Multinational Corporations & Global Economy Changes

MULTINATIONAL CORPORATIONS AND THE CHANGING GLOBAL ECONOMY Peter Drucker argues that multinationalism and expanding world trade are interconnected. The rapid growth of multinationals in the 1950s and 1960s coincided with the fastest expansion of global trade, at around 15% annually. It's estimated that 2533% of traded manufactured goods are intra-company shipments within MNCs. MNC foreign affiliate sales in host countries are 3-4 times total world exports. The export share of MNC foreign affiliates has increased substantially. For US MNCs, export intensity rose from under 20% in the mid-1960s to over 40% in the early 1990s for all economies. It doubled from 20% to 40% for developed economies and increased even more sharply in Latin America and developing Asia. However, the average export intensity of all affiliates has remained steady at 21-24%. India has very low export intensity, while over 40% of China's total exports are by MNC affiliates. Apart from trade in goods, other transactions like lending, technology transfers, and services take place extensively within MNCs, often using transfer prices different from arm's length prices between independent parties. This may reflect legitimate business concerns but can also shift profits or avoid controls and duties. MNCs' ability to manipulate financial flows via transfer pricing is a concern for governments. Monitoring and controlling transfer prices requires inter-governmental cooperation and corporate disclosure. Intra-firm trade also allows MNCs to impose restrictive business practices within their organizations, like limiting affiliate exports, allocating markets, or restricting technology use. Although pursued for business interests, these may conflict with host countries' objectives. Arguments in Favor of MNCs Proponents argue MNCs benefit host countries by:  Increasing investment, income and employment  Transferring technology  Bringing professional management techniques  Increasing exports and reducing imports  Equalizing costs  Integrating national economies  Conducting efficient R&D  Encouraging domestic suppliers  Increasing competition global production Criticisms of MNCs However, MNCs also face criticisms:  Their technology maximizes global profits rather than meeting developing countries' needs regarding employment, markets, resources and development stage.  Through power and flexibility, MNCs can undermine national economic autonomy and act against national interests.  MNCs may destroy competition and gain monopoly power.  Their enormous resources pose risks to national sovereignty where they operate.  MNCs have been accused of unethical political involvement in some countries.  They can retard employment growth at home.  MNCs may rapidly deplete some non-renewable resources and damage the environment.  Transfer pricing helps MNCs avoid taxes.  MNC business strategies in host countries may undermine local cultures, promote harmful consumption, etc. The Future and Regulation of MNCs MNCs likely will grow enormously due to favorable economic changes in many countries. Trends include increasing market orientation, evolving technologies, industry globalization, the rise of services, and regional integration. Many argue MNCs need a code of conduct for guidance and regulation. The UN and OECD have proposed voluntary codes covering issues like ethics, information disclosure, competition, taxes, and environmental and employee treatment. But developing countries' calls for legally binding rules have been rejected by advanced economies. The core elements of an MNC regulatory regime should include:  A framework allowing MNCs and host countries to benefit from agreed upon investment terms  Home and host country laws regulating MNC behavior on issues like ethics, information, competition, and standards  Tax policy cooperation to monitor transfer pricing and eliminate tax havens  Harmonizing investment incentives among host countries  An international process for discussing MNC investment and activities