Comprehension questions1. What words are used to express negative attitude to multinationals? 2. What examples are used by the author to show that in some cases multina 3. What is criticized about the MNCs? 4. What are the economic advantages of multinationals? 5. What is happening to multinationals now?
Foreign Direct Investment The decision to invest outside the home country is a major one that requires careful analysis. Investments overseas can be portfolio investments, where investors buy shares and debentures (long-term obligations) that can be liquidated at market value any time. These investmc-nts can be made without leaving (he home country through an international investment broker or a banking institution. Foreign direct investments are quite different. They usually involve the establishment of plants or distribution networks abroad. Investors may acquire part or all of the equity of an existing foreign company with the objective of controlling or sharing control over production, research and development, and sales. Contrary to portfolio investments, foreign direct investments mean a long-term commitment where capital funds will be tied up for a long time. Multinational corporations usually take a strategic approach to foreign investment. The multinational company's first strategic objective is to locate or create markets for its present and future products. Markets for products are no longer national in today's world. The technological and cultural changes of the twentieth century, have created fairly uniform world markets, with increasingly similar economic and social needs. All countries in the world strive to achieve maximum material development. They all aspire to achieve full technological growth and the highest possible standard of living, regardless of their present stage of development. Consequently, MNCs of all types and nationalities, large and small, have expanded with great vitality abroad, often overshadowing their market shares at home. Such is the case, for example, of the Swiss drug companies and the leading German, Japanese, and American automobile manufacturers. The typical MNC pools all its resources to achieve the highest possible efficiency and obtain the maximum return on investments. Research and development, raw materials, investment capital, and managerial skills are utilized for the benefit of many world markets. For example, an automobile originally designed in Japan is later sold, assembled or manufactured, with minor changes, in the United States, Canada, Brazil, Western Europe, and so on. The basic development costs, like research and design, can be expected to be amortized on sales in many markets. Research may be carried out in one country, parts made in another, then assembled and sold in a third country. Financial considerations are also the most important and sometimes decisive factors. What is the expected return on an investment? What are the sources of working capital? What are interest rates? What is the cash flow projection—i.e., the amount of cash that remains after a company has paid taxes and other cash expenses? Only when reliable access to outside financing is available can a project for foreign direct investment be termed viable. A non-viable project is one where the expected rale of return,or profits realized on assets employed, is likely to be lower than from a comparable investment in the host country. Local regulations or legislation is another factor that must be studied before an investment is made. United States antitrust legislation prohibits corporations from dominating or monopolizing an industry. Labor laws are still another important legislative factor. Before an investment is made, it is important to consider right-to-work laws and the existence or absence of labor unions. The likelihood of government interference has to be studied. Investment incentives are still another consideration. These incentives are usually of a monetary nature, such as cash grants, lower taxes, accelerated depreciation, training allowances, research subsidies, and interest rebates on loans. Incentives differ from country to country and region to region and are always highest in a depressed area. Prior to making a foreign investment, a corporation has usually had some form of trade with the foreign nation. When a corporation starts to export for the first lime, it will usually engage distributors, who receive a commission on products sold. Distributors are called exclusive if they are under contract to sell only the exporter's products. Otherwise, they are called multiple, representing other manufacturers as well. When the foreign country becomes familiar with the products, the company might not renew the contract with the distributors but rather will set up its own sales organization. It will acquire its own network of dealers throughout the country, probably supervised by various regional sales offices. Again, dealers can be exclusive or multiple. Building up a dealer network is complicated and expensive. The exporter may prefer to license a foreign manufacturer. The latter is then authorized to manufacture the product under license, using the original manufacturer's brand name. In return, the exporter will receive royalty payments. A drawback of licensing, as well as of authorizing foreign distribution, is that the original manufacturer gives up control over the product. If the licensed product lacks quality, the exporter's reputation will suffer. It may be very difficult to correct a distributor's marketing mistakes if the exporter eventually decides to handle the distribution. Therefore, licensing and distributing are almost always of a temporary nature. Sooner or later the exporter will be faced with the foreign direct investment question. The basic decision is whether to set up a manufacturing or make an acquisition of an existing one. Then there is the question of whether to create a joint venture or go it alone. A joint venture is a subsidiary formed by two or more corporations, This form is chosen when companies want to share capital outlay and "know how." In the long run it is often an unsatisfactory relationship, as the respective partners find it increasingly difficult to share control. In many countries there is resistance to foreign direct investment. Most of this resistance is a direct consequence of criticism of multinational corporations. Some strategic industries (such as food, computers, nuclear reactors, and energy) will find it increasingly difficult to expand abroad. Foreign investment will be dependent on the power struggle between governments and multinational corporations. But direct investment is likely to continue its adventurous course in many ar- eas. The economic integration of the United States. Europe, and Japan will stimulate its development.
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