website title
Students Zone - Answers to End of Chapter Questions
CHAPTER 6: MULTINATIONAL CORPORATIONS OR MNCS
1. What do you understand the Transnationality Index to mean? What can we learn about the process of globalisation from the TNI evidence in Table 6.2?
Answer
The Transnationality index seeks to measure the extent to which MNCs are actually ‘global’ or truly international in their behaviour. As a proxy for measuring ‘globalness’ the TNI ranks companies according to the foreign share of their assets and employment.
Table 6.2 suggests or shows that the most transnational companies (as measured by the TNI) tend to be based in countries other than the world’s largest economies of USA, Japan and Germany. Only 3 Us companies figure in table 6.2 of the highest TNI ranking 37 MNCs, with 3 from Japan and 3 from Germany. Tables 6.1 and 6.2 give us rather different messages. The biggest companies are not high ranking on the TNI, and the high-ranking companies seem to start in relatively small economies. So perhaps the motivation for becoming transnational (or behaving truly as if in a borderless worlds, as in the Ohmae view) is simply one of necessity. To grow Swiss and Canadian companies, for example have to look outside their home economies.
Note that on the TNI rankings two companies taken by many to be absolutely symbolic of globalisation, McDonald`s and Coca Cola, only rank 24th and 26th respectively.
2. Ohmae says that we now live in a ‘borderless world’. What does he mean? Do you think he is right? What impact does this have on business?
Answer
Ohmae`s argument, in a nutshell, is that a modern international company is not essentially ‘home based’ in reality or in outlook. The typical MNC, says Ohmae, sees itself as a ‘citizen of the world’ seeking maximum growth and profits by taking advantage of production and marketing opportunities around the world. This, he says, is already the case for most big international companies, and this is a good thing.
The ‘borderless world’ approach to doing international business has clear beneficial impacts on business, Ohmae argues, especially as it makes use of best practice in free markets everywhere, thus imposing efficiency and effectiveness on companies and giving customers and other stakeholders around the world similar benefits.
3. Explain what ‘transfer pricing’ means in the context of globalised business activity. Why do businesses do this and what effect does it have on governments?
Answer
Transfer pricing, as explained in chapter 6, is a standard and necessary procedure in multi-plant or divisional firms in which plants and or divisions supply and are supplied by one another. It is a requirement of sensible management attempting to monitor and manage costs and efficiency. International firms may, however, use transfer pricing as a means of avoiding taxes by clever internal accounting. By managing internal supply prices firms can locate profits in divisions or subsidiaries based in low tax countries. This is clearly very helpful for firms, which by so doing reduce their tax liabilities and increase their profits. The practice of transfer pricing is very common indeed. For governments the costs are clear - lost potential tax revenues.
4. Some people argue that globalisation has failed to rid the world of poverty and is therefore not desirable. If poverty still exists, others might reply, it is because there has not been enough globalisation yet. When MNCs are truly free to operate where and how they want to, then the benefits of free markets will be able to raise everybody’s living standards. Explain these two viewpoints. Which do you think is the sounder argument?
Answer
Judgement as to which is the sounder of these two points of views ultimately up to the student or reader. One approach to the question could be to consider the different positions as ‘agents of control’ as against ‘agents of change’. The control idea claims that global firms seek to exploit whatever opportunities they can find, or indeed create, for business gain using their economic and political power to their own advantage. By implication these firms are assumed to do little or nothing to alleviate poverty around the world. The agents of change approach would see MNCs spreading new ideas, new techniques and new products around the world - so called ’technology transfer’, as well as creating employment opportunities. Furthermore, simple free market economics and the idea of the invisible hand suggest that firms in competitive markets must seek to serve their customers if they are to prosper. By so doing firms operate to the benefit of all consumers - including the poor.
Is ‘ridding the world of poverty’ a reasonable objective of global firms? Can society properly expect such business motivation? If not, and if most would argue that it is not, then this question could be seen as being deliberately provocative and attempting to stimulate debate.
5. It is sometimes said that MNCs limit the sovereignty of governments and nation states. Others argue that only governments can raise taxes or an army, and so governments are clearly more powerful than companies. Who is right?
Answer
Both points of view may be correct. There is considerable evidence of firms wielding influence over governments. A classic example from the 1970s was the Ford Motor Company insisting that the UK government intervene in industrial action being undertaken in some (then) very large Ford factories. The threat from the company was that if solutions could not be found to the conflicts then the factories could be closed down and production moved to other countries. This example illustrates that the concept of MNC power and its potential misuse, is not seen as applying only to weak poor or developing economies.
On the other hand it is of course true that firms do not have the ability to directly levy taxes, or to raise armies. But they may indeed negotiate the taxes they pay with the governments of host countries, seeking tax holidays or long-term tax relief in return for inward investment.
6. Look at the official EU ‘portal’ or gateway website (http://europa.eu.int ). What can you learn from this website about the EU approach to and attitude towards MNCs?
Answer
An open question, seeking student’s comments. The www sites may be found to give unclear information on what exactly is the stance of the EU towards the behaviour of existing non-EU MNCs within Europe, and on the question of conditional investment. (See q 5 above too).
7. Look at the quotation from the Communist Manifesto of 1848 in this chapter. Given what is said there, and using any other relevant information you have, how surprised do you think Marx and Engels would be if they could see the levels of globalisation now, in the 21 st century?
Answer
Probably neither Marx nor Keynes would be very surprised to see the levels of international trade and globalisation that exist now. But their interpretations would, presumably differ somewhat. Marx might see the current situation as evidence of international capitalism exploiting workers and markets around the world as part of the class struggle which has gone on since Greek and Roman times, whereas Keynes might see the modern business world simply of evidence of free markets flourishing. What would surely surprise them both would be the speed and scope of modern business communication systems, and of international travel.
Other End of Chapter Questions >>
- Chapter 1
- Chapter 2
- Chapter 3
- Chapter 4
- Chapter 5
- Chapter 7
- Chapter 8
- Chapter 9
- Chapter 10
- Chapter 11
- Chapter 12
