2. 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
3. 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
4. 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.
5. 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
6. 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.
7. 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
8. 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
9. 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
10. 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
11. 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
13. 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
14. 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
15. 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
17. 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)
18. 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
19. 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)
20. 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
21. 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
22. 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.
23. 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)
24. 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
25. 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)
26. 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
27. 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
28. 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
29. 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.
30. 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.
31. 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
32. 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.
33. 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.
34. 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.
