Section 5. International Business

Target Questions:

1. What is a multinational corporation?

2. What is a branch?

3. What is an affiliate?

4. What is foreign direct investment?

5. What is a greenfield investment?

6. What is the origin of multinational corporations?

7. What are advantages/disadvantages of multinational corporations?

Multinational Corporation (MNC), sometimes called transnational corporation or international corporation, business that produces or distributes products or services in one or more foreign countries by establishing a branch or affiliate there. A branch is a part of a company that is located in another country. An affiliate is a company partially or entirely owned by another company. MNCs engage in foreign direct investment (FDI) – that is, investment in one country by citizens of another country. Sometimes such investment involves acquiring an existing company. In other cases MNCs undertake what is known as greenfield investment by creating new facilities or activities.

The MNC has its origin. Usually it is the outgrowth of the great trading companies of the 17^th and 18^th centuries. In 1811 the New York statute said corporations could be created by the filing of documents. After that it became a matter of bureaucratic operations to become a corporation. By 1850 it was a very common thing in the United States and was under general statute in European countries as well. Since that time the corporate movement began. As the jet plane, satellite communications and computers began, it became possible for a company to control business in all the world.

Nowadays most MNCs are very large corporations based in developed countries. About half of the 600 largest MNCs have headquarters in the United States, about a sixth are based in Japan, and about a tenth are in Great Britain. An increasing number of MNCs now originate from the newly industrialized and developing areas, including Hong Kong and South Korea. These developments have been aided by technological improvements in transportation, communications, and production processes.

The tremendous growth and spread of MNCs has sparked controversy. Some people believe that MNCs contribute to unemployment in the country where they are based by hiring foreign workers for overseas branches or affiliates. Some people also believe MNCs exploit the people and resources of other countries. However, others argue that MNCs create more jobs than they eliminate and that MNCs bring capital and technology to areas that need it.

The growth of international corporate operations is faster than the economic growth of the industrialized nations. There are some projects which predict that within a generation almost a half of the free worlds production will be internationalized.

Activity 1. International Business

Read the following article.

THE NATURE OF INTERNATIONAL BUSINESS

There are many different forms and levels of international business that organizations can engage in, and it is difficult to draw sharp lines of distinction between them. But for discussion purposes, we shall identify three general forms. They are shown in Figure 1.

Levels of International Business Activity:

High Multinational business

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