Chapter 8 Multinational Corporations - Discussion

Chapter 8: Multinational Corporations - Discussion Questions §

MNCs are the firms that control or manage production establishment in at least 2 countries and it placed production facilities in many countries under the control of a single corporate structure. And it also engage in economic production, international trade, and cross-border investment.

There are 2 importance aspect that encourage MNCs to internationalize their transaction in other countries

• Locational Advantages : refer to any specific countries that contain 3 characteristic that provide valuable opportunity for MNCs to produce their product. Those 3 characteristic include:

  1. Natural-resource investments - large deposits of a particular natural resource . Ex: China has a kind of rare mineral that can be used to produce computer and phone screen, therefore, the tech firms want to invest in China.
  2. Market-oriented investments - large consumer markets (firms prefer large demands market so that they could sell more of their product). Ex: a numbers of auto mobile firms want to invest in China because they look at the large population of China ;high demands.
  3. Efficiency-oriented investment - opportunity to enhance the efficiency of the firms’ operation or to put in simply, the availability at a lower cost of the factors of production

• Market imperfections

  Two difference market imperfections have been used to understand two different types of internalization (Horizontal integration and Vertical integration):

  1. Horizontal integration - occurs when a firm creates multiple production facilities, each of which produces the same good or goods. Ex: Toyota produce the same model of cars in their various facilities. the main reason behind this horizontal integration is the Intangible asset. because the knowledge of producing cars could not be sell to other firms in other countries, therefore, Toyota has to produce that model of car by themselves. In this sense, the intangible assets would be worthy only if one firm keep that knowledge to themselves.
  2. Vertical integration - refers to instances in which firms internalize their transactions for intermediate goods. Firms decide to produce intermediate good that would serve as the input into another production process. Ex: Ford use steel for their car production, normally ford need to purchase steel from the steel firms to serve as the input for car production. However, because of the issued that caused by the specific assets, Ford decide to produce steel by themselves and no longer buy from others.

• What are the pros and cons of the MNCs on the host country?

  😍 The benefit of MNCs in host country include the provision of significant employment and training to the labor forces in the host country. Moreover, MNCs could also transfer the skill and expertise that happen to develop the quality of the labor force in the host country. Also, MNCs contribute to the increase in the host country’s GDP through their spending with local supplier and capital investment. On top of that, MNCs also play a crucial role as to increase the competitiveness of the local firms, likewise, local firms have the incentive to strengthen their efficiency and to improve the quality of their product. hence, it could extend the consumers choice on the variety of products in the market.

  Along with the advantages, MNCs also bring the disadvantages to the host country, those include:

  🙄 Domestic firms might have the disadvantages, through the fact that, local firms do not have enough capability to compete with such advanced firms. On top of that, the profit that earn by MNCs may be flow back to their home country rather than re-invested in the host country. Moreover, technologies transfer and all could not be ensure.

Key Terms §

• Efficiency-Oriented Investment: One of the three types of foreign direct investment by a foreign firm in the local economy made in order to use the locally abundant factor in production oriented toward the global market. Foreign Direct Investment: A form of cross-border investment in which a resident or corporation based in one country owns a productive asset located in a second country. Such investments are made by multinational corporations. FDI can involve the construction of a new, or the purchase of an existing, plant or factory.

• Global Value Chains: Global value chains (GVCs) refer to international production sharing, a phenomenon where production is broken into activities and tasks carried out in different countries.

  A car’s wheel created in country A while the body was created in country B, to be assembled in country C

• Horizontal Integration: A form of industrial organization that occurs when a corporation creates multiple production facilities, each of which produces the same good or goods in different countries. Firms integrate horizontally to capture the full value of the intangible assets they control.

• Intangible Asset: Something whose value is derived from knowledge orfrom skills or production processes of a firm. An intangible asset can be based on a patented process or design, or it can arise from production specific knowhow shared by workers in the firm. The inherent difficulty of selling or licensing this kind of asset provides an important rationale for horizontal integration.

• Locational Advantages: Country characteristics, such as its factor or natural resource endowments or market size, that create incentives for a foreign corporation to invest in the country.

Market-Oriented Investment

Natural-Resource Investment

Positive Externalities

Specific Asset

Vertical Integration