Multinational Corporations
Multinational Corporations have emerged as one of the principal sources of foreign direct investment since the late 1970's by the world's major industrialized nations. These firms allocate many different theories to achieve the status of a multinational. Internalization, product cycle, obsolescing bargain, and oligopoly theories along with the tariff-jumping hypothesis, shed light on how these foreign operations continue their path of vertical integration. However, even with these lucrative investment strategies it is difficult to distinguish help or hurt to the host country. Because of this proponents and critics of these practices have argued to whom is the greater advantage and why. A critique of these arguments will help in discussing the effectiveness of MNC's to illicit the policy goals of local governments; economic efficiency, growth, and improvement in the standard of living. A multinational corporation (MNC) is an enterprise that engages in foreign direct investment (FDI) and that owns or controls value-added activities in more than one country (Spero & Hart, 1997, 96). Firms are considered to be more multinational if (1) they have many foreign affiliates or subsidiaries in foreign countries; (2) they operate
Four theories and one hypothesis provide explanations of how structural goals are achieved by the MNC's. The internalization theory "...contends that firms expand abroad in order to "internalize" activities in the presence of market imperfections just as they expand domestically for similar reasons" (Ibid, 109). There are three prerequisites that must be met by the MNC to contend with the local firms even though the disadvantages of the former as a foreigner, "...(1) it must have market power that derives from ownership of some specialized knowledge, (2) it must consider the particular foreign location advantageous for new investments relative to alternative locations including its home market, and (3) it must prefer FDI over exporting and licensing by the usual internalization logic" (Ibid, 110). The product cycle "...theory argues that firms invest abroad when their main products become "mature" in domestic markets. As the initial high-growth stage of domestic product commercialization ends and the domestic market becomes saturated, the firm begins to look for new sources of demand abroad in order to maintain its growth. This is achieved by establishing foreign subsidiaries with lower costs so that the firm can remain competitive in its home market while also improving its access to foreign markets" (Ibid, 383). In the obsolescing bargain theory a firm that has invested in a host country starts with a good bargaining position with the host country's government because of firm-specific advantages such as superior technology, access to capital markets, and access to final product markets (Ibid, 111). Once the firm has made an investment, however, the bargaining advanta
Some common words found in the essay are:
Spero Hart, Multinational Corporations, ibid 111, host country, economic efficiency, multinational corporations, product cycle, foreign direct, obsolescing bargain, economic efficiency growth, host countries ibid, efficiency growth improvement, local firms, contends firms, improvement standard living, efficiency growth, growth improvement standard,
Approximate Word count = 1137
Approximate Pages = 5 (250 words per page double spaced)
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