New market players upset MNCs' old games

Videos
Photos

By Ding Yifan (China Daily)
Updated: 2008-06-20 07:43

Seen as a sign of the remarkable progress of globalization, multinational corporations (MNCs) have recently been subjected to questions about their development across the world. Such doubts stem from one fact: their home countries' influences on MNCs are no longer as strong as they used to be after MNCs gained a leading position in global commerce.

There is a Chinese term describing one's wealth - "as rich as a country". It could apply to MNCs as well. The total sales volume of the top 250 multinationals is about one-third of the global output. More than 100 multinationals have an annul sales over $50 billion, while only 60 countries have a yearly gross domestic product (GDP) above this figure.

Companies started to develop businesses in at least two countries since the 19th century, when the European countries began to take colonies. Zaibatsu, the Japanese conglomerate engaged in industrial and financial businesses, also launched their overseas branches after World War I.

But all these MNCs did not embark on full-scale development until the end of World War II .

In the 1970s, the heated cross-border investment among the developed countries was the primary force nurturing the growth of MNCs. In the 1980s, developing countries in Asia became investment destinations of MNCs and China was preferred by multinationals since the 1990s.

In course of their growth during these years, MNCs have also changed their strategy. In the early stage, they chose their investment destinations where they could establish manufacturing outlets at lower costs. And the products from these factories were mostly sold back to their home countries or to a third country.

Later, local markets of the MNCs' investment destinations were also exploited after the developing countries saw economic booms and rises in income. Labor cost was an important element for MNCs to choose where to put their money, but they had more vital indexes to consider: political stability, abundant labor supply and well-organized infrastructure.

That is why the African countries have not become major receivers of investment from MNCs from developed countries although they have rich natural resources and low labor costs.

The development of MNCs has given rise to a wide variety of new challenges in the government's supervision upon businesses. The corporate structure of MNCs enables them to easily evade government control.

For example, multinationals can move their factories to other countries if they find their host countries have harsher labor stipulations.

"Transfer pricing" is another frequently used tactic of MNCs to reduce taxes. By trading productive elements, like assets, services and funds, among different branches, the MNCs could allocate the total profit among different parts of the company in different countries in order to reduce their overall taxes.

The corporate structure of multinationals has directly contributed to the rapid rise of their profits and it is more convenient for them to raise funds from the stock market. The cross-border chain of manufacturing, marketing and distribution help them offer commodities at lower prices to their home country and boost the economic growth there.

In the 1990s, the United States enjoyed high economic growth with low inflation and a low interest rate. Such an economic prosperity could not have been achieved without the US multinationals setting factories in Asian countries and exporting their inexpensive commodities back to the US.

All these contributions used to win considerable supports for MNCs from their home country. But such supports have begun to be questioned by the public in developed countries in recent years.

With mature industrial structures, developed countries would see very close ties between industrial giants and small and middle-sized businesses. Smaller businesses won a considerable portion of benefits from such cooperation.

When the leading companies develop into multinationals, they would usually contract their businesses to overseas branches or foreign partners at lower costs to gain more commercial returns. Thus, smaller businesses in developed countries have less commercial opportunities. Some fire employees, others cut salaries and a few even go bankrupt.

It is against this background that politicians in developed countries began accusing developing countries, especially the emerging markets, of stealing their jobs through unfair competition.

From the perspective of developing countries, multinationals not only establish factories, but also transfer new technologies. They offer better payment than local businesses, which promotes income growth and improves the purchasing power of common people.

Of course, there are also voices from developing countries accusing MNCs of introducing pollution. There have been cases in which MNC projects have been boycotted by local residents for fear of health risks.

As globalization intensifies, the businesses in emerging markets begin their efforts of going multinational. Businesses from China and India invested in several other countries and this was soon noted by the media in developed countries.

Some of these media outlets accused the new MNCs of occupying overseas resources. Such accusations are actually out of their worry that they might pose threats to the MNCs from their own countries.

Whether from developing or developed countries, the multinationals could create more jobs and wealth to their host countries and contribute to the local economy.

It is true that MNCs have widened the income gap between their home countries and their host countries because of their complex internal transfer mechanism and other characteristics.

Yet, globalization makes it possible that developed and developing countries enhance their cooperation and find a better means to strike a balance between the growth of MNCs' commercial returns and their contribution to the improvement in the lives of disadvantaged groups in the global community.

The author is a researcher with the Development Research Center of the State Council

(China Daily 06/20/2008 page8)