Multinational corporations and global value chains
International political economy has become an ever-increasingly important topic in the world today. The rise of multinational corporations and global value chains has created a complex system that has a direct impact on the world’s economy, politics, and culture. Through continued research and analysis of this phenomenon, we can gain a better understanding of the implications of multinational corporations and global value chains and their effects on the global economy. By looking at the structure, strategies, and operations of multinational corporations and global value chains, we can begin to get a better understanding of their influence on the international political economy. These insights can help us to better comprehend the interconnectivity of international markets and the potential impacts of multinational corporations and global value chains on the global economy.
Defining Multinational corporation, Foreign direct investment & Global value chain
Multinational corporation
An MNC, or multinational corporation, is a company that operates in multiple countries and has a global reach. These companies often significantly impact the global economy due to their size and reach. MNCs may own and manage production facilities in several different countries or have a more decentralized structure with various subsidiaries operating independently in different locations. MNCs can be involved in various industries, including manufacturing, technology, finance, and more. There are many examples of MNCs, such as General Electric, Coca-Cola, and Nestle.
According to Oatley, an MNC is a company that has ownership and manages production facilities in two or more countries. there are approximately 63459 parent firms that together own a total of 689520 foreign affiliates. These parent firms and their foreign affiliates account for about 25 per cent of the world's economic production and employ some 66 million people worldwide.
Foreign direct investment
Foreign direct investment (FDI) is a type of investment made by a company or individual in a foreign country. It typically involves establishing a new business or acquiring an existing business in a foreign country. FDI can take many forms, including establishing a new factory or plant, acquiring a current company, or expanding an existing business into a new country. FDI is often made by multinational corporations, which are companies that operate in multiple countries. Individual investors or governments can also make it. FDI can significantly impact the host country's economy, as it can bring new investment, jobs, and technology to the local market.
According to Oatley, foreign direct investment (FDI) is 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. Multinational corporations make such investments. FDI can involve the construction of a new or the purchase or an existing plant or factory
Global value chain
A global value chain (GVC) is a network of economic activities that involve the production and distribution of goods and services across different countries. It consists of the coordination of different stages of production, from raw materials to the final product, through a series of activities that different firms may carry out in other locations. These activities include sourcing raw materials, manufacturing, assembly, marketing, and distribution. The term "global value chain" describes the increasingly interconnected nature of the global economy and the complex networks of economic activity that span multiple countries.
A value chain can refer to the series of activities involved in creating a product or service, which can be contained within a single geographic location or even a single firm. However, a global value chain involves coordinating these activities across multiple countries and firms. It is a way of organizing economic activity that allows firms to specialize in certain stages of production and take advantage of differences in the cost and availability of inputs and labour across different countries. The GVC initiative aims to study these complex networks of economic activity and understand how they contribute to the global economy.
Liberal view vs Alter-globalization view
Liberal view
Multinational corporations (MNCs) can play a role in a liberal economic order by investing capital in countries where it is scarce and by transferring technology and management expertise from one country to another. This can promote the efficient allocation of resources in the global economy by allowing countries to specialize in producing goods and services in which they have a comparative advantage. MNCs can also help to stimulate economic growth in the host countries where they operate by creating jobs and increasing demand for local goods and services. However, MNCs can also negatively impact host countries by exploiting local resources, contributing to environmental degradation, and undermining local businesses.
Alter-globalization view
The alter-globalization perspective views multinational corporations (MNCs) as instruments of capitalist domination, arguing that they often exert significant control over critical sectors of the economies of their host countries. This can enable MNCs to make decisions about using resources with little regard for the host country's needs and its people. MNCs may also seek to weaken labour and environmental standards to increase profits, which can negatively impact workers and the natural environment in the host countries where they operate. Critics of MNCs argue that they can contribute to economic inequality and social unrest in host countries by concentrating wealth and power in the hands of a few. Therefore, it is essential for governments and other stakeholders to consider the potential benefits and costs of MNCs carefully and to take steps to ensure that they operate responsibly and sustainably.
Multinational corporations
Historical evolution
Multinational corporations (MNCs) have a long history dating back to at least the late 19th century when some European companies began establishing operations in other parts of the world. The evolution of MNCs has been shaped by various factors, including technological advances, changes in the global political and economic environment, and the actions of governments and other stakeholders.
During the late 19th and early 20th centuries, MNCs were primarily focused on extracting raw materials and establishing production facilities in developing countries. However, many MNCs also played a role in European powers' colonization of various parts of the world.
After World War II, MNCs began to play a more significant role in the global economy as barriers to international trade and investment began to decline. This period also saw the rise of the United States as a dominant economic power, with many American MNCs establishing operations around the world.
In the late 20th and early 21st centuries, MNCs continued to expand their operations globally, often taking advantage of advances in transportation, communication, and information technology to facilitate the flow of goods, services, and capital worldwide. However, the activities of MNCs have also been the subject of controversy and criticism, with some arguing that they contribute to economic inequality and environmental degradation and undermine the sovereignty of host countries.
The first global economy period (1880-1929)
During the first global economy period between 1880 and 1929, multinational corporations (MNCs) played a significant role in the global economy. Many MNCs were focused on extracting raw materials and establishing production facilities in developing countries, often with the support of colonial powers. MNCs also played a role in the globalization of financial markets as they sought to raise capital from international investors to fund their operations.
The rise of MNCs during this period was facilitated by advances in transportation, communication, and other technologies, which made it easier for companies to operate across national borders. MNCs also benefited from declining barriers to international trade and investment and favorable legal and regulatory frameworks in many countries.
However, the activities of MNCs during this period were subject to controversy. MNCs were often accused of exploiting local resources and labour, contributing to environmental degradation, and undermining the sovereignty of host countries. These issues would continue to be a source of tension and debate in the following decades.
Beginning of new global economy
During the period between 1930 and 1979, multinational corporations (MNCs) continued to play a significant role in the global economy. This period saw the rise of the United States as a dominant economic power, with many American MNCs establishing operations worldwide. However, MNCs also faced several challenges and controversies during this period, including accusations of exploiting local resources and labour, contributing to environmental degradation, and undermining the sovereignty of host countries.
The global economic environment changed significantly during this period, with the onset of the Great Depression in the 1930s and the aftermath of World War II in the 1940s and 1950s. These events led to adopting of various policies and regulations designed to promote international trade and investment, including the creation of international organizations such as the International Monetary Fund (IMF) and the World Bank.
The 1970s were marked by economic instability, rising tensions between the industrialized and developing worlds, and growing concerns about the environmental impacts of economic activity. These developments would shape the evolution of MNCs and the global economy in the following decades.
New global economy (from 1979)
Multinational corporations (MNCs) have played a significant role in the global economy since the 1980s. This period has been marked by the increasing integration of the world economy, with the expansion of international trade and investment and the growing interdependence of national economies. MNCs have been major drivers of this trend, taking advantage of advances in transportation, communication, and information technology to facilitate the flow of goods, services, and capital worldwide.
However, the activities of MNCs have also been the subject of controversy and criticism. Some have argued that MNCs contribute to economic inequality and environmental degradation and undermine the sovereignty of host countries. As a result, governments and other stakeholders have sought to regulate the activities of MNCs and ensure that they operate responsibly and sustainably.
The global economic environment has undergone significant changes since the 1980s, including the collapse of the Soviet Union and the emergence of China as a major economic power. These developments have had important implications for MNCs and the global economy.
From hub-and-spokes to global value chains
The hub-and-spokes world
The term "hub-and-spokes" is often used to describe a pattern of economic interdependence in which a central hub country controls access to a group of smaller, peripheral countries, also known as "spokes." This type of economic arrangement is often associated with multinational corporations (MNCs), which may use their economic power to influence the policies and practices of host countries.
In a hub-and-spokes system, the hub country may serve as a hub for producing, distributing, and financing goods and services. In contrast, the spokes countries may specialize in producing raw materials or intermediate goods. The hub country may also exert influence over the policies and practices of the spokes countries through trade agreements, investment, and other means.
Critics of the hub-and-spokes model argue that it can contribute to economic inequality and may undermine the sovereignty of the spoke countries. Some have called for more balanced and equitable economic relationships between countries rather than the concentration of economic power in a few hub countries.
A significant portion of global FDI around 1914 was focused on natural resources and services, such as financing, insuring, transporting commodities, and foodstuffs. This is because various factors, including the availability of natural resources, the level of economic development in host countries, and the demand for particular goods and services, have historically driven FDI.
In the early 20th century, many multinational corporations (MNCs) were focused on extracting raw materials and establishing production facilities in developing countries. Advances in transportation, communication, and other technologies and declining barriers to international trade and investment facilitated this. However, MNCs also played a role in other sectors of the economy, such as manufacturing, and the distribution of FDI across different sectors would have varied depending on the specific circumstances of each country.
Free-standing companies, also known as independent or standalone companies, operate independently of any parent company or conglomerate. These types of companies may play an important role in various sectors of the economy, including manufacturing, service industries, and natural resource extraction.
Free-standing companies may have several advantages over companies that are part of a larger conglomerate. For example, they may have more flexibility and autonomy to make strategic decisions and adapt to changing market conditions. They may also focus more on specific products or service lines, making them more specialized and efficient.
However, free-standing companies may face challenges, such as limited access to capital and other resources, and may be more vulnerable to economic downturns or other external shocks. Therefore, it is important for free-standing companies to carefully consider the potential risks and benefits of operating independently and to develop strategies to mitigate potential risks.
According to some estimates, Latin America and the Caribbean received around one-third of global FDI flows in the early 21st century, while Asia received around one-fifth. These figures may have varied over time and would have been influenced by various factors, including economic conditions, political stability, and the level of development in host countries.
The United Kingdom (UK) has historically been a major source of FDI, with many UK-based MNCs establishing operations in other parts of the world. According to some estimates, the UK accounted for around 45% of global FDI flows in the early 20th century. However, the distribution of FDI across different source countries would have varied over time. Various factors, including the level of economic development, the availability of capital, and the competitive advantages of different countries, would have influenced it.
In the late 19th and early 20th centuries, the policy environment for multinational corporations (MNCs) was often based on the legalization of extraterritorial rights and the recognition of full property rights for foreign investors. This was facilitated by treaties and other agreements that granted MNCs certain privileges and protections when operating in foreign countries.
The legal recognition of extraterritorial rights allowed MNCs to operate in host countries with a degree of independence from local laws and regulations. This could include the right to establish their own courts and resolve disputes with host governments and other parties through arbitration or other international legal processes.
The recognition of full property rights for foreign investors also includes the right to acquire land and other assets in host countries and the right to sell or dispose of these assets at will.
Global value chains
Global value chains (GVCs) refer to the network of activities involved in the production and distribution of goods and services around the world. GVCs have evolved significantly over the past several decades, with a sharp decline in the share of the primary sector (such as agriculture and resource extraction) and a sharp growth in the share of manufacturing and services.
According to some estimates, the share of manufacturing and services in GVCs increased from around 25% in the 1970s to over 50% by 2000. This shift reflects many factors, including technological advances, changes in the global economic environment, and the evolution of international trade and investment patterns.
Various factors, including the increasing integration of the world economy, the decline of barriers to international trade and investment, and the increasing importance of knowledge-based industries, have driven the growth of manufacturing and services in GVCs. These trends have had important implications for the global economy and have shaped the evolution of multinational corporations (MNCs) and other economic actors.
Multinational corporations (MNCs) have been the dominant organizational form in the global economy for many years and have played a significant role in the evolution of global value chains (GVCs). MNCs have often used outsourcing and other forms of externalization to access specialized inputs and capabilities, and they have engaged in increasingly complex and interdependent production networks.
Intradirect trade, or trade within a company between different affiliates or subsidiaries, has also increased significantly over the past several decades. According to some estimates, the share of intradirect trade in global trade increased from around 20% in the 1970s to more than 40% by the year 2000. This trend reflects the growing importance of MNCs in the global economy and their increasing reliance on complex and interdependent production networks.
The growth of intradirect trade and the increasing importance of GVCs have been driven by various factors, including technological advances, changes in the global economic environment, and the evolution of international trade and investment patterns. These trends have had important implications for the global economy and have shaped the evolution of MNCs and other economic actors.
Foreign direct investment (FDI) stocks (i.e., the total accumulated value of foreign investments in a country) have historically been concentrated in North America, Europe, and Japan, reflecting the economic dominance of these regions in the global economy. However, there has been a striking rise in FDI flows into China in recent decades. As a result, the country has emerged as a major economic power and has attracted significant investment from abroad.
According to some estimates, China has received a large share of global FDI flows in recent years as foreign companies have sought to take advantage of the country's large and growing market, low-cost labour, and other factors that make it an attractive destination for investment.
More recently, there has also been an increase in FDI outflows from China, as Chinese companies have sought to establish operations in other parts of the world and access new markets and resources. This trend reflects the growing economic power and global reach of Chinese companies and the increasing interdependence of the global economy.
The policy environment for multinational corporations (MNCs) has been shaped in part by the spread of regional trade agreements (RTAs) and bilateral investment treaties (BITs) in recent decades. RTAs are agreements between two or more countries to reduce trade barriers and promote regional economic integration. BITs are agreements between two countries to protect and encourage investment by nationals of one country in the other country.
RTAs and BITs can provide a favourable policy environment for MNCs by reducing barriers to trade and investment and establishing rules and protections that help to ensure a stable and predictable business environment. RTAs and BITs can also facilitate the flow of goods, services, and capital worldwide and contribute to the integration of global value chains (GVCs).
However, RTAs and BITs can also be controversial. Some critics argue that they can undermine the sovereignty of host countries, contribute to economic inequality, and negatively impact the environment and labour standards. As a result, the spread of RTAs and BITs has often been the subject of debate and controversy.
Evolution since 2008
There have been some developments in the global economy since the financial crisis of 2008 that have favoured developing countries in East Asia. These developments have included the continued growth of emerging markets, the increasing importance of developing countries in global value chains (GVCs), and the shifting patterns of international trade and investment.
Emerging markets, including many countries in East Asia, have experienced strong economic growth in recent years, and this has contributed to an increase in demand for goods and services from these countries. As a result, many multinational corporations (MNCs) have sought to establish or expand operations in these markets to take advantage of the growing opportunities.
Developing countries in East Asia have also become more important players in GVCs, as they have increasingly specialized in producing intermediate goods and services that are used in producing final goods. This has contributed to the global economy's integration and facilitated the flow of goods, services, and capital around the world.
The distribution of foreign direct investment (FDI) among different regions has changed significantly over the past several decades. According to some estimates, the United States, Europe, and Japan represented around 90% of global FDI flows in the 1980s. This share declined to around 80% between 1990 and 2009 and decreased to around 60% between 2010 and 2016.
This shift reflects a number of factors, including the rise of Asian multinational corporations (MNCs) as important foreign investors and the increasing economic importance of developing countries in the global economy. Many Asian MNCs have sought to expand their operations abroad and become major global value chains (GVCs) players. This has contributed to the growing importance of developing countries in the global economy and has led to a shift in the balance of economic power towards these regions.
The changing distribution of FDI among different regions of the world has had important implications for MNCs and other economic actors. It reflects the increasing interdependence of the global economy.
Emerging market countries have increasingly become home bases for multinational corporations (MNCs) in recent decades. Many MNCs have established operations in these countries to take advantage of the growing market opportunities and to access specialized inputs and capabilities. Some of the emerging market countries that have become important home bases for MNCs include Hong Kong, China, South Korea, Singapore, Taiwan, Venezuela, Mexico, and Brazil.
According to some estimates, around 60 of the top 100 MNCs from developing countries are based in Southeast and East Asia, while another six are based in India. These MNCs have often focused on specific sectors of the economy, such as manufacturing, and have sought to expand their operations abroad to access new markets and resources.
Most developing world MNCs are considerably smaller than developed country MNCs, and only a small number of developing country MNCs ranked among the world's 100 largest MNCs in 2017. However, the number of developing country MNCs has been growing in recent years, and these companies are increasingly playing a more significant role in the global economy.
According to some estimates, China's FDI outflows increased from around 4.6 billion USD in 2000 to 216.4 billion USD in 2016. This trend reflects the growing economic power and global reach of Chinese companies and the increasing interdependence of the global economy.
Chinese companies have increasingly become major players in global value chains (GVCs) and have established operations in various sectors, including manufacturing, services, and natural resource extraction. Several factors, including advances in transportation and communication technologies, the liberalization of international trade and investment, and the growing economic importance of developing countries, have facilitated the expansion of Chinese FDI outflows.
Regional multinationals
Regional multinationals, also known as "multilocal" or "regionalized" multinationals, are companies that operate on a global scale but focus on a particular region or geographic area. These companies often have a decentralized organizational structure, with operations and decision-making power being delegated to local subsidiaries in each region. This allows them to tailor their products and services to the specific needs and preferences of the local market, while still leveraging the resources and expertise of the global organization. Regional multinationals can be contrasted with "global" multinationals, which have a more centralized organizational structure and tend to standardize their products and operations across different regions.
Alan Rugman's theory of regional multinationals is based on the idea that the majority of multinational corporations (MNCs) are actually regional in scope, rather than truly global. According to Rugman, most MNCs operate in a limited number of regions or countries, focusing on serving the specific needs of those markets rather than trying to standardize their operations across the globe.
In his research, Rugman analyzed firm-level data from the 2011 Fortune Global 500 list and found that 320 out of the 380 companies on the list could be classified as regional MNCs, while only 9 out of the 380 companies could be classified as "global" MNCs. This suggests that most MNCs have a more decentralized, regionally-focused organizational structure and operate in a limited number of regions or countries.
The majority of multinational corporations (MNCs) had a regional focus, with 80% of MNCs classified as regional and only 4% classified as global. Additionally, the average score for regional sales and assets for these MNCs was 70% for sales and 72% for assets during the period from 1999-2008.
Most multinational corporations (MNCs) from 1999-2008 had a regional focus, with most of their sales and assets concentrated in specific regions or geographic areas. This suggests that these MNCs were primarily focused on serving the needs of local markets, rather than trying to standardize their products and operations across the globe.