What are the main reasons that multinational corporations are criticized for?

multinational corporation (MNC), also called transnational corporation, any corporation that is registered and operates in more than one country at a time. Generally the corporation has its headquarters in one country and operates wholly or partially owned subsidiaries in other countries. Its subsidiaries report to the corporation’s central headquarters.

In economic terms, a firm’s advantages in establishing a multinational corporation include both vertical and horizontal economies of scale (i.e., reductions in cost that result from an expanded level of output and a consolidation of management) and an increased market share. Although cultural barriers can create unpredictable obstacles as companies establish offices and production plants around the world, a firm’s technical expertise, experienced personnel, and proven strategies usually can be transferred from country to country. Critics of the multinational corporation usually view it as an economic and, often, political means of foreign domination. Developing countries, with a narrow range of exports (often of primary goods) as their economic base, are particularly vulnerable to economic exploitation. Monopolistic practices, human-rights abuses, and disruption of more-traditional means of economic growth are among the risks that face host countries.

A company may have reached a plateau satisfying domestic demand, which is not growing. Looking for new markets.

Continued investment in the Home country yields diminishing returns.

 Foreign direct investment is one way to expand. FDI is a means to bypassing protective instruments in the importing country.

Examples:

(i) European Union: imposed common external tariff against outsiders. Multinational companies circumvented these barriers by setting up subsidiaries . JBS USA is a subsidiary of a Brazilian company, the world's largest meat processor of beef and pork. (It kills 5000 heads of cattle per day.)

(ii) Japanese corporations built auto assembly plants in the US, to bypass VERs.

US corporate tax = 35% (21% in 2018) if income exceeds $335,000, Greece = 29%, France = 34%, Germany = 32%. Corporate tax rates are much lower in most other countries.

Comparison of effective tax rates is not meaningful, because MNCs park some profits offshore to avoid taxes. US = 19%, Japan = 22%

Tax competition: TSMC and Intel are building chip factories (Intel Fab) in Arizona. Samsung asks Texas for tax holiday for 15 years.

Build factories where consumers are. China produces 24 million cars. USA produces 4 million cars.

 Transportation costs are like tariffs in that they are barriers which raise consumer prices. When transportation costs are high, multinational firms want to build production plants close to either the input source or to the market in order to save transportation costs.

Giant Container Ship Blocking Suez Canal Finally Shifts

Multinational firms (e.g. Toyota) are better off establishing factories where consumers are located than shipping goods to faraway counries.

 Japanese firms (e.g., Komatsu) invest here to produce heavy construction machines to avoid excessive exchange rate fluctuations. Also, Japanese automobile firms have plants to produce automobile parts. For instance, Toyota imports engines and transmissions from Japanese plants, and produce the rest in the U.S.

Toyota is behind GM and Volkswagen in China, and plans to expand its production in China (in addition to Tianjin and Guangzhou) and has no plans to build more plants in North America. (China's autoparts are cheaper.) It may have been a mistake for Toyota to overexpand its plants in the US. GM and Volkswagen have expanded their production plants in Shanghai.

A Komatsu machine used in ethanol production in Ida Grove, Iowa.

GM purchased Monarch (GM Canada) and Opel (GM Germany). It did not buy Toyota, Nissan, and Volkswagen. Subsequently, they became competitors. Toyota is #1 in the car industry at present. Market shares of car companies in 2018 are:

GM = 17%, Toyota, Ford (joint second) = 14%, Hyundai-Kia: 9%.
World = 90 million cars. China = 24 million, US =11 million.

A foreign country may have the necessary resources (e.g., rare earth elements ).

REEs are critical to US military technology. LED and OLED displays use REEs. Yttrium is used in atomic batteries (long life batteries are needed to power guided missiles).

Since 1995, China is the dominant owner of REEs, extracting 85% of the world REEs.

Chinese barge shipping rare earth minerals

Due to high transportation costs, FPE does not hold. ⇒Cheap foreign labor. Labor costs tend to differ among nations. MNCs can hold down costs by locating part of all their productive facilities abroad. (Maquildoras)

Komatsu first established its European factory in Belgium in 1967, and its American subsidiary in 1970. Over the years it established many other subsidiaries throughout Europe, Russia, America and Asia.

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