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International Market Development and Trade > The Relationship between MNCs and the States > Flashcards

The Relationship between MNCs and the States Flashcards

1
Q

What is the radical view in terms of political ideology towards FDI?

A

Pessimistic view of FDI, Govs see MNCs as purely profit driven; exploiting resources of host country without giving back. Implies a country more closed to FDI e.g Japan

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2
Q

What is the free market view in terms of political ideology towards FDI?

A

Positive view, FDI brings know-how, jobs etc. Very welcoming towards FDI, one of the most open countries = UK

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3
Q

What is pragmatic nationalism in terms of political ideology towards FDI?

A

They recognise that MNCs can bring benefits but there are still downsides so they look for benefit maximisation and downfall minimisation
- Shift to this view from 1980s

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4
Q

What are the benefits of Chinese FDI from Angola’s perspective?

A
  • Reconstruction of infrastructure after it was destroyed by civil war
  • Development of shopping centres and hotels
  • Chinese farmers buying land and growing food
  • Angola learning new things - business
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5
Q

What are the costs of FDI from Angola’s perspective?

A
  • Not enough workers to satisfy demands
  • Translator working the same hours as the labourers
  • Importing of rice
  • Chinese labour taking new jobs
  • Locals homes demolished to make way for construction
  • Sending expatriates - less training
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6
Q

What are the benefits and costs of FDI from a Chinese perspective?

A

Pros:

  • Creates jobs for expatriates
  • Positive effect on balance of payments
  • Increased market share

Cons - language barriers, foreign food

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7
Q

What are the benefits of FDI for the host country?

A
  • Resource transfer effects
  • Employment effects
  • Balance of payments - positive if FDI acts as a substitute for imports and if subsidiary exports from host country
  • Effects on competition and economic growth
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8
Q

What are the costs of FDI for the host country?

A
  • Adverse effects on competition
  • Balance of payments - outflow of earnings to parent company, negative if subsidiary imports goods
  • Risk of loss of sovereignty and economic independence
  • FDI as a potential source of social disruption
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9
Q

What are the benefits of FDI for the home country?

A
  • Reverse resource transfer
  • Employment effects
  • Balance of payments: positive if foreign earnings are sent back and if there is demand created for home country exports
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10
Q

What are the costs of FDI for the home country?

A
  • Employment effects - when FDI substitutes for domestic production
  • Negative impact on balance of payments due to: capital outflow to finance FDI, if FDI is a substitute for exports, if purpose is to serve home market from low cost production location
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11
Q

How do MNC’s and host countries have different/similar goals?

A

MNCs want to maximise profits and minimise costs whereas HCs want GDP growth and employment.

MNCs want R&D and HCs want their facilities used for R&D

MNC wants optimal location for high order functions whereas HC wants to attract and retain

MNC wants flexibility to move profits, relocate and use labour force but HC wants to gain taxation, prevent closure of MNCs and develop flexible labour

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12
Q

How do MNCs take advantage of different locations?

A

Regulatory arbitrage - advantage of different regulatory regimes

Tax arbitrage - advantage of different tax differentiates, ensure tax is deductible as much as possible through internal prices

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13
Q

What are some examples of arbitrage?

A
  • eBay paid 17% less UK tax through falsifying internal costs
  • Starbucks revenue at £398m but reported £33m loss in UK due to interest on intragroup loan, royalties paid to Netherlands and coffee distributed from Switzerland
  • Amazon recording EU sales in Luxembourg (lowest ct) and paying small proportion of tax in relation to revenue
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14
Q

How do host countries restrict inward FDI in terms of market access?

A
  • Exclusion of foreign firms from certain industries
  • Restrictions on the degree of foreign ownership of domestic firms
  • Government screening of investment proposals
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15
Q

How do host countries restrict inward FDI in terms of performance requirements?

A
  • Local content reqs.
  • Minimum export level reqs.
  • Reqs. for involvement of local personnel in managerial positions.
  • Reqs. related to technology transfer
  • Restrictions on the remittance of profits and/or capital abroad
  • Level and method taxing profits of MNCs
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16
Q

What is an example of a host country excluding foreign firms?

A

US gov has asked firms not to do business with Chinese firms as they see China as a threat to national security

17
Q

What is an example of how Govs screen investment proposals?

A

Murdoch power not allowed to take over Sky as they would have too much influence over public opinion through control of too many media outlets

18
Q

What are invectives to attract inward FDI?

A
  • Tax concessions
  • Low interest loans
  • Grants
  • Subsidies
19
Q

Who holds greater bargaining power between the MNC and the state?

A
  • Depends of size of MNC
  • Depends on needs of host country
  • MNCs could be argued to be more powerful than governments as they struggle to exert power over tax
  • Depends on the political stability of the government; level of corruption e.g potential for lobbying
20
Q

How does bargaining power lie between the Chinese gov and MNCs?

A
  • Largest market in the world - 1,000,000 consumers

- Enables governments to extract concessions as MNCs cannot afford to not meet demands of Chinese gov

21
Q

How did the Tees Valley Combined Authority in NE England offer Ineos, a UK chemicals company, advantages to attract a new car plant investment in 2018?

A
  • Build the factory
  • Clean the site
  • Give the company the land for free
  • £20m cash grant
  • Reduced electricity rates
  • Cash to train local workers
  • Tax credit for research
22
Q

What is a location tournament?

A

Situation where MNCs have high power compared to hist environments because host environments are competing with each other for a limited amount of FDI

23
Q

How does the balance of power between the MNC and the state change over time?

A
  • Obsolescence of bargain - value of FDI after initial investment diminishes - shifts power to HC
  • Relative power of MNCs and states changes historically
  • Depends on power resources and constraints which change over time
24
Q

What are the concerns of governments?

A
  • MNCs relocating to other countries due to factor costs
  • MNCs using transfer pricing to reduce the taxes they pay
  • MNCs only recruiting low skilled labour
25
Q

Why do MNCs need governments?

A

For infrastructural basis - legal protection of tangible and intangible property, institutional mechanisms for good labour, diplomatic protection against hostile foreign environments

26
Q

How does bargaining power shift?

A
  • Shifts to MNCs when the cost of losing the investment are high to the government
  • Shifts to the host gov when there is scope to find alternatives
  • Shifts to the host gov when there is competition between MNCs for investment
  • Shifts to host gov when they have an advantageous investment environment
27
Q

What is locational tournament and what examples are there?

A
  • Bidding between states for MNC investment

- E.g Tennessee gave $577m in incentives for a $1bn VW plant

28
Q

Why is transfer pricing common in Europe?

A

Due to varying degrees of corporation tax due to new EU member states and aggressive competition for FDI by Switzerland and Ireland

29
Q

What is transfer pricing and why is it a problem?

A

Allowable costs make the actual rate of tax payable lower than the headline rate.

Internal transactions make this problematic and MNCs set their own transfer prices for internal transactions.

30
Q

Where has transfer pricing been an issue?

A

Significant for intangible transfers.

  • $53bn of revenue lost through transfer pricing in US in 2001
  • UK House of Commons reported 1 in 4 largest companies paid zero CT in UK
31
Q

What is the primary aim of host governments?

A

To embed MNC activities
Active embeddedness - incorporating localised assets by choice
Obligated - MNCs complying with state criteria to access an asset

32
Q

Why does power shift to the host government?

A
  • Fixed capital is sunk once the investment is made
  • Technology matures over time
  • Host country gains technical and managerial skills

International Market Development and Trade (8 decks)

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