What Is International Business?

Dealing with so many different cultures and with extensive field experience, I tend to
apply the simplest of definitions:

International business =
Business transactions crossing national borders at any stage of the transaction.

But then very often other questions crop up.

international business

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Definitions (2)

1. The economic system of exchanging good and services, conducted between individuals
and businesses in multiple countries.

2. The specific entities, such as multinational corporations (MNCs) and international

business companies (IBCs), which engage in business between multiple countries.

International business is a term used to collectively describe all commercial

transactions (private and governmental, sales, investments, logistics,and transportation)
that take place between two or more nations. Usually, private companies undertake such
transactions for profit; governments undertake them for profit and for political reasons.[1]
It refers to all those business activities which involves cross border transactions of goods,
services, resources between two or more nations. Transaction of economic resources
include capital, skills, people etc. for international production of physical goods and
services such as finance, banking, insurance, construction etc.[2]

A multinational enterprise (MNE) is a company that has a worldwide approach to

markets and production or one with operations in more than a country. An MNE is often
called multinational corporation (MNC) or transnational company (TNC). Well known
MNCs include fast food companies such as McDonald's and Yum Brands, vehicle
manufacturers such as General Motors, Ford Motor Company and Toyota, consumer
electronics companies like Samsung, LG and Sony, and energy companies such as
ExxonMobil, Shell and BP. Most of the largest corporations operate in multiple national
markets.

Areas of study within this topic include differences in legal systems, political systems,
economic policy, language, accounting standards, labor standards, living standards,
environmental standards, local culture, corporate culture, foreign exchange market,
tariffs, import and export regulations, trade agreements, climate, education and many
more topics. Each of these factors requires significant changes in how individual business
units operate from one country to the next.

The conduct of international operations depends on companies' objectives and the means
with which they carry them out. The operations affect and are affected by the physical
and societal factors and the competitive environment.

Operations

• Objectives: sales expansion, resource acquisition, risk minimization

Means

• Modes: importing and exporting, tourism and transportation, licensing and

franchising, turnkey operations, management contracts, direct investment and
portfolio investments.
• Functions: marketing, global manufacturing and supply chain management,
accounting, finance, human resources
• Overlaying alternatives: choice of countries, organization and control mechanisms

Physical and societal factors

• Political policies and legal practices

• Cultural factors
• Economic forces
• Geographical influences

Competitive factors

• Major advantage in price, marketing, innovation, or other factors.

• Number and comparative capabilities of competitors
• Competitive differences by country

There has been growth in globalization in recent decades due to the following eight
factors:

• Technology is expanding, especially in transportation and communications.

• Governments are removing international business restrictions.
• Institutions provide services to ease the conduct of international business.
• Consumers know about and want foreign goods and services.
• Competition has become more global.
• Political relationships have improved among some major economic powers.
• Countries cooperate more on transnational issues.
• Cross-national cooperation and agreements.

Studying international business is important because:

 • Most companies are either international or compete with international companies.
• Modes of operation may differ from those used domestically.
• The best way of conducting business may differ by country.
• An understanding helps you make better career decisions.
• An understanding helps you decide what governmental policies to support.

Managers in international business must understand social science disciplines and how
they affect all functional business fields.

Tom Travis, the managing partner of Sandler, Travis & Rosenberg, PA. and international
trade and customs consultant, uses the Six Tenets when giving advice on how to
globalize one's business. The Six Tenets are as follows[3]:

1. Take advantage of trade agreements: think outside the border

o Familiarize yourself with preference programs and trade agreements.
o Read the fine print.
o Participate in the process.
o Seize opportunities when they arise.
2. Protect your brand at all costs
o You and your brand are inseparable.
o You must be vigilant in protecting your intellectual property both at home
and abroad.
o You must be vigilant in enforcing your IP rights.
o Protect your worldwide reputation by strict adherence to labor and
human rights standards.
3. Maintain high ethical standards
o Strong ethics translate into good business.
o Forge ethical strategic partnerships.
o Understand corporate accountability laws.
o Become involved with the international business self-regulation
movement.
o Develop compliance protocols for import and export operations.
o Memorialize your company's code of ethics and compliance practices in
writing.
o Appoint a leader.
4. Stay secure in an insecure world
o Security requires transparency throughout the supply chain.
o Participate in trade-government partnerships.
o Make the most of new security measures.
o Secure your data.
o Keep your personnel secure.
5. Expect the Unexpected
o The unexpected will happen.
o Do your research now.
o Address your particular circumstances.
6. All global business is personal
 o Go to the source.
o Keep communications open.
o Keep the home office operational.
o Fly the flag at your overseas locations.
o Relate to offshore associates on a personal level.
o Be available to overseas clients and customers 24/7.

MULTINATIONAL ENTERPRISE

A multinational corporation (MNC) or transnational corporation (TNC), also called

multinational enterprise (MNE)[1], is a corporation or an enterprise that manages
production or delivers services in more than one country. It can also be referred as an
international corporation. The International Labour Organization (ILO) has defined[citation
needed]
an MNC as a corporation that has its management headquarters in one country,
known as the home country, and operates in several other countries, known as host
countries.

The first modern multinational corporation is generally thought to be the Dutch East
India Company. Nowadays many corporations have offices, branches or manufacturing
plants in different countries from where their original and main headquarters is located.

Some multinational corporations are very big, with budgets that exceed some national
GDPs. Multinational corporations can have a powerful influence in local economies, and
even the world economy, and play an important role in international relations and
globalization. The presence of such powerful players in the world economy is reason for
much controversy.

Characteristics

As I see it, following are the characteristics of a Micro Multinational Company.

1. Operates in several countries.

2. Normally a small group of people runs it.
3. People are scattered around the globe.
4. Resources are limited.
5. Many people wear several hats.
6. Financing available for growth is not sufficient.
7. Usually can be categorized as a small business.
8. Adopts the new technologies very quickly.
9. Heavily leverages the Internet for expansion.
10. Uses resources very efficiently.
11. Mostly managed by entrepreneurs with extensive technical backgrounds.
12. Most of the people in the company are stake holders instead of employees on
salary.
 13. Routine daily tasks are outsourced to countries with low cost technical labor.
14. Yearly combined budget of the growth and management tools is only a fraction of
the annual sales.

Multinational Business Enterprises:

A New Category of International Organizations

-/-

Report orginally published in Yearbook of International Organizations, 12th ed, 1968-69,

pp 1189-1214 with the detailed report, including the survey data on which this article is
based. The report included a list of 600 multinational business enterprises. Tables
separate. [Version française abregée]. Also published in International Associations, 1968,
1, pp 1-11

Introduction

The editors of the Yearbook of International Organizations have, in previous editions,

restricted their attention to non-profit international organizations, whether governmental
or non-governmental.

Nearly all intergovernmental organizations are non-profit but the few exceptions have
been included in previous editions of the Yearbook to ensure that all intergovernmental
organizations were listed. These include such bodies as Eurochemic and Eurofima.

There are many non-governmental organizations which, although they do not have profit
as the main aim, nevertheless operate in order to facilitate profit maximization by their
members. Most of these are in the commercial section of the Yearbook classified list.

The distinction between governmental and non-governmental organizations as defined by

the Economic and Social Council of the United Nations, does not differentiate between
profit and non-profit international non-govern- mental organizations. In practice however
the non-governmental organizations accepted into consultative status with the United
Nations have all been non-profit organizations.

Since the 1966-1967 edition of the Yearbook and particularly during the first six months
of 1968, there has been considerable interest in ' multinational ' or ' transnational '
business enterprises and corporations. Articles dealing with the characteristics and
business polices of world enterprises have however been appearing in the Harvard
Business Review and other American publications since the beginning of the 1950s.
Studies of the definition and classification of international organizations have stressed the
need to include as a separate category the largely ignored group of international profit-
 making organizations. These would then constitute a third major group of organizations
on the international scene, together with international governmental and non-
governmental, non-profit organizations.

It must be pointed out that the decision to add profit-making organizations to the list of
international organizations in this Yearbook implied a fundamental assumption which has
in fact been borne out by research in the United States on organizations in general,
namely that corporations and corporate structures bear many if not most of the
characteristics of any or all other kinds of organizations. In addition it has been argued
that as corporations recognize the effects of their policies on the well-being of society,
which is important for their survival, their decisions are governed less by straight-forward
profit maximization and more by objectives which combine long-term profits with
improvement in the general social welfare. This approximates the decision-making
problem experienced in government agencies.

Apart from a few isolated studies on the classification of international organizations in

general, the main interest in this ' new ' category has come from the field of international
economics and business administration. This interest has been stimulated by the estimate
that within the next decade 75 % of the world's productive capacity will be controlled by
a small group of 300 multinational corporations. This has led to the suggestion that these
organizations can become an instrument of great utility for the general progress of human
welfare — a progress founded on the profit motive as the basis of a free market economy.

The International Chamber of Commerce has recently created a ' Special Committee on
the Transnational Corporation ' of which the first meeting was held on March 16th, 1968.
The purpose of the Committee is to undertake a study in depth of the increasing influence
of the multinational corporation and to establish recommendations for governments and
business circles. It is hoped in this way to aid the multinational corporation, of whatever
country of origin, to fulfil its role in the economic development of countries in which it is
active. The Committee will formulate its conclusions on the basis of a report by
American economist, Dr Sidney Rolfe.

A comprehensive study of the importance of the multinational corporation has been in

progress at the Harvard Graduate School of Business for some years under Prof Raymond
Vernon. The study is specifically concerned with manufacturing organizations listed in '
The 500 Largest U.S. Industrial Corporations ' (' Fortune ', 1934 and 1965) with
manufacturing subsidiaries in 6 foreign countries.

The published studies have not yet produced criteria which could be used to evaluate any
business enterprise in order to establish a list of multinational corporations. Criteria have
been discussed but only isolated examples of organizations fulfilling them have been
cited. There has been a tendency to restrict attention to very large multi- national
manufacturing organizations because of their considerable economic importance. Little
attention has been given to economically less important profit organizations which might
in fact be more ' international ', whether they are industrial, commercial or service
enterprises. There are, for example, international accounting, engineering, advertising and
employment firms.

The UAI after consultation with the International Chamber of Commerce, has undertaken
to explore another aspect of this question. The UAI is primarily interested in making
available as soon as possible details on all multinational corporations as international
bodies, in the same way as is done for intergovernmental and international non-profit
non-governmental organizations. In order to do this, criteria of ' multinationaly ' have to
be developed which are sufficiently general to be applied to all types and sizes of profit
corporation. As an aid to the general debate on this ' new ' category of organizations and
to test a few available criteria, it was decided to include in 12th edition of the Yearbook a
preliminary list of possible candidates for consideration as multinational corporations.

Definition of ' Multinational '

There is a graduation from organizations undertaking international trade to international

business enterprises. A summary of the methods by which a national manufacturing
organization could operate internationally illustrates the problem of definition. A
company can. according to Roy Blough :

• solicit purchases by foreign buyers in one or more countries and ship to them in
wholesale lots, leaving the further distribution of the goods to them;
• market and distribute the goods to their final users in the foreign country. In
which case it may make arrangements with local distributors or establish a
distribution network of its own;
• establish a factory in the country in which it is selling or plans to sell and produce
for sale in third countries and also in the home country;
• contact with foreign producers to purchase from them goods which the company
distributes whether in the country of production, third countries, or the home
country;
• sell its patents, technical know-how, and/or trademarks to a company in a foreign
country or license their use for a term of years in exchange for periodic royalty
payments;
• undertake to supply management, at a fee, for a foreign manufacturing enterprise
which it does not own or in which it has only a minority interest;
• combine any of the above methods, depending on the market with which it deals.

These operational differences are complicated by the forms which the relationship
between the parent and the daughter companies can take under differing national
legislations with different degrees of financial commitment on the part of the parent
company. Examples are :

• Branch office : a foreign local office of the parent company having no

independent or corporate status.
• Subsidiary: a foreign firm established under national law of the country, whose
capital stock is 50 % or more controlled by the parent company.
 • Joint company : a foreign firm in which the parent company financial interest and
foreign financial interest are equally divided.
• Affiliate : a foreign firm in which the capital Interest of the participating parent
company is less than 50 %.
• Sub-subsidiary: a subsidiary or affiliate not established directly by the parent
company (or sub-affiliate) but by another subsidiary or affiliate of the latter. This
situation can be further complicated since the subsidiary can Itself be In the home
country or in a foreign country.

These definitions are not universally accepted. In the remainder of this note, affiliate will
be used as a general term to describe all daughter and associated companies. The
definition of a multinational corporation Is made more difficult since there is no
international corporate law. The parent and foreign daughter companies are established
on equal footing in terms of their respective national legislation. From an international
legal point of view a multinational corporation is merely an agglomeration of corporate
entities loosely linked by a network of non-resident shareholdings, of which the majority
happens to be in hands of the parent company. A multinational corporation is not a legal
entity. This is also true of the other group of international organizations not established
by intergovernmental agreement, namely non-profit non-governmental organizations.

Efforts have been made within the European Economic Community since 1960 to
establish a legal basis for a European corporation. This is considered essential to permit
an integration of economic strength to meet American competition. It has been suggested
that the existence of European corporations would lead to the standardization of corporate
legislation and become the instrument of effective long-term economic integration.

In the course of the lengthy discussions on a European corporation a number of criteria

have been suggested. It has been proposed that only the larger corporations in the
Common Market with a ' European outlook ' should be allowed to take on this new form.
A counter proposal suggests that no barrier should be raised to corporations wishing to
take on the new form. Another suggestion is that a minimum capital should be fixed
[possibly $250.000 - 500,000). To avoid these somewhat arbitrary distinctions, a further
proposal attempted to define a European corpora- tion as one with any of the following
characteristics : branches in at least one country other than the parent country; financial
interests in corporations in at least one country other than the parent country; financial
control of at least one corporation in a country other than the parent country; quotation of
shares of the corporation on stock exchanges of at least two countries.

Another set of criteria has been proposed by Jacques Maisonrouge, President of the IBM
World Trade Corporation, namely: basic policies of the corporation must be applied to all
its subsidiaries In order to create a world- wide image; the company must operate in a
great number of countries at different stages of economic development; several of the
subsidiaries must be complete industrial organizations (i.e. their activities must include
research and development, manufacturing, sales and service); the subsidiaries must
preferably be managed by nationals so that men of various nationalities can be trained for
top jobs particularly at headquarters; stocks of the company should be quoted on the
exchanges of the countries in which the company is active so that the capital is in effect
multinational; the company must be a good citizen in every country in which it operates.

A more indirect approach has been made by Professor J Houssiaux of the Université de
Nancy. He attempted to develop criteria to describe a national corporation and from this
deduced criteria for a ' plurinational ' corporation. The criteria are : capital spread
throughout the world through the intermediary of a variety of financial markets; ability to
function in any region of the globe under the direction of a team of executives of a
number of nationalities, within an organization conceived independently of the
management techniques of a particular economy; activities oriented in terms of the world
breakdown of the factors of production, whilst taking into account the long term
evolution of this breakdown, as compared with the anticipated evolution of income and
demand throughout the world.

Professor Houssiaux notes three conditions as essential for the establishment and
development of such enterprises. These are : unity of management policy and
organization as a guide to the major decisions governing the growth of the enterprise
(including : consolidated balance sheet for the entire group; reinvestment of profits from
individual subsidiaries based on needs of corporation as a whole; continual modifications
and extensions to group structure; organization of transfers and collective services on a
global basis within the group); global conception of development and trade relations; and
an environment with institutions based on internationalism.

Attention so far has been concentrated on the better known types of profit corporation
which are owned by private shareholders. There is however a large group of mixed
government-private corporations, cooperatives, ' associations ', ' societies ', and other
organizations which may not use terms in their titles which have any connection with
profit-making operations, although this represents a principal aim.

The fundamental question which must be answered in order to establish criteria is which
groups are to be considered as members of any such organization. Studies to date have
generally assumed that an organization Is multinational because it operates in a number
of countries, i.e. the subsidiaries are treated as a type of member. To be consistent with
the other forms of organization listed in this Yearbook, the logical requirement is that the
stockholders should be considered as members. These are the persons who vote
according to the rules of the organization to elect the directors, etc.. in nearly the same
fashion as do the members of other international organizations. Logically it is therefore
the nationality of these members which qualifies the organization as an international one.

Possible Criteria

For the purpose of preparing a definitive list of these organizations as been done for the
other two types of international organization, the Union of International Associations
considers that a detailed analysis of possible multi- national corporations should consider
the use of all the following characteristics which measure different aspects of the concept
of internationality.
It may be impracticable to obtain information systematically on some of the items. It will
almost certainly be necessary to consider a number of criteria together in any final
definition to cover the many different types of profit organization. Possible criteria
include:

1. Shareholding in parent company: Ideally the shareholding should be balanced such

that, for example, nationals of no country have control of more shares than nationals two
other countries combined. This ignores all the realities of the respective financial
importance of different countries. A balance of voting strength has not been used as an
absolute criterion in evaluating non-profit organizations for this reason. In many cases
this depends on the financial contribution as in profit organizations. An additional
difficulty is the impossibility of obtaining systematic data on the nationality of the
shareholder. There is also the difficulty of indirect shareholdings via holding companies
and investment clubs. This criterion may however be useful in certain simple cases.

2. National stock exchanges on which the shares are quoted: A minimum could be
specified for the number of foreign stock exchanges on which the shares are quoted. This
is a crude approximation to the international shareholding balance. The disadvantage of
this criterion is that it might exclude some corporations partially or wholly owned by
governments particularly those ofsocialist persuasion. This criterion might however be
useful in evaluating those corporations which expect to be quoted on a stock exchange.

3. Composition of Board of Directors: The national origin or current citizenship of

members of the Board may be of great importance to the decision-making process of an
international corporation, and to the acceptability of its affiliates in host countries. In the
case of non-profit organizations, the nationalities of members of the governing body are
used as a guide to the significance of the stated geographical spread of membership. In
the absence of precise information on the nationalities of shareholders, those of members
of the Board (who are the elected representatives of the shareholders) could be
considered as a first approximation. An arbitrary acceptable ratio of headquarters country
voting directors to foreign country directors could be defined.

4 Composition of executive staff within companies controlled by the parent

company: A multinational management has been suggested as one characteristic. An
ideal balance of nationalities is unrealistic but it would be possible to define some
minimum acceptable ratio of headquarters country staff, to foreign staff. The criterion
could be used to exclude excessively ethnocentric organizations. It has the advantage that
the information would not be considered confidential.

5. Balance of factories or installations (excluding sales offices and licensed

producers): A multinational manufacturing enterprise should have its installations in a
number of countries. Minimum criteria could be based on the total number of countries in
which the company has installations, or, more stringently, on the ratio of headquarters
country installations to foreign country installations. This criterion is clearly not suited to
an evaluation of a trading or service company, or a highly diversified company.
 6. Balance of sales offices (excluding representatives on commission): A trading or
service company could be evaluated on the basis of the total number of countries in
which the company has offices, or, more stringently, on the ratio of headquarters country
offices to foreign-country offices.

7. Continental or regional head offices: A possible convenient indication of

multinationality is the existence of regional head offices. These can be considered as
evidence of a decentralization of decision-making out of the headquarters-country. This
criterion may be less applicable to smaller corporations.

8. Languages: A possible convenient indication of multinationality is the acceptance of a

number of working languages both in dealing with customers and for internal
communication between the principal head office and the regional or foreign national
offices.

9. Income ratio for whole group controlled by the parent company: The ratio of
income earned in the headquarters country to that earned in all other countries can be
considered as one measure of the relative interest of the directors in home and foreign
operations. The disadvantage of this criterion is that the information may be considered
confidential. Income is often difficult to define consistently.

10. Tangible assets ratio for whole group controlled by the parent company: The
ratio of tangible assets in the headquarters country to those in all other countries can be
considered as one measure of the relative interest of the directors in home and foreign
operations. The disadvantage of this criterion is that information may be considered
confidential. The definition of tangible assets will vary.

11. Relationship between parent group and foreign affiliates: The degree of
independence in decision-making accorded to foreign affiliates by the parent company
can be considered as a measure of the diminution of the influence of one national
viewpoint in the conduct of the affairs of the company. This is an important concept but
the effects are difficult to measure and are easily confused with a unified management
policy.

12. Tax status: The tax position of the parent company and subsidiaries could be used as
a criterion. Tax treaties and tax laws as applied to corporations doing international
business are so very complex that this would seem to be unworkable. The information is
also likely to be highly confidential. This may however become an important criterion in
the future when special international legislation is created to deal with multinational
corporations.

13. Relationships with non-governmental, non-profit organizations: A possible

measure of '' other-directedness ' on the part of the corporation is membership of trade
associations or any other such body for the exchange of technical or commercial
information (e.g. European Indus- trial Space Study Group, Inter-American Council of
Commerce and Production, International Association of Food Distribution, International
Copper Research Association, International Superphosphate Manufacturers' Association,
This criterion may become important since such organizations will have to make
provision for multinational corporation membership as distinct from that of individual
national companies).

14. Relationships with intergovernmental organizations: Another possible measure of '

other-directedness ' on the part of the corporation is any form of consultative relationship
with intergovernmental organizations (e.g. with the International Telecommunications
Union, or as a partnership with the International Finance Corporation in joint ventures
stimulated by the World Bank, or as membership of the General Committee of the
FAO/lndustry Cooperative Program or the FAO Fertilizer Industry Advisory Committee,
etc.). The greater the effort made to produce a stringent definition of internationality, the
more complex measurement becomes and the fewer the number of organizations which
will fulfil the resultant criteria. Existing organizations must be assumed to lie on a scale
between extreme protective nationalism and a form of ideal internationalism.

The position of some organizations on this scale may be governed more by the
requirements of the business with which they are concerned than with any desire to be
nationalistic or internationalistic. The desirable multinational corporation characteristic of
centralized control and decentralized decision-making may not be suitable in a particular
trade or industry.

Sources of Information and Problems in Establishing a List

The most serious difficulty in establishing any list of multinational corporations is the
lack of published information on corporations throughout the world which covers the
items mentioned in the possible criteria above. Very few directories give an indication in
detail of the number of countries in which a parent company has affiliates and the extent
to which these affiliates are in fact controlled by the parent. The relationship between
parent, subsidiary, branch and sub-subsidiary is normally very difficult to follow through.
A final difficulty is the rapid change in the situation from month to month as subsidiaries
are sold or parent companies merge or are taken over by other companies,

It would have been possible to attempt to send questionnaires to a wide selection of

companies but the results obtained would have required a considerable amount of
analysis to permit comparison. The percentage of answers would not have provided the
basis for a complete selection.

The alternative chosen was to analyse information already available in published form to
provide a preliminary list of possible multinational corporations which could be used as
the basis for a more critical list in a subsequent edition of the Yearbook. The directory
which proved suitable to this program was ' Who Owns Whom '. This lists approximately
120,000 affiliate companies throughout the world whose 16,000 parents have their
headquarters in the major European countries and the USA. It also indicates whether the
affiliate is wholly owned or controlled (i.e. a '' subsidiary ') or represents only a non-
controlling-financial interest (i.e. an ' associate '}. The other types of parent-daughter
relationship are covered by these two terms which are defined in detail below. The main
advantage of using this directory was that it included all categories of business
enterprises, not just manufacturing enterprises as do the majority of directories of this
type.

The choice of the first source was based on the assumption that a multinational
corporation must, in terms of each national legislation, form at least one subsidiary in
each foreign country in which it operates directly. By checking the location of
subsidiaries a direct count of the number of countries should be obtained.

The main disadvantage of this directory is that it did not cover all the major industrialized
countries. No information was available in comparable form on Canadian and Japanese
parent companies and their affiliates. In addition the information on the U.S. parent
companies was restricted to details on their European affiliates. Since the U.S. parent
companies are considered to be the major group of potential multinational corporations, a
second source of information was required.

The only suitable directory which could be located that was not restricted to one type of
entreprise was the ' Directory of American Firms Operating in Foreign Countries '. This
listed the countries in which 4,000 American parent companies had approximately 14,000
affiliates. The disavantage of this directory was that only the 1966 edition was available.
It was possible to update the information on European affiliates by making use of the first
directory, which was available in a 1968 edition. In addition this directory did not make
any comparable distinction between subsidiaries, associates and branches.

Analysis of Sources

No information is available on the acceptable number of countries to qualify for '

multinationality '. It would have been possible to select some minimum figure and merely
prepare a list of those companies which exceeded this. Two is the logical minimum, but
the criteria for the other organizations in this Yearbook is three. The study at Harvard
University is based on six.

Due to the limitation on space available for this preliminary list in the Yearbook a
compromise solution was chosen. It was decided to analyse all the companies listed in the
two directories to determine exactly how many there with affiliates in 1,2, 3... etc.
countries. On the basis of the analysis the minimum figure could then be chosen so that
the maximum number of companies could be listed in the Yearbook. This minimum
figure was developed from the results of the analysis shown in Table 1. [Tables separate]

Table 1 Number of countries (excepting the country of the parent company) in which
parent companies have affiliates (i.e. subsidiaries and associates). This table shows for
the major European countries and the U.S.A. how many, for example. German parent
companies have affiliates in 9 foreign countries (13 from the table).
 Table 2 Number of parent companies for each major industrialized country having
affiliates (i.e. subsidiaries and associates) in a given foreign country. Whilst preparing
Table 1 it was convenient to prepare Table 2. This shows for each of the major European
countries and the U.S.A. how many, for example, Swedish parent companies, have
affiliates in Brazil (21 from the table).

Table 3 Preliminary list of possible multinational business enterprises. Using the data in
Table 1 the minimum number of countries was fixed arbitrarily at 10. This gave a
preliminary fist of 600 enterprises which is printed as Table 3.

The parent corporations listed have been arbitrarily split into groups having affiliates in
10-12, 13-15, 16-20, 21- 25, 26-30, 31-40, and 41 plus countries. Within each group the
corporations have been placed In alphabetical order within headquarters country to
facilitate consultation.

This list should contain a high proportion of corporations which will fall Into the category
of multinational once general criteria have been defined. The list arbitrarily excludes (due
to the minimum of 10) many corporations which might be considered as multinational,
but the data in Table 1 gives some indication of the number of these. The list includes a
number of corporations which might be excluded from a future list. These are the cases
where :

• a very large corporation has a relatively minor proportion of its affiliates in other
countries, but because of the size of the corporation the number of these affiliates
is equivalent to or greater than that of a smaller organization with interests more
equally balanced between countries.
• the affiliates in foreign countries are not owned or controlled (i.e. they are not '
subsidiaries ') but pri- marily associates in which the corporation has a non-
controlling interest. Using the information in the directory ' Who Owns Whom ', it
was possible to analyse each European company included in Table 3 in greater
detail in order to establish a scale on the basis of which cases falling into these
groups could perhaps be specified. Four columns of figures follow the name of
each parent corporation as an aid to any future definition of ' mutinational '. Only
two columns could be completed for American companies.

The meaning of the columns is a follows :

Column ' a ' r Number of foreign countries in which the parent company has
•
affiliates (i.e. subsidiaries plus associates). This figure formed the basis for the
analysis in Table 1.
• Column ' b ' : Percentage of the total number of affiliate companies (i.e.
subsidiaries plus associates) of the parent company which are in foreign countries.
No distinction was made between subsidiaries, sub-subsidiaries and sub-sub-
subsidiaries, etc.
• Column ' c ' : Percentage of the total number of foreign affiliate companies (i.e.
subsidiaries plus associates) which are owned or controlled subsidiaries, as
 opposed to associates. Dormant companies were treated as associates. Since no
data was available to distinguish between U.S. parent company subsidiaries and
associates an attempt was made to approximate the policy of the company in this
respect. Information on the percentage of subsidiaries amongst European affiliates
only is given in brackets.
• Column ' d ' : An index of ' internationality ' combining the information in the
previous column to facilitate comparison between companies. The index is
derived as follows : (col. ' a ') X (col. ' b ') X (col. ' c ')/1000 = index of '
internationality '. This gives an index for each parent company in the range 0 -
17000 if all possible countries and territories are taken into account. In practice
the majority of companies fall into the range 20 - 150. The upper end of the range
includes the companies which have been cited as examples of multinatio- nal
corporations. The lower end of the range includes the companies which are more
likely to be excluded from any future list of multinational corporations.

Comment on Initial Criteria and Sources

The criteria used to distinguish between possible candidates have largely been dictated by
published information available. They represent different attempts to isolate the quality of
' internationality '. The results of this survey have been expressed in a manner which does
not preclude a more or less stringent definition of multinationality. None of the criteria
listed in Table 3 is wholly satisfactory :

• number of countries. Even in the limiting case where a company has no foreign
affiliates, it can be of considerable international economic importance by
operating through intermediate trading and import-export companies. All that can
be said is that the probability of a parent company being ' international minded ' is
higher if it has operating affiliates in a number of foreign countries.
• percentage of foreign affiliates. This criteria does not distinguish between large
monolithic companies with relatively few financially significant subsidiaries and
companies with a considerable number of subsidiaries of much less financial
importance. In a particular country or industry it may be convenient to adopt one
or other structure, it has been assumed that the number of foreign affiliates
corresponds approximately to the geographical division of financial interests. It
has also been assumed, following on from this, that the higher the percentage of
foreign affiliates, the lower the probability that the company will be primarily
interested in its affairs within the country of its headquarters. This criterion is
therefore a crude approximation to a determination of the position of a company
on the line between purely national (ethnocentric) and completely international
(geocentric).
• percentage of foreign affiliates controlled. It has been suggested that multinational
corporations should only include those cases where the parent company has a
controlling interest in affiliates. This distinguishes such corporations from those
which in the extreme merely have a minority interest. It could also be argued that
a corporation with a vast network of minority interest was less centralized and
therefore more international.
 It was not possible to check the two directories used so that It had to be assumed that
together they represented a fairly complete and accurate coverage of the parent
companies in the European countries and the USA. A certain amount of inconsistency
over the definitions of subsidiary and associate is to be expected. The defi- nitions used
by the editors of ' Who Owns Whom ' are

' A subsidiary is defined as a company more than 50 per cent of the share capital of which
is owned by another company which in the directory is therefore defined as a parent
company. A company is classified as an associate when it is so described by itself or
where it has annouced that it has acquired a substantial interest in another company or
where published information is available that it owns not less than 10 per cent of the
share capital of the other company. Members of industrial consortia are listed as
associates. Any company of which another company is the associate as already defined is
regarded as being In asso- ciation with that other company '.

The definitions used by the editors of ' Directory of American Firms Operating in Foreign
Countries ' are :

' This Directory includes only those firms in which American firms or individuals have a
substantial direct capital investment in the form of stock, as the sole owner, or as a
partner in the enterprise '. ' Bran- ches ' and ' subsidiaries ' are included but not
distinguished or defined.

Comment on survey

From Table 1 there are 2991 parent companies in 14 European countries and the U.S.A.
with affiliates In one foreign country only, and 7045 with affiliates in one or more. Of
these parent companies, U.S.A. parents constitute respectively 37 % and 40 %. There are
595 parent companies with affiliates in 10 or more foreign countries and 166 with
affiliates in 20 or more. Of these parent companies, U.S.A. parents constitute respectively
45 % and 52%. It is interesting to note that the number of the intergovernmental and
international non-profit organizations listed in this Yearbook as having headquarters in
the Table 1 countries is 50% of the total of parents companies with headquarters in the
same countries [comparing companies in at least three countries on the assumption that
these can be considered equivalent to the minimum membership criterion of the other
organizations).

The 7,046 parent companies have affiliates in 26,393 countries, i.e. each company has
affiliates in an average of 3.75 countries. (2.48 in the case of European companies only).
The European parent companies included in the Table constitute approximately 40 % of
those surveyed. The remaining parent companies only have affiliates in their own
countries.

From Table 2 the distribution of the links of the parent companies with foreign countries
is 53 % Europe, 11 % Africa, 25 % America, 9% Asia and 5% Australia. A separate
study of foreign enterprises in Japan gives some indication of the validity of the figures in
 this Table. This study estimated that ' almost 800 ' foreign enterprises had been set up in
Japan by 1966. Table 2 gives a corresponding figure of 465. The difference is probably
due to implantations from countries other than those for which information was availabe,
and also to the inevitable difficulty of obtaining information and ensuring that it was kept
up to date. (One difficulty in the survey which affects the results is the differences in the
definition of a country, e.g.Portuguese parent companies do not consider Angola as a
separate country, whereas companies operating from other countries would treat Portugal
and Angola as separate countries. No attempt was made to allow for this.)

Comment on list

The list published in Table 3 can be considered as a selection of cases on which criteria
may be tested. It does not however include any of the mixed category of profit
organizations mentioned earlier in this note.

All the examples of multinational corporations previously cited in published articles

appear to have been included. They tend to lie in the higher groups and have a high index
of ' internationality '. The list includes 70% of the 180 corporations mentioned in an
unpublished list of American corporations which an in the ' Fortune ' list but which have
a minimum of 6 foreign manufacturing subsidiaries. This is being used as a basis for
research at Harvard University by Professor Raymond Vernon. The organizations
included from this ' manufacturer ' list represent 48% of the U.S. organizations included
in Table 3.

As stated earlier the list does not include business enterprises from a number of important
countries Including Canada, Japan and the Eastern European countries. Nor was it
possible to obtain information on the parent com- panies registered in the tax havens.

From Table 1 however, the number of parent companies correlates quite strongly with the
figure for export trade. The countries for which data on parent companies was available,
with the exception of Spain, Portugal and Luxem- burg, all had an export figure of at
least $1.7 thousand million dollars. The only other countries with comparable exports are
Canada (10.6), Japan (10.4), Australia (3.4), Venezuela (2.7), South Africa (1-9), and
Brazil (1.7), together with some Eastern European countries. Of these countries only
Canada and Japan are probably hosts to many parent companies which should be
included in the list.

The list itself contains a number of unexpected cases due to the sources used and the
method employed in the short time available. Examples are Pan American Airways
(USA) in the 40 plus group and the travel agents Agence Havas (France) in the 10-12
group which are included because of the number of offices in foreign countries. The
index for Agence Havas is however only 8 which makes it one of the least ' international '
in the list according to the criteria employed. Unfortunately the sources used did not
provide sufficient comparable information on Pan American.
 The lack of adequate distinction between branches and subsidiaries or associates in the
source on U.S. corpo- rations makes it difficult to compare details on European and
American organizations in the tables. Due to the inclusion of more information on
branches in the American source the figures for American organizations are all scaled
upwards. Some indication of the extent of this upward scaling can be obtained by
comparing the figures for Belgium (461 U.S. organizations) with those from a detailed
American Embassy list published in December 1967 of U.S. organizations in that
country. The list also included some representatives and information offices of American
companies and had a total of 657 U.S. organizations mentioned. Of these 21 % were
indicated as branches or other entities directly dependent on the American parent. This
gives approximately 525 affiliates in comparison with the Table 2 figure of 461.

Information on European organizations has however all been obtained from the same
source. The position of the Compagnie Nationale Air France (France) in the list in the 10
—12 group, is probably more indicative of the status of national airlines as multinational
companies. The index in this case was zero, since all foreign affiliates were listed as
associates.

The question raised by such organizations, which depend on an international network of

sales bureaus, is whether and to what extent they can be considered as multinational. It is
at this point that data on the nationality breakdown of the Board of Directors would prove
useful. But, even if the directors are all nationals of the head- quarters country, such
organizations should perhaps be considered as a special type of multinational corporation.
A study of types of multinational corporation which has received a great deal of publicity
is that of Professor Howard Perlmutter (Institut pour I'étude des méthodes de direction de
I'entreprise, Lausanne). He distinguishes the following groups of corporations in what he
considers to be an evolutionary chain (although every corporation Is considered to have a
combination of a!l the characteristics):

• Ethnocentric corporation : senior management suspicious of foreigners and

unfamiliar business methods; head- quarters maintains responsibility for all main
decisions; priority is given to nationals from the headquarters country in filling
important posts in foreign subsidiaries; parent company considered to be superior
and have a monopoly of know-how. In practice this type of organization arouses
the suspicion of local governments and can lead to nationalistic attacks.
• Polycentric corporations : recognition that local situations are different from one
another and from the parent country; subsidiaries operated by the nationals of
each country; parent company relies on financial controls rather than command
structure to achieve a profit; company becomes a confederation of loosely
connected subsidiaries, many of which have access to all financial and research
data; parent company remains in the hands of nationals of the headquarters
country who occupy all important posts.
• Geocentric corporations : posts filled without regard to nationality; policies
formulated without regard to national preferences; subsidiary directors participate
in the formulation of general policies; headquarters location consi- dered to be an
accident of history to be changed according to the convenience of tax laws.
It might be possible to establish arbitrarily sets of quantitative criteria which would group
corporations into three such groups, or preferably more in order to split up the higher
proportion of organizations at the ethnocentric end of the range. In this way degrees of
multinationality could be recognized which would permit satisfactory classification of the
sales bureau type of organization. Such a scale could possibly be developed by using the
index technique with more ratio criteria, since low index values indicate organizations
which are more likely to be ethnocentric as defined above.

The ratio of headquarters country directors to foreign directors does appear to represent
the most easily obtain- able and least confidential additional criterion. It is the closest
approximation to the nationalities of the sharehol- ders and may in fact be preferable
since it gives a real picture of the ethnocentrism of the Board and decision ma- king.
Information on the shareholders would only give a theoretical picture of the operation of
the organization on the assumption that the Board decisions reflected the day-to-day
opinions of shareholders. In addition it is normally by its Board or management that a
corporation is judged, rather than by its shareholders.

In examining suitable criteria in the future, provision will have to be made for the
consortium arrangement and the bi-national joint venture which is becoming important
and widespread. Another type of structure which may not fall within any of the criteria
yet suggested is that of a large corporation which controls a complex network of bi-
national operations. A further problem is created by individuals families, and national
corporations which create and completely control multinational corporations as a means
of conducting their international operations. There is also the highly charged question of
the distinction, or the necessity for a distinction, between multinational corpo- rations,
multinational groups (which have been broadly defined as a collection enterprises
between which any form of fink may exist which is sufficiently strong and durable to
permit a common economic policy), and international cartels (which have been defined
as voluntary agreements among independent enterprises in closely related indus- tries in
two or more countries with the purpose of exerting a monopolistic control of the market).

Conclusions

The main question raised by this preliminary study is how restrictive a definition of
multinational corporations is required and whether it would be preferable to define
criteria to separate groups of corporations of different degrees of internationality in order
to cover all cases. It may prove to be the case that many small new corporations with
subsidiaries in only a few countries are less ethnocentric and more international than
many of the large corpora- tions.

It might be useful to distinguish between long-established corporations with

international interests in many countries (mainly trading companies), large national
corporations developing International Interests, and smaller corporations recently
created as international companies by national corporations from a limited number of
countries (usually two to four).
 It would be an advantage to make any future criteria consistent with those employed to
detect international non- profit organizations. The additional complexity of the more
highly developed profit corporations may make it useful to reassess non-profit
organization criteria in order to distinguish between the more and the less international in
a similar manner.

The multinational corporation will become an increasingly important concept over the
next few years as mergers and takeovers establish international economic empires. The
corporations themselves will have to make great efforts, as some have already done, to
become truly international in order to avoid nationalization, discriminatory tariffs or
accusations of economic colonialism. They are faced with increasingly complex tax
problems and the burden of double taxation, due to the lack of any international legal
status or provisions for international non-governmental organizations (whether profit or
non-profit).

One solution is the creation of special national legislation in each country to deal with
multinational corporations which make their headquarters there. At present only the tax
havens such as the Bahamas, Bermuda and Lichtenstein provide an adequate place where
a large multinational corporation can establish its central activity. In the case of
international non-profit organizations, Belgium is the only country with special
legislation. An example may howe- ver be set by Peru where legislation has just been
proposed to deal specifically with the tax problems of multina- tional corporations and
their employees.

Another suggestion that has been made is that it is in the interest of national tax
authorities and of such cor- porations that they should pay a single tax to a specially
constituted international authority on the basis of their consolidated financial statements.
This would avoid the necessity for the current highly complex network of bilateral
conventions on double taxation. In view of the significance attached to these corporations
as tools for the rational economic development of the world, such a body might alleviate
another current problem by providing a source of development funds. The tax funds
could be channelled through the United Nations to the countries in greatest need.

The role of the large multinational corporation in aiding the less developed countries has
been frequently stres- sed. This is an important reason for listing these bodies in this
Yearbook. Some of the specific functions that they can (but will not necessarily) perform
which could contribute to general economic devleoprnent are, according to Roy Blough :
to make sound and profitable investments in developing countries which for less broadly
based com- panies would be too risky; to make use of a world-wide store of
technological, managerial, and other knowledge and skills that are likely to be better
adapted to the needs of the less developed countries than is the knowledge of business
firms that have access only to home-country technology; to create jobs and stimulate the
desire for education in the developing countries; to make use of their international
communications system to help countries achieve the benefits of cooperation; and to
provide developing countries with contacts with foreign markets without which their
export trade and industries cannot be rapidly developed. It is to be hoped that listing these
 organizations in this Yearbook will contribute to a greater understanding of the role that
they will play in developing world society together with the intergovernmental and
international non-profit nongovernmental organizations.

Role of mnc’s in developing countries

Sustainable Development: The Role of Multinational Corporations

Gary Quinlivan, PhD

Saint Vincent College

The economic role of multinational corporations (MNCs) is simply to channel

physical and financial capital to countries with capital shortages. As a consequence,
wealth is created, which yields new jobs directly and through “crowding-in” effects. In
addition, new tax revenues arise from MNC generated income, allowing developing
countries to improve their infrastructures and to strengthen their human capital. By
improving the efficiency of capital flows, MNCs reduce world poverty levels and provide
a positive externality that is consistent with the United Nations’ (UN) mission —
countries are encouraged to cooperate and to seek peaceful solutions to external and
internal conflicts.

It follows that a supporting role for the UN would be to motivate developing

countries to achieve the necessary political and economic environment that attracts
foreign direct investment (FDI). Nations lacking FDI have common characteristics: they
have economies that are heavily dependent on government regulations and controlled by
inefficient state-operated monopolistic enterprises, and they tend to have non-democratic
regimes. As a consequence, these nations are experiencing extreme rates of poverty,
repressed human rights, and excessive environmental damage. These problem countries
are primarily concentrated in Sub-Saharan Africa, South Asia, North Africa, and the
Middle East.1

An important role currently undertaken by the UN is the provision of a valuable and

detailed assessment of the economic impact of MNCs through its publication of the
World Investment Report. In addition, the UN’s publication of the Human Development
Report and the World Bank’s World Development Report, provide researchers with a
broad picture of trends in world welfare. These reports, however, present static measures
of income inequality and are thus too limiting. According to Nancy Birdsall and Carol
Graham, the UN and World Bank should also analyze measures of mobility.2 Studies that
focus only on income inequality, as emphasized by Jere Behrman, may be highly
misleading because countries may have identical income distributions but far different
social welfare levels due to differences in economic and social mobility.3
 The primary thrust of this paper is to examine the myths and facts about MNCs that
underlie public opinion and thus shape public policy.4 In particular the paper addresses
the following questions: Are profit-motivated MNCs engaging in destructive competition
and insidious plots to economically and politically manipulate entire economies? Are
MNCs methodically eliminating domestic firms in order to exploit their monopoly
powers? Do MNCs export high-wage jobs to low-wage countries? Are MNCs
undermining the world’s environment? Are MNCs augmenting the external debt
problems of developing countries? Are MNCs perpetuating world poverty? Do MNCs
exploit child labor?

Monopoly Power?

Competition is not destructive, it has compelled MNCs to provide the world with an
immense diversity of high-quality and low-priced products. Competition, given free
trade, delivers mutually beneficial gains from exchange and sparks the collaborative
effort of all nations to produce commodities efficiently.

Has the monopoly power of MNCs grown? Granted, some MNCs are very large: as
of 1998, they produced 25 percent of global output, and in 1997, the top 100 firms
controlled 16 percent of the world’s productive assets and the top 300 controlled 25
percent. Firm size and market power, however, are dynamic. The Wall Street Journal
(WSJ) annually surveys the world’s 100 largest public companies ranked by market
value.5 Comparing the rankings in 1999 to that of 1990, there were five new firms
(Microsoft, Wal-Mart, Cisco Systems, Lucent Technologies, and Intel) in the top ten.
Four of the five new firms were not even in the top 100 in 1990. Even more remarkable is
that there were 66 new members on the 1999 list. The UN tracks the 100 largest
nonfinancial MNCs ranked by foreign assets.6 Although not as dramatic as the change in
the WSJ rankings, from 1990 to 1997, the UN reported a 25 percent change in the
composition of their top 100. An increase in monopoly power should also lead to fewer
and larger MNCs, but as reported by the UN, from 1988 to 1997, the number of MNCs
rose substantially from 17,500–20,000 to approximately 60,000 with over 500,000
foreign affiliates.7

Has the increase in foreign direct investment (FDI) by MNCs harmed domestic
investment? The UN’s 1999 World Investment Report cited two recent studies: the first,
by Eduardo Borensztein, José de Gregorio and Jong-Wha Lee, found an additional dollar
of FDI increases, crowding-in, domestic investment in a sample of 69 developing
countries by a factor of 1.5 to 2.3; the second study, by the UN, utilized data from 1970
to 1996 for 39 mostly developing countries and found a strong crowding-in effect
associated with FDI in Asia, but offered some evidence of a possible crowding-out effect
in Latin America.8 An alternative avenue to examine crowding in/out effects is to survey
the number of new firms that enter the marketplace. According to World Bank data
covering 133 countries, the number of firms (excluding investment companies, mutual
funds, and some others) incorporated and listed on stock exchanges increased from
29,189 in 1990 to 40,394 in 1997.9 Sub-Saharan Africa was the only region with a
negligible increase in the number of listed domestic companies.

Coordinated international manipulations of markets are almost always government

supported and directed. For example, in the first two quarters of 2000, OPEC, the
Association of Coffee Producing Countries, and the Cocoa Producers Alliance cartels
attempted to force commodity prices upward. In the 1970s, OPEC’s oil price distortions
were a major source of world recession and the increased external debt and poverty of
developing countries. Fortunately, free markets protect consumers from prolonged
abuses by government-sponsored monopolies and cartels.

The Right/Left Wing Conundrum

Paradoxically, both the extreme right and extreme left are united in their belief that
MNCs, with an evil intent, are infringing on national sovereignty.10 They view MNCs to
be amoral government-manipulating rent-seeking monoliths that exploit the lack of
environmental regulations and cheap foreign labor in developing countries.11 Their
remarks, however, lack substance.

MNCs do not operate with immunity — they are heavily monitored both in the
United States and abroad.12 Admittedly, from 1991 to 1998, there has been a tendency
toward the liberalization of FDI regulations. According to the UN, there were 895 new
FDI regulations enacted by more than 75 countries, but only 52 of these regulations
sought greater control over FDI.13 The role of multilaterals (primarily the UN and World
Bank) should be to promote responsible deregulation that encourages competition,
discourages rewards to special interests (both domestic and foreign), and defines and
protects private property rights.

Profits are very important to MNCs, but their investment decisions are heavily deterred
by the presence of economic and political corruption. A UN survey of MNCs revealed
that the number one reason MNCs do not invest in given countries is the presence of
extortion and bribery, and not surprisingly, the main source of the corruption is
government officials. Both the International Chamber of Commerce and the International
Organization of Employers have established social codes and standards agreed upon by
their members that attempt to discourage bribes and extortion and to establish principles
for responsible environmental management.

MNCs are not committed to the destruction of the world’s environment, but instead have
been the driving force in the spread of “green” technologies and in creating markets for
“green products.”14 Market incentives (e.g., the threat of liability, consumer boycotts, and
the negative impact on reputation) have forced firms to police their foreign affiliates and
to maintain high environmental standards. The UN’s 1999 World Investment Report notes
several studies that confirm foreign affiliates having higher environmental standards than
their domestic counterparts across all manufacturing sectors. The UN also positively
reflected on the efforts initiated by MNCs to assist domestic suppliers (“regardless of
ownership”) to qualify for eco-labeling and to meet the ISO 1400 certification-
environmental standards currently supported by more than 5,000 MNCs. MNCs have
advanced several programs (e.g., Global Environmental Management Initiative, Caux
Round Table, and the Global Sullivan Principles) to establish industry codes dedicated to
achieving high levels of social responsibility.15

Multinationals are not siphoning jobs from high- to low-wage countries, in fact, they
tend to preserve high-wage jobs in developed countries — in 1998, 75 percent of FDI
went to developed countries.16 Besides, labor costs do not determine where MNCs base
their affiliates, other variables are deemed to be collectively more decisive, e.g., political
stability, infrastructure, education levels, potential for future markets, taxes, and
government regulations.

The biggest threat to the national sovereignty of developing countries does not come
from the MNCs but from rent-seeking initiatives to protect special interests under the
guise of “level-field” trade agendas. For example, proposals, which seek to impose
various enviro-labor standards have the support of or have been submitted as agenda
items by the WTO, International Labor Organization, UN Conference on Trade and
Development (UNCTAD), and non-governmental organizations such as the Union of
Industrial and Employers Confederations of Europe and the International Confederation
of Free Trade Unions. These organizations may have good intentions, but policies such as
enviro-labeling and world minimum wage or compensation laws prohibit developing
countries from fully participating in world trade.17

Jobs and Capital Formation

In 1998, MNCs had 86 million employees — 19 million in developing countries —

and were also responsible for more than 100 million jobs created indirectly through
multiplier effects.18 Indirect job creation is estimated, by the UN, to be 3 to 7 times the
jobs directly generated by MNCs respectively in the manufacturing and food industries.

Foreign direct investment (FDI) is the most desired form of capital flow. The MNC is
taking a long-term equity position in the domestic country. If the investment does well,
both the MNC and domestic country are better off — the MNC receives profits and the
domestic country receives jobs, an expanded tax base, and capital formation. If the
investment does not do well, the MNC may lose their investment and the domestic
country does not receive the ongoing benefits aforementioned, but the domestic country
owes no restitution. As a result, FDI does not contribute to the external debt problems of
developing countries. In 1999, the United States received a record $277.5 billion in FDI
of which $87 billion was channeled into manufacturing.19 In April 2000, the United States
recorded its lowest unemployment rate (3.9 percent) in 30 years.

External debt problems are portfolio in nature and primarily attributable to loans from
multilateral organizations (e.g., World Bank and IMF) and G-7 governments. Private
loans are problematic to the extent that the government is involved and has given
guarantees to support favored industries. Government loan guarantees cause moral
hazard — the market does not correctly assess the risk associated with loans because a
government, the IMF, and/or World Bank are expected to bail out the lenders if a crisis
occurs.

According to the UN, in 1998, $166 billion ($760 billion from 1993 to 1998) or 25.8
percent of the world FDI inflow went to developing countries. Africa, Latin America
and the Caribbean, and Asia, received respectively $7.9, $71.6, and $84.9 billion of FDI.
Only $2.9 billion dollars of FDI was obtained by least developed countries (LDC),
which are primarily composed of the Sub-Saharan African countries. Given risk
conditions, capital flows to where it can earn the highest rate of return. The required risk
premium is much higher when a developing country is experiencing civil wars, suffers
from over regulation, has a weak infrastructure, is politically unstable, keeps its markets
closed to foreign competition, has inflexible labor markets, and imposes high taxes.

The Heritage Freedom Index (HFI) measures the degree of economic and political
repression present in developing countries.20 As predicted, FDI is smaller in developing
countries that are repressed. Based on the 2000 HFI, of the 18 economies in the Middle
East and North Africa, 10 are either mostly unfree or repressed and only Bahrain is free.
The results are even more dismal for Sub-Saharan Africa where 35 (make that 36 given
Robert Mugabe’s policy of land-grab terrorism) of the 42 economies in the region are
mostly unfree or repressed.

Poverty

Evidence supplied by the World Bank and the UN strongly suggests that MNCs are a
key factor in the large improvement in welfare that has occurred in developing countries
over the last 40 years.21 In those countries (the LDC) where the presence of MNCs is
negligible, severe poverty rates persist and show little sign of improvement.

From 1960 to 1995 for developing countries:22 The purchasing power parity measure
of real per capita GDP improved a healthy 3.5 percent per year. While the LDC’s growth
rate was a mere 1.7 percent per year. Adult literacy rates increased from 48 to 70 percent.
Only the Sub-Saharan African and South Asian regions’ literacy rates remained stagnant.
Overall, infant mortality rates dropped 56 percent. Children born in 1995 were expected
to live 16 years longer as compared to 1960 — it took industrialized countries one
century to achieve the same results. From 1980 to 1997, life expectancy for low income
countries increased from 52 to 59 years.23 Sub-Saharan Africa and South Asia were only
able to increase their life expectancies from 48 to 51 and 54 to 62 respectively. But in
developing countries most open to MNCs, the improvement in life expectancy has been
dramatic: East Asia and Latin America and the Caribbean regions have achieved a life
expectancy nearing that of the industrialized countries.

The daily per capita supply of calories, cereals, fat, and protein and the production of
food has, with one minor exception, improved over the last 16 to 25 years at all levels of
human development for developing nations.24 The production of food per capita has risen
39 percent from 1980 to 1996. The weakest performance, from 1970 to 1995, in diet
improvements and food production per capita occurred in Sub-Saharan Africa, which lost
3 percent of their daily per capita supply of protein and for whom food production per
capita dropped 1 percent from 1980 to 1996. From 1975 to 1990-97, malnutrition rates
for children under age five plummeted from 40 to 30 percent. Sub-Saharan African rates
improved by only one percentage point and in South Asia, 50 percent of children under
age five still suffer from malnutrition.

From 1980 to 1998, world child labor rates (i.e., the percentage of children working
between the ages of 10 and 14) tumbled from 20 to 13 percent.25 Child labor rates
dropped from 27 to 10 percent in East Asia and the Pacific, from 13 to 9 percent in Latin
America and the Carribean, and from 14 to 5 percent in Middle East and North Africa.
Regions lacking MNCs had the worst child labor rates and the smallest reductions: Sub-
Saharan Africa’s and South Asia’s child labor rates dropped respectively from 35 to 30
percent and from 23 to 16 percent. The reduction in child labor rates was attributable to
increased family income, which has permitted families to improve their diets, to have
better homes, and to provide their children with more educational opportunities. As
evidenced, enrollment rates for ages 6 to 23 rose for all developing countries from 46
percent in 1960 to 57 percent in 1995. Only Sub-Saharan Africa had an enrollment ratio
below 50 percent in 1995.

Finally, following the financial crises of the 1980s, mobility case studies revealed
increased economic and social mobility in Latin America and the Caribbean, especially in
Peru and Chile.26 As expected, almost all the contributing authors in Birdsall and
Graham’s book point out that education has been the principal reason for the increase in
mobility over the last century. Once again, the improvement in education is conditional
on increased real income and, thus, positively affected by the presence of MNCs.

Summary

The role of MNCs is underappreciated — they have provided developing countries

with much needed capital, jobs, and environmentally friendly technologies. Through free
market initiatives, MNCs create wealth, which provides the income flow necessary for
welfare improvements. If the desideratum of developing countries is to escape severe
conditions of poverty, they need to privatize, deregulate, protect private property rights,
and establish a rule of law — the MNCs will then provide the capital