10.8.2 The operation of MNEs
Multinationals can diversify operations across different countries. This brings them
great benefits:
● MNEs can locate their activities in the countries which are best suited for them. For
example, production planning can be carried out in the parent country, the production
itself can be carried out in one of the newly industrialised countries where labour
is relatively cheap, and marketing can be done in the parent country where such activities
are well developed. The relocation of production may go some way to explaining
the decline in the manufacturing sector in the developed nations.8
● An MNE can cross-subsidise its operations. Profits from one market can be used to
support operations in another. The cross-subsidisation could take the form of price
cutting, increasing productive capacity or heavy advertising.
● The risk involved in production is spread, not just over different markets but also over
different countries.
● MNEs can avoid tax by negotiating special tax arrangements in one of their host
countries (tax holidays) or through careful use of transfer pricing (see Chapter 9).
Transfer prices are the prices at which internal transactions take place. These can be
altered so that high profits can be shown in countries where the tax rate is lower. For
example, in the USA in 1999, two-thirds of foreign-based multinationals paid no federal
income tax. The loss to US taxpayers from this has been estimated to be in excess
of $40 billion per year in unpaid taxes.
● MNEs can take advantage of subsidies and tax exemptions offered by governments to
encourage start-ups in their country.
The very size of MNEs gives rise to concern as their operations can have a substantial
impact upon the economy. For example, the activities of MNEs will affect the labour
market of host countries and the balance of payments. If a subsidiary is started in one
country, there will be an inflow of capital to that country. Once it is up and running,
however, there will be outflows of dividends and profits which will affect the invisible
balance. Also there will be flows of goods within the company and therefore between
countries, in the form of semi-finished goods and raw materials. These movements will
affect the exchange rate as well as the balance of payments and it is likely that the effects
will be greater for developing countries than for developed countries.
There is also the possibility of exploitation of less-developed countries, and it is
debatable whether such footloose industries form a viable basis for economic development.
Added to this, MNEs take their decisions in terms of their overall operations
rather than with any consideration of their effects on the host economy. There is therefore
a loss of economic sovereignty for national governments (see Chapter 12).
The main problem with multinationals is the lack of control that can be exerted by
national governments. In June 2000, the OECD updated its Guidelines for Multinational
Enterprises, which are not legally binding but are promoted by OECD members governments.
These seek to provide a balanced framework for international investment that
clarifies both the rights and responsibilities of the business community. It contains
guidelines on business ethics, employment relations, information disclosure and taxation,
among other things. Against all this is the fact that without the presence of MNEs,
output in host countries would be lower, and there is evidence that on labour market
issues the multinationals do not perform badly.