Multinational Corporations

DO PHU HAI
 MULTINATIONAL CORPORATIONS
 A multinational corporation (MNC) is a corporation that
has its facilities and other assets in at least one country
other than its home country .
 The movements of private foreign capital take place
through the medium of these multinational
corporations. Thus multinational corporations are
important source of foreign direct investment (FDI).
 Besides, it is through multinational corporations that
modern high technology is transferred to the developing
countries.
THEY CHOOSE DIFFERENT
METHODS OF FOREIGN
INVESTMENT .THE MAIN
MODES OF FOREIGN
INVESTMENTS ARE –

1. Agreement with Local Firms for

Sale of MNCs Products
2. Setting up of Subsidiaries

3. Branches of Multinational
Corporation
4. Foreign Collaboration or Joint
Venture
Multinational Corporations in
the Developing Country
Economy
Multinational companies played a
significant role in the promotion of
growth and trade in developing country.
With the adoption of industrial policy of
liberalization and privatization rote of
private foreign capital has been
recognized as important for rapid
growth. The important reasons behind it
are-
1.) Promotion of Foreign Investment
2.) Non-Debt Creating Capital inflows
3.) Technology Transfer
4.) Promotion of Exports
 Potential Benefits of MNCs on Host
• Countries
Provision of significant employment and training to the labour force in
the host country
• Transfer of skills and expertise, helping to develop the quality of the
host labour force
• MNCs add to the host country GDP through their spending, for
example with local suppliers and through capital investment
• Competition from MNCs acts as an incentive to domestic firms in the
host country to improve their competitiveness, perhaps by raising
quality and/or efficiency
• MNCs extend consumer and business choice in the host country
• Profitable MNCs are a source of significant tax revenues for the host
economy (for example on profits earned as well as payroll and sales-
related taxes)
 Potential Drawbacks of MNCs on Host Countries

• Domestic businesses may not be able to compete with MNCs and

some will fail
• MNCs may not feel that they need to meet the host country
expectations for acting ethically and/or in a socially-responsible way
• MNCs may be accused of imposing their culture on the host country,
perhaps at the expense of the richness of local culture. Might MNCs
reduce cultural diversity around the world as they continue to
expand, particularly into less developed or developing countries?
• Profits earned by MNCs may be remitted back to the MNC's base
country rather than reinvested in the host economy.
• MNCs may make use of transfer pricing and other tax
avoidance measures to significant reduce the profits on which they
pay tax to the government in the host country
 Positive impacts
 The cost-benefit for the MNC’s – This is probably the most significant
factor around which business decisions are made. The cost savings is
where multinational companies benefit the most, from the cost of labour
to raw materials. A company might choose to set up a factory in the same
country from where raw materials are sourced. In all likelihood, the cost of
labour in these countries will be much lower and add to this, if the
companies can finagle a tax concession from the government, then the
profit margins they would get from the sale of the products can be
exponentially increased.
 Benefits to the government – This point has roots in the earlier three
points. MNC’s create employment for their citizenry and give them more
spending power. They increase annual tax collections for the government.
MNC’s can help in regulating and keeping the cost of products
competitive. The more products and services in the market, the more
 Positive impacts
 Benefits to the consumer – The obvious benefit of reducing the
manufacturing costs should be a reduction of the selling cost while at the
same time maintaining a high standard of product quality. Not to be cynical
here, I don’t think the cost reduction will ever happen, but at least the
quality of the product will not be compromised to bring down the
manufacturing costs. The other benefit is choice. Suppose a company can
manufacture a product cheaply. In that case, they can reinvest the money
in other endeavours such as expanding their product line, research and
development, exploring new markets and market segments, etc.
• Employment benefits – MNC’s create new jobs in countries they expand
to and create new higher-paying, higher-value jobs in countries they already
operate out of and create auxiliary support businesses. For the most part,
they bring in industry best practices and help increase the quality of life of
their employees by providing them with higher salaries and training.
 Negative impact

• Dominating the market – While MNC’s bring in big money, it is the

same monetary power that it brings to bear to crush the competition and
small local businesses. To pressure local suppliers to align with how much
they are willing to pay for a product/service. MNC’s have the power to
dictate the supply timelines and the penalties of failure to deliver while at
the same time avoiding penalties if payments are not made on time.
• Social influence – MNC’s are the bringers of change. They introduce the
local population to new products and services and a new way of thinking.
Some of these new ways may counter the traditions of the land and
might topple generations of traditions. Now, some of this might be a
good thing, and some of it might be bad, it is all about your point of view
and only history can judge.
 Negative impact

• Influence on government – The more powerful MNC’s have the power to

lobby for change in government policy to suit their requirements which may
be detrimental to the local businesses or the population. Most of the time,
the populace doesn’t even realise that things like these happen, and even if
they do realise, everything can be spun to smell like a bed of roses when it
is actually a pile of dung.
• Dumping ground – All of us want the latest and best product in the market.
It has become so bad that a more-than-a-year-old mobile phone is
considered outdated, and more importantly, “so last season”. Where do all
these products go? I remember one of the best-selling cars in my country for
about a decade was a car that was outdated in most parts of the world
about a decade before it was launched for us. Launching outdated products
can compromise safety and can harm the local environment.
 Effects of Multinational Corporations in Vietnam:
In recent years foreign direct investment
through multinational corporations has vastly
increased in many developing countries .In
last few years, the number of multinational
corporations in Vietnam have increased . so
its effect on Vietnam’s economy also
increased .
1) Employment
2) Labor exploitation
3) Corruption
4) Uses of natural resources for the purpose of MNCs
5) Changes in Foreign Direct Invest (FDI)
Potential for positive spillover effects, such as
production methods and information spread, from
MNCs to domestic suppliers.
https://lup.lub.lu.se/luur/download?func=download
Effects of Multinational Corporations in Vietnam
 The Vietnamese economy has been progressing to become a supplier to many
multinational corporations (MNC). However, barriers presently exist that
prevent Vietnamese firms from fully integrating into the supply chain of these
global actors.
 Weak FDI overflow and block trading has government officials and business
executives troubled that Vietnamese firms are still on the periphery of these
global supply networks.
 Even as MNCs operating in Vietnam import many semifinished products from
other countries, Vietnamese firms are not benefiting from the opportunities to
incorporate into the supply chain because of the lack of global experience, FDI,
an educated workforce and outdated facilities.
 Vietnamese firms must upgrade their facilities and equip their labor forces to
acquire MNC contracts and fi nd global partners who can supply financing and
knowhow.
 Effects of Multinational Corporations in Vietnam

 Vietnamese firms face three major problems as it relates to

supply chain integration: capital, skilled labor (both worker
and manager level) and technology.
 These issues are preventing the integration of Vietnamese fi
rms into active supplier network of the world’s largest firms.
As such, the Vietnamese government can implement
policies to encourage fi rm activity: financing for Vietnamese
firms participating in MNCs supply chain and invest in
developing human capital.
 Financing Opportunities
 Most Vietnamese firms have low levels of capital, which makes it diffi cult to
compete with rivals from China, Taiwan, and Thailand. This is partly due to the
Vietnamese banking system.
 The banking system acts as a state bank as it interferes in setting interest rates
and rules. The largest 4 commercial banks in Vietnam (Vietcombank, Agribank,
BIDV, and Vietinbank) are heavily influenced by political forces and often ignore
market driven sentiments.
 For example, in 2008, the Vietnamese state bank leader confused CPI with an
inflation index, which raised interest rates up to 18% that cost VND 36 Billion.
 Many firms went bankrupt from 2008 to 2012. The central bank should implement
a system to buy bad debt and sell it in the secondary market, while applying
clearing methods for these special cases. This will help to free up capital and
promote business development. Additionally, making a fund for Vietnamese fi rms
already in MNC supply chains will help them renew equipment, technology, and
increase human capital in this competitive space.
 Developing Human Capital

 Morethan 81% of the labor force in Vietnam lacks the

necessary skills or education.
 Specialtyor technical engineers need to be trained by
working in MNCs plants abroad so that they can return to
Vietnam to create products that meet MNCs technical
requirements.
 Financial
to technical employees should be available so that
they can create new owned business, or to encourage them
to expand existing businesses. Allowing for tax exemption to
technology expenses may incentivize fi rms to innovate.
 CRITICISM OF MULTINATIONAL
CORPORATIONS

Anti- corporate advocates criticize multinational

corporations for entering countries that have low human-
rights or environmental standards. . Some negative outcome
generated by multinational corporations are –
1) Capturing Markets:
2) Use of Capital-intensive Techniques
3) Setting up Environment-Polluting Industries
4) Volatility in Exchange Rate
5) Transfer Pricing and Evasion of Local Taxes
FORIGEN DIRECT INVESTMENT(FDI)

• Definition
• FDI is the sum of equity capital
• FDI usually involves participation in
management, joint-venture, transfer
of technology and expertise
• FDI is one example of international
factor movements.
 TYPES OF FDI

1.Horizontal
FDI

2. Platform FDI

3. Vertical FDI
METHODS
• by incorporating a wholly owned subsidiary
or company anywhere
• by acquiring shares in an associated
enterprise
• through a merger or an acquisition of an
unrelated enterprise
• participating in an equity joint venture with
another investor or enterprise.
 FORMS OF
FDI
• low corporate tax and individual income tax rates
• tax holidays
• other types of tax concessions
• preferential tariffs
• special economic zones
• EPZ – Export Processing Zones
• Bonded Warehouses
• Maquiladoras
• investment financial subsidies
• soft loan or loan guarantees
• free land or land subsidies
• relocation & expatriation
• infrastructure subsidies
• R&D support
• derogation from regulations (usually for very large projects)
 Advantages of FDI

• Foreign expertise can be an important in improving

the existing technical process in the country.
• Advances in technology and process it improves
the competitiveness of countries in the domestic
economy.
• Can improve the quality of products and processes
in a particular sector, increased attempts to better
human resource.
Importence And Barriers To FDI
• DEVELOPING WORLD
 foreign investment robustly increases local productivity
growth(2010 meta-analysis )
• CHINA
 FDI has increased considerably in the last decade($59.1
billion in 2012)
 the largest recipient of foreign direct investment(U.S.A -
$57.4 billion of FDI.)
• INDIA
 disallowed overseas corporate bodies (OCB) to invest in India
 UNCTAD survey projected India as the second most
important FDI destination (after China) for transnational
corporations during 2010–2012.
• UNITED STATES
 U.S. has a fundamentally 'open economy' and low barriers
 "conduct a review of the global competitiveness of the
United States in attracting foreign direct investment.”
Trends and Facts in FDI

Comparative
exploration
FDI inflows by region, 1995–2009 (US$ billions)
 Top 10 Recipients of FDI Inflows
Countries Share of FDI

China 17.30%
Hong Kong, SAR of China 8.80%
Saudi Arabia 6.50%
India 6.30%
Brazil 4.70%
Singapore 3.10%
Angola 2.40%
Chile 2.30%
Mexico 2.30%
Turkey 1.40%
total 55.10%
Top 10 Recipients of FDI Inflows
Sales
China
Hong Kong, SAR of China
Saudi Arabia
India
Brazil
Singapore
Angola
Chile
Mexico
Turkey
total
FDI inflows by development status (US$ billions)
 OECD’s data

 https://data.oecd.org/fdi/fdi-stocks.htm#indicator-c
hart
 Sources of Foreign Direct Investment

• Although the majority of PCF are sourced from the advanced

countries, significant shares of FDI have more recently been
coming from non-OECD countries and this trend has
accelerated in the last decade.
• In fact, overall, “growing FDI between developing countries in
recent years has sometimes compensated for reductions in FDI
flows from high-income countries” (World Bank 2006)
 Sources of Foreign Direct Investment

• The growing role of developing economies as sources of FDI is

confirmed by investment promotion agencies (IPAs). As of
2009, developing and transition economies account for three
of the top ten most promising investors and seven of the top
twenty (UNCTAD 2010b)
• It is important to note that FDI outflows from the developing
countries have shown less volatility than FDI outflows from
advanced economies
FDI outflows, 1995–2009 (US$ billions)
 Conclusion
• International Capital flow is now a days at an increasing rate
towards the whole world.
• Developed countries are receiving more inflows than developing
countries.
• Countries like Vietnam should give emphasis on the capital stock
market.
• FDI is playing vital role on capital movement. While developed
nations still account for the largest share of FDI inflows, FDI into
developing nations has increased.