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First MNC was Dutch East India Co (1602), granted monopoly in colonial
trade. Today, UN estimates about 62,000 MNCs with 900,000 affiliates.
• Why do nations trade goods and services?
What are gains from specialized production?
• How economically important are foreign
direct investments of multi- and transnational
corporations? Who benefits most from FDI?

• How much do MNCs harm LDCs,

outweighing any alleged benefits?
• Is a sinister network of interlocked
firms dominating the world economy,
using its political power to oppress?
• Who can compel MNCs to become
more accountable corporate citizens?
Comparative Advantage Theory
Classical theories of international trade argued that nations gain mutual
benefits by specializing in producing goods with lower opportunity costs.

David Ricardo refuted Adam Smith’s absolute advantage

theory: when a country could produce every good more
efficiently than another nation, it would maximize those
goods’ productions. Ricardo formalized Robert Torrens’
comparative advantage idea, in his On the Principles of
Political Economy and Taxation (1817), using a classic
example of trading English cloth and Portuguese wine.

Altho Portugal produced both goods with less labor input than did England,
their relative costs differed: very hard to make English wine, less difficult to
produce cloth. Thus, Portugal should produce excess wine, and trade it for
English cloth. England benefits from free trade because its cost of producing
cloth is unchanged, but English now drink wine at closer to the cost of cloth.

In general, every nation should specialize in producing & trading those goods
in which it enjoys a comparative advantage – calculated not as co$t, but as
lower opportunity cost (= amount of good1 given up to produce unit of good2).
Free Trade Maximizes National Utility
Economists since Ricardo claim that “free trade” makes all nations
richer, as comparative advantages increase global production levels.
Without protectionism (e.g., high tariffs), free trade
enables nations to devote their scarce resources to
producing goods & services for which they enjoy
comparative advantage. Economies of scale plus
specialization increase the “production possibility
frontier,” yielding highest global customer utility.

But, Friedrich List (1841) wrote that nations locked in

to providing raw commodities couldn’t industrialize.
By 20th century, African (agriculture, diamonds, gold)
and Arab (oil, gas) nations had all developed much
less rapidly than some countries that were lacking in
plentiful raw materials (Japan, Taiwan, Singapore).

How has rapid mobility of international financial capital eroded comparative

advantages among nations? Does the global search for highest investment
returns equalize all countries’ relative abundances to attract new capital?
The Competitive Advantage of Nations
Michael Porter’s competitive advantage model advocated success via
national competitive advantages in firms, clusters, innovative products.
Based on industry case studies in 10 nations, Porter developed
his “Diamond Model” of four key interlinked production
factors. Pro-active governments can stimulate these factors,
but they’re very difficult for firms to duplicate, resulting in
national competitive advantages. For example, outsourcing
occurs because cheap labor is unavailable inside advanced
economies. Ease of technology flows undermine any absolute
and comparative advantages they may have over Third World.

• Factor conditions – created by sustainable,

heavy investments in specialized production
factors: skilled labor, capital, infrastructure
• Demand – domestic pressures for quality
• Related & supporting industries – facilitate
continuous info exchanges promoting
• Firm strategy, structure & rivalry – firm
organization & nature of domestic rivalries
Competence & Sustainable Advantage
Source of firms’ sustainable competitive advantages is some core
competence that is distinctive, proprietary, and difficult to replicate.
Firm skills/assets that comprise core competencies:
• Customer focus, ability to manage customer lifetime value
• Superior product quality, employees, management team
• Extensive distribution contracts
• Accumulated brand equity and positive company reputation
• Low-cost production techniques
• Patents and copyrights
• Government-protected monopoly

Porter’s diamond promotes a cluster of competence in a region when

resources and competences reach critical thresholds, giving it a key
position in global industry & sustainable advantages over other places.
1. Techno clusters - well adapted to a high-tech knowledge economy, formed around
a core of renowned universities & research centers
2. Historic know-how clusters - based on traditional production activities that
maintain their advantage in know-how over years or centuries (e.g., Terza Italia).

How can clusters boost competition? By increasing the productivity of

firms in a cluster? Driving innovations? Stimulating new businesses?
Porter wrote, “The rise of the multinational corporation … weakened
the traditional explanations of why and where a nation exports.”

Multinational corp – manages production facilities

located in at least two countries

Transnational corp – controls assets of other entities

in other than its home economy, usually via equity

1st World: Vodafone, GE, BP, Vivendi, DT, Exxon, Ford, GE, Shell, Total, Suez
3rd World: Hutchison, Singtel, Cemex, LGE, Petroleos de Venezuela, Petronas

1. Horizontally integrated: manage production establishments

located in different countries to produce same/similar products
2. Vertically integrated: manage establishments in one country to
produce products that serve as inputs to its production
establishments in another country
3. Diversified: manage establishments located in different
countries that are neither horizontally or vertically integrated
Foreign Direct Investment
MNCs are source of FDI, the movement of capital across national
borders that grants the investor control over an acquired asset.

Control means owning ≥10% of incorporated firm

shares; ≥ 10% of voting power for unincorporated
firm; or developing a new branch plant that is a
permanent establishment of originating firm.

FDI may comprise > 20% of global GDP.

Greenfield investment: Direct investment in

new or expanded facilities, creating jobs &
transferring technology and know-how.
Greenfield plants are the principal FDI mode
used to invest in less-developed countries.

Mergers and Acquisitions: Transfer of existing

assets from local to a foreign firm, creating
either new legal entity or a company affiliate.
Primary FDI mode in developed countries.
Capital Flows to Developing Nations

In 2001, private capital flows to less-developed countries (including Central & Eastern
Europe) totaled $171 billion, versus $57 billion in official development assistance.
SOURCE: UNCTAD 2004 Development and Globalization: Facts and Figures
But, Most FDI Goes to Developed Nations

Note sharp drop in just two years!

MNCs: Benefits & Costs
MNCs benefit less-developed countries, but also impose costs on them
MNC investments fuel the local growth-engines:

• Higher wage-incomes, stimulating local businesses

• Training, human capital build higher-skilled labor force

• Contribute to government taxes & fees, or revenues by

purchasing and privatizing existing national assets

How much do MNCs harm LDCs, outweighing any alleged benefits?

► Exploitation of low-wage labor; expatriate managers remit incomes & firm

profits to the developed nations’ most privileged classes

► Capital-intensive production worsens LDC poverty and income inequality

► Government corruption, reaping tax concessions, subsidies, lax enforcement

► Transfer pricing shifts accounting to off-shore tax havens (Cayman Islands),

minimizing corporate tax burdens and reducing nation-states’ tax revenues
Power of the Megacorps
In Gibson’s Neuromancer, megacorps are massive conglomerates,
holding monopolistic power across multiple markets, so powerful that
they can ignore the law, control military-scale security forces, own
vast territories, even behave as if they were sovereign governments.
Does a nefarious web of transnational ownerships
and interlocking directorates controlling the
world’s economies? (See network figure)
Is a global corporate culture emerging to convert
employee loyalties from national identities?
Are MNCs obtaining global power and influence?

Do largest MNCs manipulate international

relations, using economic clout inside political
districts, lavish spending on public relations &
political lobbying, control of IGOs like WTO?

What recent instances of popular resistance to

the rising political power of the MNCs? How
best hold MNCs accountable for their actions?
WTO – Ensuring Free Trade?
The WTO, created in 1995, is a primary target of
activists in the anti-corporate globalization movement.
“The WTO is the only global international organization dealing with the rules of
trade between nations. At its heart are the WTO agreements, negotiated and
signed by the bulk of the world’s trading nations and ratified in their parliaments.
The goal is to help producers of goods and services, exporters, and importers
conduct their business.” <www.wto.org>

The WTO multilateral trading system is

negotiated and signed by governments.
These contracts guarantee member
nations’ trade rights & bind governments
to keep trade policies within agreed
limits. Their purpose is to ensure that
trade flows as predictably and freely as
possible, by helping producers,
exporters, and importers of goods and
Core WTO principles are “Trade services conduct their business smoothly.
without Discrimination” & “Promoting
Fair Competition” among nations.
WTO – A New Evil Empire?
Anti-globalists criticize the WTO for its allegedly undemocratic
decision-making and lack of openness in reaching agreements.
They claim the 25 richest developed nations manipulate trade
deals to the disadvantage of 120 poor developing countries.
LDCs often lack staff and expertise to win
favorable tariff reductions. Textile quotas
block clothing imports from low-wage
countries. US, EU, and Japanese subsidy
rates are $20,000 per farmer.

What should be a “level playing field” in free-trade talks?

• Should all nations have equal access and status in trade

disputes? How can poor nations afford negotiators & experts?

• Should negotiations produce actually equal outcomes and

implementation? Would genuine trade “fairness” require a massive
transfer of wealth from the richest to poorest nations?