is opening new
stores throughout the world.
CHEAPER PRODUCTION COSTS
Second, a company may expand or relocate to secure cheaper
production costs. A company may shift its production,
distribution, or customer support to a country where labor costs
are lower, where property is cheaper, or even where it is less
costly to acquire the raw materials needed for their production
processes. The motivation for this is to increase profit margins
by saving money during the production process. For example,
steel MNCs such as Arcelor Mittal have bought up factories in
the former Soviet bloc, because these facilities are much
cheaper than plants in North America or Western Europe.

AVOIDING TAXES
Third, a company may expand or relocate to avoid taxes or trade
barriers. Corporate tax rates are different around the world, as
are tariffs and regulations governing business. For instance, the
Japanese government restricts the sale of foreign cars in Japan
in order to protect their automotive industry, which makes up a
large portion of their national income each year. Many
economists argue that the United States’ relatively high
corporate tax rate is responsible for businesses leaving the
country in recent years. Singapore, on the other hand, attracts
many companies because of its low trade barriers and stable
economy. This motivation for expansion is often linked to
horizontal FDI.
GOVERNMENTAL INCENTIVES
Fourth, government grants may attract companies to expand or
relocate. If a government wants to grow a particular industry—
or perhaps to reduce another country’s share of that industry—it
may offer grants that reduce the cost of opening a new facility
in their country. The United Kingdom offered business grants in
the 1980s that attracted many American-based firms.
COMBINATION OF REASONS
In reality, many MNCs expand for multiple reasons. Choosing
the location of a new facility—and deciding whether it will be
acquired by purchasing an existing firm and creating a branch,
merging with another firm to create a subsidiary, partnering to
create a joint venture, or building a turn-key facility—comes
down to weighing the previous four factors.
How MNCs Influence the International System
· INTERNATIONAL SYSTEM
· FINANCIAL RESOURCES
· GLOBALIZATION
Now that we’ve seen some of the ways that MNCs work, and
why companies might want to become MNCs, let’s consider

how they are able to influence the international system. MNCs
are inherently international; they operate in multiple countries,
and therefore have dealings with the government, workers, and
potentially NGOs in those places. They are also involved, to at
least some degree, in international trade and must deal with
international laws and the intergovernmental organizations that
enforce financial and other regulations in the international
sphere.
The largest MNCs have financial resources greater than the
poorer states in which they may locate their production
facilities. Because of their size and resources, they are
generally able to draw in the best technical and management
expertise, and employ large government and public relations
departments, which help to influence public opinion and
policymaking in their favor.
Due to their nature, MNCs are also central to a process that has
revolutionized international relations in the past two centuries,
but especially in the past 40 to 50 years: globalization.
Globalization refers to the integration of communication
systems, transportation systems, ideas, societies, cultures and
economies into a single, interdependent world system.
Advantages of MNCs
Many people are skeptical of the benefits conveyed by MNCs
and globalization. Here are some of the advantages and
disadvantages of MNCs, which are often felt most strongly by
poorer countries, which tend to present the lowest-cost
environments for production.
First and foremost, multinational firms create jobs, which help
to stimulate local economies and provide a greater tax-base for
governments. Because some multinational firms are very large,
the magnitude of job creation can have a major positive impact
on areas where unemployment was previously very high. When
people have a steady income, they are able to spend more,

which in turn boosts other local businesses.
MNCs may also benefit the locations they move into by
bringing foreign expertise and technology. Training provided by
foreign experts can help improve local workers’ skill levels,
productivity, and sense of self-confidence and pride in their
work, which has positive benefits for both the corporation that
employs them and the individual workers. The children of
skilled workers are more likely to receive education and job
training, helping to end the cycle of poverty some were trapped
in. Moreover, foreign technology, once brought into an area by
an MNC, may spread to other local businesses, making them
more modern, efficient, and ultimately more profitable.
Because of their size and resources, MNCs can also benefit
from a number of “economies,” a term used to refer not to a
local or national economy in the traditional sense, but to the
benefits accrued from large-scale or high-quality operations.
MNCs may enjoy economies of scale. In an economy of scale,
the cost per unit produced or distributed is progressively
lowered (for the producer) because fixed costs—such as the
building and initial cost of equipment, but also labor costs when
people can specialize in tasks to be more efficient—can be
spread out over more units to sell. Sometimes, this provides a
benefit to customers, either local or abroad, because the
company chooses to reduce the sale price of the good.
Alternately, these savings can be kept as additional profits by
the company.
Technical economies can also be a benefit of MNCs. Technical
economies are a specific type of economy of scale, which occur
when large-scale businesses are able to invest in specialized
machinery that makes their operations more efficient, and thus
contributes to more efficient production in the long-run.
Purchasing economies, similarly, occur for large companies that
are able to buy in bulk. Doing so means a lower cost per unit for
supplies, but requires the financial resources to pay for a large
quantity of materials at once. Purchasing economies thus
require high-volume production to actually convey benefits,

which means economies of scale and purchasing economies go
hand in hand for well-managed MNCs.
isadvantages of MNC's
· HOST COUNTRY ISSUES
· PROFITS NOT SHARED
· HUMAN RIGHTS VIOLATIONS
· RACE TO THE BOTTOM
In practice, however, not all of these benefits may be passed
along to the host country. Unfortunately, MNCs’ influence
enables them to sometimes take advantage of governments and
workers that are desperate for economic opportunities. Many
MNCs have been criticized for overstating the economic
benefits they provide to poorer areas where they are located.
They have also faced serious charges regarding their human
rights and environmental records.
To begin with, there is no guarantee that profits made from
production at a plant in, for instance, Indonesia, will be kept
there. Earnings leftover after paying for costs and potentially
investing further in a facility are more likely to be sent back to
the parent company based in, for instance, the United States.
Even more serious charges of human rights violations are not
uncommon. Accusations that MNCs exploit workers by paying
them the lowest amount possible and requiring them to work
long hours are frequent. This is possible because some countries
have very weak labor laws to protect workers, so the practices
are not technically illegal by local standards, although they go
against international protections for human rights.
Nevertheless, states with already relatively low standards for
worker or environmental protection may end up competing with
each other in what is referred to as a “race to the bottom.”
Governments are enticed by the prospect of attracting MNCs to
make their restrictions on companies’ behavior as loose as
possible.
Human Rights Violations

Human rights violations may even be as serious as using forced
labor or child workers. In 2015, for example, it was discovered
that a number of major US food retailer MNCs were selling
shrimp that came from processing facilities in Thailand that
were using children and enslaved migrant workers. Although
these facilities were not owned by the MNCs, today it is widely
accepted that MNCs should be responsible for ensuring that no
human rights violations occur within their supply chain.
ENVIRONMENTAL VIOLATIONS
MNCs have also been responsible for using sites with lax
environmental regulations to save money by using polluting or
otherwise unsafe practices that would not be allowed in other
countries. In other cases, MNCs have been accused of using
cutting corners even in locations with more robust
environmental protection standards, because they can simply
use their considerable resources to pay any fines or clean-up
costs that they might incur if their violations are detected.
LAX ENVIRONMENTAL STANDARDS
An MNC in this situation might also hope, realistically, that a
government would choose to overlook less severe violations, or
opt for the least-severe punishment, for fear of driving the MNC
to relocate their operations. This is another way in which an
MNC can use its economic impact and resources (both legal
expertise and financial resources) to influence a state’s
behavior.
BHOPAL DISASTER
The Bhopal chemical disaster, widely regarded as the worst
industrial disaster in history, is one illustration of how horribly
wrong things can go when an MNC cuts corners on safety. On
December 2, 1984, a tank failure at a Union Carbide pesticide
plant in Bhopal, India released 30 tons of toxic gas into the air,
exposing more than 600,000 people.
HUGE DEATH TOLL
Thousands died in the days after the accident, and the death toll
rose to 15,000 over the years that followed. Toxic materials

may also remain buried under the site, although it is no longer
in operation. There has also been a high incidence of birth
defects in children born to survivors of the disaster. In 2010,
eight low-level executives at Union Carbide Bhopal were
convicted of negligence, but Union Carbide’s American
leadership escaped prosecution.
DEEPWATER HORIZON OIL SPILL
A more recent instance in which an MNC was held responsible
for the disastrous consequences of a failure in their equipment
was the Deepwater Horizon oil spill. On April 20, 2010 an
explosion on the British Petroleum (BP) and Transocean oil rig
in the Gulf of Mexico killed 11 workers and started a steady
leak of oil into the ocean.
WORST SPILL IN HISTORY
Over the 87 days it took to cap the well, an estimated 3.19
million barrels, more than 130 million gallons, of oil leaked
into the Gulf. The spill, the worst in history, killing sea life and
damaging ecosystems. Dolphin, sea turtle, and seabird
populations all experienced elevated annual death rates in the
years after the spill. Shrimp fisheries in the Gulf were closed
for a year after the spill. BP pledged to pay millions for clean-
up, and committed to fund a $500 million research program to
study the environmental impacts of the spill.
NEGLIGENCE CRITICIZED
Some people, however, felt the company was not treated harshly
enough for the alleged negligence that led to the accident in the
first place. The accident had environmental impacts that
affected multiple countries, and may have caused long-term
damage to ecosystems.
WATCHDOGS
Environmental, human rights, and some development NGOs are
some of the most vocal critics of single-minded profit-seeking
by MNCs. Virtually the entire purpose of many NGOs is to

serve as ‘watchdogs’ for MNCs practices, and to raise
awareness among voters and lobby governments to hold MNCs
responsible for the outcomes of their operations.

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