03 - Economic Development (Role of MNCs)

Hwa Chong Institution (College): History Paper 1 Theme II: Understanding the Global Economy How did the Development of the Global Economy Impact the World? 1 Role of the Private Sector in Post-War Economic Development A multi-national corporation (MNC) is a corporation or enterprise that manages production establishments or delivers services in at least two countries. Most MNCs are industrial corporations which make goods in factories in various countries and distribute them worldwide. They can take the form of financial corporations or service providers. • Such companies have offices and/or factories in different countries and usually have a centralized head office where they coordinate global management. Nearly all major MNCs are American, Japanese or Western European e.g. Nike, Coca-Cola, Wal-Mart, Toshiba, Honda and BMW. Very large MNCs have budgets exceeding those of countries, and can have powerful influence in international relations and local economies. Most MNCs are from developed countries, and play a major role in developing economies. Since 1945, MNCs have grown rapidly. In 1976, 371 MNCs had branches in 20 countries. Presence of MNCs have often contributed to the productivity and production of the host country, as well as aided and expanded its economic growth. Background: The earliest historical origins of multinational corporations can be traced to the major colonising and imperialist ventures from Western Europe, notably England and Holland, which began in the 16th century and proceeded for the next several hundred years. During this period, firms such as the British East India Trading Company were formed to promote the trading activities or territorial acquisitions of their home countries in the Far East, Africa, and the Americas. The multinational corporations as it is known today, however, did not really appear until the 19th century, with the advent of industrial capitalism and its consequences: the development of the factory system; larger, more capital intensive manufacturing processes; better storage techniques; and faster means of transportation. During the 19th and early 20th centuries, the search for resources including minerals, petroleum, and foodstuffs as well as pressure to protect or increase markets drove transnational expansion by companies almost exclusively from the United States and a handful of Western European nations. Sixty per cent of these corporations' investments went to Latin America, Asia, Africa, and the Middle East. Fueled by numerous mergers and acquisitions, monopolistic and oligopolistic concentration of large transnationals in major sectors such as petrochemicals and food also had its roots in these years. The US agribusiness giant United Fruit Company, for example, controlled 90 per cent of US banana imports by 1899, while at the start of the First World War, Royal Dutch/Shell accounted for 20 per cent of Russia's total oil production. Hwa Chong Institution (College): History Paper 1 Theme II: Understanding the Global Economy How did the Development of the Global Economy Impact the World? 2 Acceleration of MNCs after WWII After WW2, multiple trends converged to accelerate MNC growth: § Favorable post WW2 economic world order that favored trade over conflict. § Banks in the US, Europe, and Japan began to lend vast sums of money to industrial companies, encouraging expansion and mergers. § Technological advances in transport, IT, and communications. § Emerging markets, burdened by debts and unemployment, began to view MNCs as a path to rapidly access technology, capital, and accelerate employment. The East Asia miracle was largely based on MNC trade. Demand for natural resources continued to provide an impetus for European and US corporate ventures between the First and Second World Wars. Although corporate investments from Europe declined somewhat, the activities of US MNCs expanded vigorously. In Japan, this period witnessed the growth of the zaibatsu (or "financial clique") including Mitsui and Mitsubishi. These giant corporations, which worked in alliance with the Japanese state, had oligopolistic control of the country's industrial, financial, and trade sectors. US MNCs heavily dominated foreign investment activity in the two decades after the Second World War, when European and Japanese corporations began to play ever greater roles after the 1970s. In the 1950s, banks in the US, Europe, and Japan started to invest vast sums of money in industrial stocks, encouraging corporate mergers and furthering capital concentration. • Major technological advances in shipping, transport (especially by air), computerisation, and communications accelerated MNCs' increasing internationalisation of investment and trade, while new advertising capabilities helped MNCs expand market shares. All these trends meant that by the 1970s oligopolistic consolidation and MNCs' role in global commerce was of a far different scale than earlier in the century. Whereas in 1906 there were two or three leading firms with assets of US$500 million, in 1971 there were 333 such corporations, one-third of which had assets of US$1 billion or more. Additionally, MNCs had come to control 70-80 per cent of world trade outside the centrally planned economies. Over the past quarter century, there has been a virtual proliferation of transnationals. In 1970, there were some 7,000 parent MNCs, while today that number has jumped to 38,000. 90 percent of them are based in the industrialised world, which control over 207,000 foreign subsidiaries. Since the early 1990s, these subsidiaries' global sales have surpassed worldwide trade exports as the principal vehicle to deliver goods and services to foreign markets. How did MNCs contribute to the rapid growth of post war economies? Western Europe was experiencing “worsening trade and payment deficit[s]” that stemmed from the considerable productivity gap and its inability to compete economically. Owing to these conditions, the United States expanded and focused the Marshall Plan by instituting the Technical Assistance and

Hwa Chong Institution (College): History Paper 1 Theme II: Understanding the Global Economy How did the Development of the Global Economy Impact the World? 3 Productivity Program in 1949. The main thrust of the Technical Assistance Program (TAP) was to increase productivity in Western Europe. The conventional wisdom surrounding the productivity gap was that Europe had technologically fallen behind the United States. To address these concerns, the United States used the TAP as a conduit through which to disseminate state-of-the-art technologies, technical knowledge, and managerial sciences. The channels through which the technological transfer occurred inherently revolved around the lending of U.S. specialists to Europe and the allowance of their European counterparts to visit and observe processes in the United States. • Additionally, U.S. government agencies played an important role in transferring technological advances. The Bureau of Labour Statistics, for example, contributed by providing statistical technical assistance that involved the exchange of specialists but also was focused on introducing a data- and statistics-rich approach to productive efficiency in Western Europe. Europe was not the sole beneficiary of these productivity and technology exchanges. The United States in 1955 initiated its TAP in Japan. Like the TAP in Western Europe, the Japanese assistance plan focused on increasing technological and productive know-how. Anecdotal evidence provided in several studies reveals the very significant impact these TAPs had on the productivity of individual companies and industries as a whole. For example, Tiratsoo (2000) recounts that after the Mitsubishi Company received technical assistance from the United States in building a new assembly plant, it was able to increase productive capacity by roughly 40%. The International Directory