INB10002

International Business Operations

TOPIC 6 : Multinational Enterprise, FDI and

Host National Response

Dr. Sim Choon Ling

Multinational Enterprise, FDI
and Host National Response
Learning Objectives

By the end of this lesson, students will be able to

• Describe the features of MNCs
• Describe the advantages and disadvantage of MNCs
for the host country
• State the involvement of MNEs in host nations
• Identify the sources of MNE and host nation
bargaining power, and the causes of power shifts
between MNEs and host countries
Introduction
• A multinational corporation (MNC) is a giant international firm
that has business operations in two or more countries.
• The firms are often managed from and have a central office
headquartered in their home country, but with offices worldwide.
• A multinational corporation is usually a large corporation who
produces or sells good or services in various countries
Features of MNCs
• Multinational corporations invest heavily in the primary and secondary
sector in the host countries.
• Importing and exporting goods and services
• They have branches or subsidiaries in many foreign countries.
Globalization has allowed these companies to extend their
geographical reach.
• Making significant investments in a foreign country.
• Opening manufacturing facilities or assembly operations in foreign
countries.
• Engage in contract manufacturing – permitting a local
manufacturer in a foreign country to produce their products.
Multinational Enterprise- Then and Now
• Origins of MNEs
• British East India Trading Company founded in 1600
• The modern MNEs of today – started to emerge only in the
late 19th century following the industrial revolution
• MNE activity grew strongly after the WW2
MNEs and Host country governments
• Why are MNEs going global?
• Political Factors
• Technological Factors
• Social Factors
• Competitive Factors
Political Factors
Liberalization of trade and foreign direct investments (FDI)
• The main political factor has been the stabilization of post-war
peace in Organization for Economic Cooperation and
Development (OECD) countries that allowed the development
of free trade among nations.
• Two main organizations have been the source of trade
liberalization – the General Agreement on Tariffs and Trade
(GATT) (replaced by the World Trade Organization (WTO) in
1995) and the European Union – to which one may add the
progressive opening of emerging nations to foreign investment
Liberalization of Trade
Technological Factors
 Lowered the cost of transport and communication as well as the unit cost of
production through economies of scale or the localization of productive
capacities and sourcing in low-cost economies.
 Increased efficiency of transportation and logistics : Air, cargos, containers
 Increased efficiency of telecommunication and information technology
 Increased critical mass of investments in R&D and production
 Economy of scale allow maximization of resources
Technological Factors

https://www.youtube.com/watch?v=d3YT8j0yYl0
Social Factors
Convergence of Consumer Needs

Wider access to information, movies, TV series, internet

International air transport and the diffusion of lifestyles by movies
and TV series have increased the brand awareness of consumers
worldwide. Some convergence of middle class consumer behavior
Brands like Sony, Nike, Fila or Coca-Cola are known nearly
everywhere.
Competitive Factors
• In 1960s, the emergence of Japanese competitors in markets that
traditionally had been dominated by American or European companies.
• Japanese firms, and later Korean firms, adopted a global approach at the
very beginning of their international expansion.
• Globalization of customers:
• In the 1970s, Citibank created a Global Account Management Unit to
service corporate customer who has international subsidiaries.
Why are governments keen
to attract MNEs?
MNEs and Host country governments
Advantages of MNCs for the host country

1. The investment level, employment opportunity and income level of

the host country increases due to the operation of MNCs.
2. The industries of the host country get latest technology from foreign
countries through MNCs.
3. The host country’s business also received management expertise
from MNCs.
4. The domestic traders and market intermediaries of the host country
gets business from the operation of MNCs.
MNEs and Host country governments
Advantages of MNCs for the host country

5. MNC’s break protectionism, curb local monopolies, create

competition among domestic companies and thus enhance their
competitiveness.
6. Domestic industries can make use of the R&D outcomes of MNCs
7. The host country can reduce imports and increase exports due to
goods produced by MNCs in the host country – helps to improve the
balance of payment
8. Level of industrial and economic development increases due to the
growth of MNCs in the host country.
Host countries and MNCs have different strategic goals
MNEs and
Host country governments
• Most countries have attempted to woo MNEs
• Growing fragmentation of production within global value chains have been
driven by MNEs
• However, at times conflicts have taken place between MNEs and host
countries (i.e. tax avoidance by some MNEs)
• Belief that activities by MNEs dominate national economies
• MNEs ‘Rule' the global economy - Almost one-third of global production is
done by MNEs
• Nationalistic interest (Not just for developing countries)- Example: Chinese
government accused the Donald Trump administration of engaging in
nationalist protectionism and took retaliatory action)
MNEs and Host country governments
Developed countries are equally fearful of foreign domination. Examples:

• Australian government generally viewed FDI favorable, however, there is some anxiety
over possible Chinese domination. Hence, the foreign investment policy on land and
property in Australia was altered in 1987 to restrict foreign ownership of residential
properties by foreign interest.

• In 1983, Malaysia multinational company, Multipurpose Group, made a successful

takeover of Dunlop Plantation Berhad and led to the changes of British regulations on
foreign takeovers to avoid sudden takeovers by regulatory authorities. The move was
referred as The ‘Malaysian midnight raid’ and upsets British investors.

• In 1986, the Royal Commission on Canadian Economic Prospects recommended that

the size of foreign direct investment in Canada be controlled to preserve Canadian
sovereignty of its resources.

• In the European Union (EU), as in Canada, fear of US business domination

MNEs and Host country governments

• Disadvantages of MNCs for the host country

• Imposes massive strain on labor force both in developed

countries (job destruction) and developing countries (sweatshops,
child labor)
• Standardized customer tastes. Reduce diversity.
• Introduces a jungle leading to the domination of the strongest
multinational
• MNCs may transfer technology which has become outdated in
the home country.
MNEs and Host country governments

• Disadvantages of MNCs for the host country

• MNC may kill the domestic industry by monopolizing the host

country’s market.
• In order to make profit, MNC may use natural resources of the
home country indiscriminately and cause depletion of resources.
• A large sums pf money flows to foreign countries in terms of
payments towards profits, dividends and royalty.
• Reduces capacity for nations to protect their national interests,
cultures & values.
MNEs and Consumer Activism in Host nations
 Are MNEs adhering to the same standards in developing countries as in industrialized
nations?
 Strong consumer activism against MNEs in countries such as India
 Cadbury case – worms in cocoa
 Coca cola, Pepsi – pesticide controversy.
 McDonalds – how is the meat slaughtered?
 Lapse regulations and government intervention
 Are consumer activists and NGOs frightening away FDI? Freedom of speech vs.
Development?
 NGOs – Breast Cancer Fund accused Revlon of using chemicals linked to cancer in its
cosmetics, Greenpeace - Save the Arctic! campaign to get toymaker Lego to stop
distributing its toys at Shell gas stations, Campaign against Nike products for slave labour
 Suspicion and past experience of colonialism and imperialism
 ‘Neocolonialism’ the control of less-developed countries by developed countries.
MNEs and nationalism
• Multinational enterprises exert enormous power in social, economic and
political arenas
• Does the rising tide of economic nationalism threaten globalization and
place the future of MNEs in jeopardy?
• Trump administration
• Brexit
• A confident China
• Global economic integration is still alive and well, once led by trade, it’s
now led by investment.
• President Trump’s call on automakers such as Toyota to produce more
within the U.S., rather than import more from elsewhere
What is nationalism? Is it
good or bad?

How should MNEs respond

to nationalism?
What should MNEs do in response to
nationalism How should MNEs react?

• Localizing their operations in every major market

• Products may remain largely standardized (think of MRI machines and smartphones) or
may not (think of entertainment and food)
• Option of regionalization if the market is too small
• Form partnerships with governments and local businesses strategy is to dismantle the
negative perception (for example through fair wages)
• Local talent
• Employee ownership options
• Alliance with workers and communities in host countries
• Strong stakeholder engagement
• Have voluntary codes of conduct
• Contribute to social wellbeing in the host country
Criticisms against MNEs
• Tax avoidance and evasion
• MNEs restrict or allocate markets among subsidiaries – Nestle
• MNEs are able to extract excessive profits and fees because of their
monopolistic advantages – Management fee, fee for using processes,
patents
• Takeover strategies
• Raising investment funds from local sources, at lower interest rates and
returns on investment siphoned off to the parent company
• Centralized research and development (R&D) efforts in the home country
and lack of knowledge transfer in host countries – IBM in India
Criticisms against MNEs
• Key positions in the MNE reserved for expatriates
• Neglecting development of local talent in host country
• MNEs offend a country’s social customs or frustrate the objectives of a
national plan
• Creates wage-price spiral in economies
• Example: Rising wages increase disposable income raising the demand for goods
and causing prices to rise and rising prices increase demand for higher wages hence
creating a conceptual spiral.
• MNEs dominate key industrial sectors
• Compete with domestic products
Criticisms against MNEs
• MNE’s loyalty to the parent nation is often disturbing to host nations
• MNEs keep profits in host countries artificially low, through transfer
pricing
• MNEs ferment currency crisis through buying and selling currencies and
transferring them between countries. Example: New Zealand in 1984
blamed MNEs for accelerating the economic crisis by speculating
against the New Zealand dollar.
• Reverse resource transfer – knowledge transfer may not align with
national interest
• Dependency – Lack of national and economic sovereignty
• FDI as potential source of social destruction – rising consumerism, rural
exodus, breakdown of traditional social structures and value
Bargaining powers of
MNEs and host countries
• The bargaining strength of MNEs
• The ability of MNEs to provide, under competitive conditions,
products or services not easily obtainable from another source
• Monopolistic position
• Possession of latest technology and advanced knowledge
• Economies of scale
• Product differentiation
• Exports a large part of its production and has control over
distribution
• Can easily find a substitute host country i.e. unskilled labour
• Small investment – no barrier to exit
• Wealth and capita
Bargaining powers of
MNEs and host countries
• The bargaining strength of Host countries
• Control of Market Access – large markets such as Mexico, Brazil
• Control of raw material that are scarce
• Restrictions
• Level of host’s expertise - Institutional weaknesses and lack of
expertise will weaken host nations monitor and manage the
behaviors on MNCs.
• Level of competition for investment opportunities -Competition
among MNCs for investment opportunities in the host nation.
• Stage of economic development the country is at – i.e. what if the
country is in dire need of hard currencies?
Host Country Responses
• Foreign firms share ownership with nationals
• Exclusion of foreign firms from certain industries
• Government to screen proposals
• Proportion of key positions in executive ranks, and on boards of directors, be
filled by nationals
• Insist on transfer of knowledge and technology
• Ceiling rates on royalties and fees paid for technology (Example: preventing
foreign firms from collecting licensing fees from subsidiaries)
• Renegotiating clauses in extractive industries to make them more favorable to
local interests
• Foreign firms raise more of their debt financing outside of local capital markets,
and use the local market to raise only equity capital.
• Foreign firms should engage in wider scale and more intensive training programs
• Foreign firms vigorously develop export market
Domestication of MNEs
• Partial or total transfer of ownership to nationals;
• Promotion of a large number of nationals to high levels of
management
• Greater decision-making powers resting with nationals
• Greater number of products being made locally rather than
being imported for local assembly or packaging.
• Specific export regulations designed to dictate participation in
world markets
• Insistence on using local raw material and products
A more cooperative attitude:
MNEs and Governments
• Trend of economic liberalization across national economies in the 1980s
• Gradual removal of restrictions on inward foreign direct investment (FDI)
– screening, performance requirements, ownership restrictions and
licensing agreements featuring technology transfer (UNCTAD 2000)
• Thus 1990s onwards, interaction between Host nations and MNCs
(particularly in high-technology manufacturing) changed from being
‘predominantly adversarial (oppose) and confrontational to being non-
adversarial and cooperative
• What happens when MNCs disregard issues such as global warming
and the environment? What about safety? How will governments react?