Lecture 08:Multinational corporations

(MNCs)

What is a multinational (MNC)?

• A multinational corporation operates across borders to administer a network of interrelated businesses

• Transnational operations depend on cross-border production networks between firms

The first multinationals

• The first multinationals were created to exploit the opportunities of long-distance trade with the East

• The early leaders in seaborne trade with the East were the Portuguese, followed by the Dutch

• The English East India Company, founded in 1600, sought to challenge the Dutch dominance

The East India Company• The EIC and its European rivals

traded in cotton, silk, indigo dye, saltpetre, tea and opium

• These chartered (government authorised) monopoly joint-stock companies operated highly sophisticated systems of accounting and control across vast distances- the profits of this trade were enormous.

• In 1757 the East India Company fought the Battle of Plessey to establish British rule in India. For 100 years a commercial company - not the British government - governed large areas of India.

New industries and managerial capitalism

• The early 20th century saw the emergence of two new industries that soon become global: oil/chemicals and motor transport

• Motor vehicle construction is the first true MNC

• Companies seek to locate plant overseas to sidestep high tariffs

• The early 20th century also saw the rise of the new super corporation, managed by professionals

Ford factory at Trafford Park, Manchester, 1914

The super corporations

• MNCs emerged in a few main fields: extraction and mining; cars; agribusiness; chemicals – all of these are linked to key elements of the second industrial revolution

• Examples:• Standard Oil of New Jersey

(SONJ)• ITT (International Telephone &

Telegraph)• IG Farben• United Fruit Company –

(Bananas) in effect came to control Guatemala by the 1930s.

Multinationals between the wars• The period after World War I saw the

emergence and economic nationalism and the promotion of import substitution

• Companies like SONJ, ITT and IG Farben needed to set up plant or agencies in third countries to avoid high tax regimes – and protected domestic producers

• The effects of MNCs on domestic economies were not yet disproportionate – but they did dominate some industries

• However, the policy had it dangers – as seen by see the expropriation of BP’s concessions in Mexico in 1936 by the Cárdenas regime

After 1945

• In 1945 European industry was devastated, while the US economy had expanded rapidly: US technology and economic productivity was the most effective in the world (this assumption had always underpinned US thinking about a one world economy); thus US companies began to expand in Europe.

• 1945-1970 50% of FDI (Foreign Direct investment) flows were from the USA

• Some went to South America (as Latin America industrialised behind tariff barriers)

• Most went to Canada and the UK

No longer a western monopoly

• The largest steelmaker in the world was created by India’s Lakshmi Mittal, who pioneered the development of integrated mini-mills and the use of direct reduced iron or DR" as a scrap substitute for steelmaking and led the consolidation process of the global steel industry

• Mittal Steel became the largest steelmaker in the world, and took over its biggest rival - Europe’s Arcelor – to form ArcelorMittal in 2006

MNCs and tax

• MNCs operate in a variety of tax and legal jurisdictions – tax avoidance is a key concern

• Transfer pricing – where an MNC’s subsidiaries charge each other for goods and services “sold” within the group – is a key way of avoiding tax

• Tax avoidance is a particular problem in developing countries, but also in the developed world

The growing significance of MNCs

• MNCs are an increasingly important factor in the international economy – 60% of international trade is internal transactions within MNCs

• They operate in most countries in the world• All governments, to a varying extent, are

influenced by multinationals• Major states often protect the interests of their

most important companies• Several MNCs have a turnover larger than the

GDP of many smaller states

Corporate profits, 2010(Source: Global 500)

The power of MNCs

• Many argue that MNCs have more power than states in certain areas, or they have the power to change a state’s domestic or foreign policy in some respects

• MNCs sometime set their own rules and demand concessions from governments (such as lower corporation tax)

• Businesses often threaten to go to other countries if a government refuses to give them concessions or follow ‘liberal’ economic policies

• This is true of developed and under-developed states

Australia and the Mining Tax• Australia has enjoyed a mining boom for

several years, fuelled mainly by coal and iron ore exports to China

• In 2012, the Australian government proposed a Minerals Resource Rent Tax, to be imposed on profits generated from the exploitation of non-renewable resources

• The main mining companies – BHP Billiton, Rio Tinto, Xstrata and Fortescue – opposed the tax, claiming it will discourage investment

• Right-wing parties have also campaigned against the tax

• The Australian Prime Minister, Kevin Rudd, lost his job in 2010 because of the controversy surrounding the tax

• A softened version of the tax will be introduced in July 2012

HSBC and the threat to relocate

• In 2011 the global bank HSBC (founded in 1865 as the Hongkong and Shanghai Banking Corporation) threatened to move its headquarters from London to Hong Kong if the UK government imposed tougher regulation

• The threat was dropped after the UK government watered down the new rules

Rio Tinto’s global operations, 2012

MNCs and governments

• MNCs influence governments: they may demand protection as a key national asset (Nigeria’s military used against the Ogoni people in the Niger Delta)

• MMCs can also get governments (particularly in weak or ‘failed’ states) to change their policies to suit their interests

• MNCs have also been known to bribe governments to give them contracts (BAE and Saudi Arabia)

Executive Outcomes

• MNCs can become involved in conflicts or influence the outcome of conflicts. Private security companies have been directly fighting rebels/armed groups in countries such as Angola, Sierra Leone and Iraq. Executive Outcomes had contracts with majors MNCs such as De Beers, Chevron, JFPI Corporation, Rio Tinto and Texaco

Benefits of MNCs

• However, there is an argument that multinational companies can help economic development in poor countries:

• They can create jobs• They can transfer technical knowledge and expertise• They can encourage the growth of professionalism,

accountability, and good practice (for example, introduce notions of human rights)

• They can encourage the growth of local firms and companies• They can help stimulate social and economic development in

areas where they operate (for example, build houses for poor people or build roads)

Nissan in the UK, 2012• In March 2012 the Japanese

carmaker Nissan announced it would build its newest model, the Invitation, at its plant at Sunderland in the UK

• The company promised investment worth £125m (backed by a government grant of £9.3m) to create 400 jobs

• The investment would create 1600 jobs in the company’s supply chain

Case studies: oil and weapons

• We will now look at a case study of the effects of multinational companies operating in developing and other countries where there are tensions or conflict

• It is difficult to establish evidence of where these companies have done significant ‘good.’

• More has been researched and written on where companies have had bad or negative effects

Shell and Nigeria

• A number of oil companies have been operating in the Niger Delta, including Shell

• Shell has been there since the 1930s• It is the largest operator. It has 90 oil and gas fields

and produces more than 1 million barrels of oil a day

• Although the Delta has been producing oil for more than 50 years, there is extreme poverty in the area

• In 2005, the Nigerian government earned about $45bn in oil revenues

• Oil contributes huge amounts of money to the Nigerian government; however, 70% of the 27 million people living in the oil-rich regions live in poverty (Guardian, 6 July 2007).

• The World Bank estimates that over the last 40 years about $300bn in oil wealth had disappeared from Nigeria.

Local benefits?

• There is a lack of electricity, safe drinking water, roads and health facilities in the region despite the wealth from oil. The oil industry has often damaged the livelihoods of local people by polluting the environment

• When Nigeria got independence from the UK in 1960, each of the 3 regions was meant to get 50% of mineral resources found there. Now the regions can get as little as 1.3% with the rest going to the government (Guardian, 5 March, 2006)

The Ogoni and other groups

• The Ogoni have been involved in protests regarding Shell and BP and the lack of distribution of the oil wealth to the people

• Ken Saro-Wiwa (a writer and environmental activist) and eight other Ogonis were killed by government troops in 1995

• Following the Ogoni uprising other ethnic groups in the region have protested or fought the authorities

Other groups• The Illaje had protested against the

Chevron oil company and protestors were killed and tortured

• The Ijaw, one of the largest groups in the Delta, demanded an end to oil production on their land in the late 1990s

• The military intervened and, according to the NGO Human Rights Watch, more than 200 people were killed, tortured and raped

• The Leader of the Niger Delta People’s Volunteer Force threatened all-out war in September 2004. Nigeria is such an important source of oil for the world that world oil prices rose dramatically on that news (Guardian, 9 November 2005)

The impact of oil in the Niger Delta

• The environment: livelihood and health impacts. Oil spills and ‘gas flaring’ have damaged the environment. An estimated $20bn of damage to the environment and to communities.

• Oil spills pollute land and water; with drinking water being polluted, people getting ill, fish are killed and farm land ruined.

• Friends of the Earth estimate that as much as 13m barrels of oil have been spilled over the last 50 years

Other impacts

• Impacts on local economy and society: price inflation, loss of property (land being taken over, for eg), irresponsible fathering of children (by expatriate oil workers, for example).

• Local protests suppressed or attacked by security forces – sometimes called for or assisted by oil companies, it has been alleged.

• Censorship or suppression of activism and the circulation of information.

• Conflicts between groups, between groups and government forces, and armed criminality – much of it fuelled by oil – leads to around 1,000 deaths a year in the region

Claims and counterclaims• According to the NGO Essential Action and Global Exchange:• Promises of local development by the government and oil companies are not

properly followed through leading to more tensions and frustrations • NGOs have criticised the oil companies’ claims to be a positive force providing

economic development• It has been observed that almost every large multinational oil company in the Delta

has:• Inadequate environmental standards• Poor public health standards• Poor human rights standards• Bad relations with local communities

What oil companies claim (1)• Companies, like Shell, admit there have been problems but say they are improving

their practices and policy including helping more in development and reducing environmental damage.

• 1. Companies talk about their commitment to Social and Corporate Responsibility:Social and Corporate Responsibility is a concept under which organisations consider the interests of society by taking responsibility for the impact of their activities on customers, employees, shareholders, communities and the environment in all aspects of their operations. This obligation is seen to extend beyond the statuary (legal) obligation to comply with legislation and sees organisations voluntarily taking further steps to improve the quality of life for employees and their families as well as for the local community and society at large.

What oil companies claim (2)

• 2. They have also criticised the government for not sharing more revenue they get from oil with communities in the Delta Region. It has been suggested that the Nigerian government is taking 95% of earnings on the Joint Venture (JV) operation with the oil companies and that money is not being used to ‘kick-start’ the economy as similar schemes have in other countries.

 • 3. They also blame ‘militants’ for stealing oil (bunkering) and for

environmental damage and for the violence in the region

 • 4. They suggest that they are in a very difficult situation. The main

responsibility for dealing with human rights, good governance, and security lies with the Nigerian government not the oil companies.

Assessing the impact

• After learning more about the Delta, answer whether the oil companies have given benefits in the areas we mentioned earlier:

• They can create jobs• They can transfer technical knowledge and expertise• They can encourage the growth of professionalism, accountability

and good practice (for example, introduce notions of human rights)• They can encourage the growth of local firms and companies• They can help stimulate social and economic development in

areas where they operate (for example, build houses for poor people or build roads)

• They might assist governments in meeting security threats

BAE Systems

 • BAE Systems (formerly

British Aerospace) is one of Britain’s most successful multinationals, exporting advanced weaponry (including aircraft, submarines, radar systems, tanks and other vehicles) to many countries.

BAE and CSR• The company now

stresses its commitment to “high ethical standards”. However, in recent years BAE has been investigated for corruption in connection with sales to several countries, including Saudi Arabia, Qatar, Tanzania, Romania and Chile.

BAE and Saudi Arabia

• A series of contracts with Saudi Arabia (the so-called Al-Yamanah arms deals) has proved particularly controversial, with unproven allegations of bribery.

• BAE’s deals with Saudi Arabia were investigated by the UK’s National Audit Office and Serious Fraud Office, but in 2006 the UK government ordered the investigation to be dropped “to safeguard national and international security”.

• In 2010, BAE agreed to pay a $400m fine for violations of US law in connection with the Saudi Arabia deals.