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in foreign nations. It is the result of conscious planning by corporate
managers. Investment f lows from regions of low anticipated
profits to those of high returns.
Foreign direct investment is one way to expand bypassing
protective instruments in the importing country. When the European
Community imposed common external tariff against outsiders,
US companies circumvented these barriers by setting up subsidiaries.
And Japanese corporations located auto assembly plants in the
US, to bypass VERs (voluntary export restraints). MNCs can
also hold down costs by locating part of all their productive
facilities abroad in low-wage countries with cheap labour and rich
natural resources.
Thus, the company becomes multinational when it begins to
plan, organize and coordinate production, marketing, R&D
(research and development), financing, and staffing. For each of
these operations, the firm must find the best location.
International joint venture is a business organization established
by two or more companies that combines their skills and assets.
It may be formed by two businesses that conduct business in a
third country, for example a US firm and a British firm may
jointly operate in the Middle East. It may be formed with a local
firm because less developed country governments close their borders
to foreign companies, or because capital costs are too large for
a single company to bypass protectionism.
As a result, the new venture increases production, lowers
prices to customers, reduces costs and is able to enter the market
that neither parent could have entered singly.
Unit Six
criterion [krai!tiəriən] критерий; (pl = ria) ethnocentric этноцентричный;
licensee [!lais
барьеры; VERs (voluntary export restraints) добровольные ограничения
экспорта.
Ex. 6. Read the following text and exchange opinions on different
forms of partici pation of multinationals in foreign economies
focusing your attention on franchising.
ən!si:] получатель лицензии; to circumvént barriers обходить
Franchising was born in the United States in 1851 when
I.M. Singer & Co. established a chain of sewing machine dealers.
Today, nearly 150 years later, it is an ever-expanding business
concept which eludes a simple definition.
The U.S. Department of Commerce, which maintains the most
complete on-going study of the franchising sector of the economy,
MULTINATIONAL CORPORATIONS
admits that although this important word has become a common
household term worldwide, it is both understood and misunderstood
by many. Today, you can hardly buy anything that does not go
through franchising in some fashion. Not everyone knows what
franchising is, but just about everyone does business with firms
in the system.
There are fundamentally two types of franchising. One —
commonly known as “Product and Tradename Franchising” —
is essentially the dominant franchising method of the past. The
other — usually referred to as “Business Format Franchising” —
is the form of franchising most people have in mind when they
speak about franchising today. McDonald’s is a business format
franchise.
Product and tradename franchising began in the United States
as an independent sales relationship between supplier and dealer
in which the dealer acquired some of the identity of the
supplier — such as the Singer Sewing Company franchisees.
Franchised dealers in this category concentrate on one company’s
product line and identify their business with that company. Typical
of this segment are automobile and truck dealers, gasoline service
stations and soft drink bottlers. It is, however, a category in
decline.
Business format franchising is characterized by an on-going
business relationship between franchisor and franchisee that includes
not only the product, service and trademarks, but the entire
business format itself — a marketing strategy and plan, operating
manuals and standards, quality control and continuing two-way
communication.
A business format franchise may be defined as a contractual
license granted by one person (the franchisor) to another (the
franchisee) which during the period of the franchise:
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—
Šrequires the franchisee to carry on a particular business
under a business format or according to a system
established by the franchisor;
—
permits the franchisee to use in or in connection with such
business the franchisor’s trade name, trade mark, service
mark, goodwill and know-how;
—
Šentitles the franchisor to exercise continuing control over
the manner in which the franchisee carries on the business;
—
Šobliges the franchisor to provide the franchisee with
training in the operation of the franchisor’s format or
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system, continuing assistance and support in carrying on
the business;
requires the franchisee to make a significant investment
—
from his own resources in the establishment of his own
business;
requires the franchisee to pay to the franchisor sums
—
of money in consideration for the franchise and for goods
and services provided by franchisor to the franchisee.
Restaurants, non-food retailing, personal and business services,
rental services, real estate services and a long list of other service
businesses fall into the category of business format franchising.
Business format franchising has been responsible for much of the
growth of franchising in the world and will continue to offer
opportunities for those individuals seeking their own businesses
to elude ускользать, не поддаваться; franchise франшиза, особое право
на производство или деятельность; product and tradename franchising
выдача франшизы (права, лицензии) на производство и продажу товара под маркой выдавшей е¸ фирмы; business format franchising франшиза на право деятельности по модели или системе выдавшей е¸
фирмы; franchisee компания, получившая право на деятельность по
модели другой компании; franchisor (-er) компания, продающая право
деятельности по е¸ модели или системе; goodwill «гудвилл» (престиж
торговых марок, деловые связи; устойчивая клиентура фирмы и т.п.).
Unit Six
2
.
Ex. 7. Drawing your information from the following text speak on the
reasons which made the f irms expand their activities overseas in
the past, when they operated in colonies; the problems caused by
multinationals in developing countries now and their possible
solutions.
What drives a firm to produce overseas rather than just sell
overseas? One possible answer is straightforward. A firm is successful
at home. Its technology and organizational skills give it an edge
on foreign competition. It begins to export its product. The foreign
market grows. At some point, the firm begins to calculate whether
it would be more profitable to organize an overseas production
operation. By doing so, it would save transportation costs. It
may be able to evade a tariff by producing goods behind a tariff
wall. A very important consideration is that it may be able to
take advantage of lower wage rates. And so, gradually, it ceases
shipping goods abroad and instead exports capital, technology,
and management — and becomes a multinational.
MULTINATIONAL CORPORATIONS
Calculation may be more complex. By degrees, a successful
company may change its point of view. First it thinks of itself as
a domestic company, perhaps with a small export market. Then
it builds up its exports and thinks of itself as an international
company with a substantial interest in exports. Finally its perspective
changes to that of a multinational, considering the world (or
substantial portions of it) to be its market. In that case, it may
locate plants abroad before ahead the market is fully developed,
in order to be firmly established abroad of its competition.
More and more of the great corporations of the world have
come to consider their “natural” markets to be the globe, not just
their home countries. The struggle in automobiles, in computers,
in telecommunications, in steel, is for shares ahead of a world
market. That is why we find companies such as IBM or General
Motors considering the entire globe as their oyster, not only with
regard to the “sourcing” of raw materials, but to the location
of plants, and finally the direction of sales effort. With modern
rapid jet transportation, instant global data retrieval, and highly
organized systems of production and distribution, the manufacture
of commodities is more and more easily moved to whatever
country produces them more cheaply, whereas their sale is
focused on the countries that represent the richest markets. Thus
we have a transistor radio whose parts have been made in Hong
Kong or South Korea or Singapore, assembled in Mexico, and
sold in the United States — by a Japanese manufacturer.
It is the highly centralized nature of these corporations that
is often the cause of international concern. Although they have
the ability to stimulate the f low of investment, technology, profits,
and more, they tend not to experience a sense of loyalty to,
or responsibility for, the citizens of the countries in which their
subsidiaries reside. Hence, they are often more likely to close
branch plants abroad in times of economic downturn than to
close plants at home.
A key concern with regards to MNCs is their mobile nature.
Logically, they tend to establish subsidiaries in countries where
conditions are most favourable to their business operations.
Furthermore, in their negotiations with the government of the
host country, their ability to pick up and leave provides them
with a great deal of leverage over states dependent on the jobs
they provide.
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Host governments do have some bargaining power, but,
particularly in developing nations, where economies are often
weak, the concerns of the host governments over how the MNC
operates in their country must often take a back burner to
investment concerns. Therein lies the risk of exploitation. After
all, some of these large corporations are more important economic
actors in global affairs than are many states.
MNCs are an important vehicle for the movement of direct
foreign investment. With direct foreign investment, a firm in one
country creates or expands a subsidiary in another through the
use of international capital f lows. The distinctive feature of direct
foreign investment is that it involves not only a transfer of resources
but also the acquisition of control. That is, the subsidiary does not
simply have a financial obligation to the parent company; it is
part of the same organizational structure.
The modern multinational corporation has its roots in the
East and West Indies traders of the mercantilist era of the
16th—18th centuries. These were rarely multinational, and often
instruments of colonialism. However, traders of the maritime
nations of that era led the expansion of trade, which occurred
with the age of discovery and the development of accurate long
distance navigation at sea.
The coming of the industrial age saw the need to capture markets
for an expanding output of basic manufactures. Improvements in
ocean and continental transportation and emerging thought about
free trade as an element of political and economic freedom, also
gave rise to the first rudimentary MNCs. Possessing multiple
markets and raw material sources, the ownership, management
and capital of these early MNCs was still largely limited to the
nation of origin. They often enjoyed direct or indirect government
support by means of tariffs, investment and financing.
By the end of the 20th century, and with many former
government monopolies in telecommunication, power generation
and transport expanding into international markets, the multinational
corporation dominated world trade in goods and services. They
account for 70% of total foreign trade of $7 trillion. Their
operations range from mining, manufacturing and energy to
modern financial and communication services of all kinds. They
are truly multinational in all major respects.
While multinational corporations would prefer to comply
through voluntary initiatives, the public interest can only be fully
Unit Six
MULTINATIONAL CORPORATIONS
served through stronger regulation and monitoring. Many companies
have mastered socially responsible rhetoric, but few have taken
action. Only a small proportion of companies have introduced
corporate codes of conduct. Even when they do, these tend to be
narrow in scope and are often not independently verified. Although
MNCs have dramatically inf luenced the economic growth and
prosperity and increased employment of LDCs (least developed
counties), the lack of ethical considerations have allowed MNCs
with too much control and power. Most corporations will only
respond to stronger regulation and to close monitoring by NGOs
(non-governmental organizations), trade unions and consumer
groups.
According to the UN Research Institute for social Development
report, some 60,000 corporations now account for more than
one-third of world exports. Their annual turnovers dwarf the
Gross Domestic Product (GDP) of many countries. In 1998, the
top five corporations had annual revenues that were more than
double the total GDP of the 100 poorest countries.
Although MNCs help distribute direct foreign investment, they
are particularly notorious for exploiting countries, especially LDCs,
causing problems regarding aspects of human rights, environment
conditions, government corruption, and economic fragility in the
particular LDC.
For the problem of human rights — most MNCs have a
substantial amount of power that allows them to easily find large
quantities of relatively cheap labour. As a result, workers are exposed
to hazardous conditions, over-exertion, and overall are subject to
the abuse of capital-owners. Since an MNC, a very mobile firm,
has quick access to cheap labour, it is relatively free to leave a
country at any time deemed necessary. Thus, the LDC’s economy
depends on the jobs given to its labourer by the multinational.
If it leaves, the country now has a great unemployment quagmire
where many are suddenly left stranded.
Determining the positions (in favour or against) of nation-states
toward MNCs is a bit complicated and not always logical. Generally,
developed countries usually favour MNCs as it allows firms to
make more profit with cheaper labour.
With developing nations, the stance is not always clear.
Sometimes, the leadership of a particular country from the Third
world will favor the investment of multinationals in their territories
in order to boost the economy and infrastructure. But there exist
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many complex economic factors that would help to decide
whether to support or oppose multinational corporations based
on whether that particular developing nation has comparative
advantage or not
3
.
Unit Six
to evade a tariff уклоняться от налога; oyster [!ɔistə] çä. источник полу
чения выгоды; data retrieval поиск информации; to pick up поднять
ся; leverage рычаг воздействия (на экономику); over-exertion [ig!z
перенапряжение; quagmire [!kw
stranded без средств.
Ex. 8. Read the following text and discuss the following: (a) two
different views on multinationals; (b) their role in globalization and
global investment; (c) the way multinationals operate and become
prominent; (d) foreign direct investment in developing countries.
gmaiə] затруднительное положение;
ə:ʃən]
Multinational corporations stand at the heart of the debate
over the merits of global economic integration. Their critics
portray them as bullies, using their heft to exploit workers and
natural resources with no regard for the economic well-being of
any country or community. Their advocates see multinationals as
a triumph for global capitalism, bringing advanced technology
to poorer countries and low-cost products to the wealthier ones.
Both of these stereotypes have some truth to them. But it
would be wrong to portray the multinational corporation as either
good or evil.
There is no doubting that multinationals matter. They are one
of the main conduits through which globalization takes place.
In 1995 multinationals cranked out some $7 trillion in sales through
their foreign affiliates — an amount greater than the world’s total
exports. Multinational firms’ sales outside their home countries
are growing 20—30% faster than exports.
Multinationals also play an important role in global investment.
At the end of 1996, the total stock of foreign direct investment —
plants, equipment and property owned by businesses outside
their home countries — stood at over $3 trillion. Worldwide,
foreign direct investment has been growing three times as fast as
total investment, although it still accounts for only 6% of the
annual investment of rich industrial economies. In addition, 70%
of all international royalties on technology involve payments
between parent firms and their foreign affiliates, showing that
multinationals play a key role in disseminating technology around
the globe.
-
-
MULTINATIONAL CORPORATIONS
Few companies, even the most familiar household names, are
truly global. The average multinational produces more than
two-thirds of its output and locates two-thirds of its employees
in its home country. Although both operate worldwide, the culture
of General Motors is distinctively American, that of Volkswagen
identifiably German. Yet there is no denying that multinationals
are the main force behind worldwide f lows of capital, goods and
services.
In the public mind, globalization and multinational corporations
are closely related. The stereotype has giant companies shifting
production from one country to another in search of the cheapest
sources of labour, without regard for the well-being of either the
high-wage workers who stand to lose their jobs or the low-paid
ones who will be hired. Yet globalization could just as easily make
multinational companies less necessary.
Why? As transport costs and trade barriers fall, it becomes
easier to serve foreign markets by exporting, rather than establishing
factories and research centres around the world. And as capital
markets become more integrated and liquid, it is easier for
single-country firms to raise money by selling bonds or shares.
Big American, Japanese or European firms, which have benefited
from their ready access to capital, should therefore be losing one
of their main advantages.
This suggests that the economic logic of the multinational
company lies elsewhere. Some explanations appear more valid
than others, but none fully clarifies why multinationals have become
so prominent at the end of the 20th century.
Today, as for many years, roughly three-fifths of all foreign
direct investment goes into wealthy countries and two-fifths into
developing countries. Those two fifths, however, are not f lowing
into the same countries. China, now the leading recipient of foreign
investment among developing countries, received almost none in
the 1980s.
In those days, a large share of direct investment in developing
countries went into the extraction of natural resources, especially
oil, for shipment abroad. Now, however, a much bigger share of
it aims to tap local markets. As they become wealthier, people
are able to buy more cars, computers and other consumer products.
This is why car makers are racing to build plants in countries
such as Thailand and Brazil: not to export to Japan and America,
but to meet rising demand within South-East Asia and South
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America. Multinationals are more prominent in these developing
economies than in richer ones.
The f lows to developing countries therefore, are going directly
to regions with the highest growth prospects. Last year Asia,
excluding Japan, captured $80 billion, around two-thirds of the
developing-country total; Latin America pulled in another $39
billion. In Eastern Europe, which enjoyed huge inf lows in
1994—1995, the tap was suddenly shut off in 1996 as governments
sold fewer state-owned companies. Africa, despite its rich natural
resources, receives almost no foreign direct investment, because
few in the region can afford rich-world consumer products
Unit Six
4
.
to portray [pɔ:!trei] изображать, описывать; advocate [!dvəkət] ñòî
ронник, защитник; bully грабитель; stereotype [!steri:outaip] cтереотип;
conduit [!k
to crank out profits выжимать прибыль; total stock of investment îá
щий объ¸м инвестиций; royalties on technology лицензионные платежи за технологию; to dissimilate распространять (технологию, знания);
household names названия компаний, известных в домашнем обиходе;
liquid market ликвидный рынок; valid веский, обоснованный; to tap
the market осваивать рынок.
Ex. 9. On the basis of the following text speak on gold mining in other
ɔndjuit] канал (по которому протекает какой-либо процесс);
areas of the world.
For over a century Ashanti Goldfields has dug gold from deep
in the valley in Obuasi, Ghana. Gold mining seems to be an
unchanging and tranquil business for the man in charge. But later
this year, Mr. Jonah moves south to the skyscrapers and noisy
streets of Johanesburg to serve as president of South Africa’s
AngloGold whose boss, Mr. Godsell, struck a deal last year to
buy Ashanti for $1.4 billion in shares.
By May, the euphemistically titled “merger” — the gigantic
AngloGold, in fact, is swallowing Ashanti — will be completed
to form arguably the world’s biggest gold miner. With annual
production of more than 7 million ounces, a market capitalization
of about $11 billion, and probable and proven reserves of
93 million ounces, it should outgun all rivals. The combined group
expects to earn profits of $1 billion a year, before interest and
tax. As the man responsible for the public face of the expanded
firm, as well as for overseeing its new expansion in Africa, a lot
more is likely to be heard of the charismatic Mr. Jonah.
-
-
MULTINATIONAL CORPORATIONS
Ashanti needed an outsider with deep pockets to keep it digging.
AngloGold promises to invest $220 million, plus $44 million over
five years for deep exploration, just for the centrepiece mine, Obuasi
Deep. After years of under-investment it will swallow money —
quite likely, more than AngloGold has bargained for. Machinery
has been endlessly patched up, rows of ramshackle trucks line
the workshops, and environmental blunders have denuded nearby
hills that must be replanted. Miners in narrow, gloomy tunnels
swelter due to the poor ventilation.
The cost of reaching large and high-grade deposits 5,000 feet
(1,500 metres) below the surface, in order to extend the mine’s
life by perhaps 40 years, could easily top $500 million. Plans to
develop some other assets depend on political stability coming
to the Democratic Republic of Congo and Zimbabwe. Joint
operations, especially at Geita mine in Tanzania, could save perhaps
$15 million a year, but that is tiny given the demands at Obuasi.
It is, though, bearable for cash-rich AngloGold — at least while
the gold price is buoyant. It recently touched $430 an ounce,
a 15-year high, and it may rise more against a weak dollar. Gold
tycoons should be in clover, but both Mr. Goldsell and Mr. Jonah
have seen the price flip-f lop between $800 and $250 in the past
two decades. Such swings can destroy an ill-managed firm, as
nearly happened at Ashanti in 1999 when Mr. Jonah’s plan to hedge
against a low gold price went disastrously wrong.
That blunder almost bankrupted Ashanti, scared off creditors
and ultimately forced Mr. Jonah into the arms of his South African
buyers. He sums it up coyly: “consolidation is a logical reaction
to a very volatile market”. Now AngloGold will hedge for the
combined firm. Though it has a much better reputation for
hedging, it will struggle to cope with the high costs of its large
South African mines and the strong rand, which has cut profits
and forced many South African miners to shed jobs and talk of
closing shafts.
A risk remains in Ghana, where politicians must be placated.
Not long ago, opposition parliamentarians objected to AngloGold
as a meddling foreign firm. Though the government backs the
sale — both as a shareholder and industry regulator — it wants
promises of long-term job protection. To minimize future political
interference, AngloGold has struck a “stability agreement” to
guarantee corporate-tax and royalty rates for the next 15 years.
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