INTENSIVE COURSE ON MULTINATIONAL CORPORATIONS

INTENSIVE COURSE ON MULTINATIONAL CORPORATIONSPROFESSOR KAZUO DOI

Multinational Corporations:Literature review and the Malaysian Experience

Presented by Zahar Angga and Aung Saw Min

REFERENCES

Economic Development, ninth edition, Michael P. Todaro and Stephen C. Smith, Chapter 15, Foreign Finance, Investment and Aid: Controversies and Opportunities

Industrialization and Globalization, John Weiss, Chapter 2, Are there different paths to industrialization?

Flying geese in Asia: The impacts of Japanese MNCs as a source of industrial learning, Roger Hayter & David W. Edgington

THE OUTLINE

Literature Review The International Flow of Financial Resources FDI & MNCs: Pros And Cons For Development

(Economic Development, ninth edition, Michael P. Todaro and Stephen C. Smith,

Chapter 15, Foreign Finance, Investment and Aid: Controversies and Opportunities) Dependent or non-dependent industrial policy

(Industrialization and Globalization, John Weiss, Chapter 2, Are there different paths to industrialization?)

Japanese MNCs and industrial learning in Malaysia

THE INTERNATIONAL FLOW OF FINANCIAL RESOURCES

Majority of non-oil-exporting developing nations incur deficits on their current accounts

Continuous net inflow of foreign financial resources represents an important ingredient in long-run development strategies of developing countries

Two main forms viz. private direct ( FDI ) and portfolio investment public and private development assistance

FDI & MNCs: PROS AND CONS FOR DEVELOPMENT

FDI & MNCs An MNC conducts and controls productive activities in more

than one country The growth of private FDI by MNCs in the developing world

has been extremely rapid in recent decades $Bil 2.4, 11, 35, 147 ( 1962, 80, 90, 2002 ) Asia (60%), Africa (<3%), LDCs (<2%)

Go to countries with the highest financial returns and the greatest perceived safety

Largely unconcerned with issues such as poverty, inequality and unemployment alleviation

FDI & MNCs, continued FDI to developing countries have remained a small

fraction of these countries total investment (figure 15.1) However, FDI has become the largest source of foreign

funds flowing to developing countries (figure 15.2 ) Scale and ownership of MNCs

Sale of 3 of top 10 is more than the GNI of all sub-Sahara Africa, 4 of top 10 larger than economy of India, Top 7 together larger than China

Operations centrally controlled by parent companies 5 of top ten based in USA, others in Europe, All top 100

except 2 are in US & European countries, Japan, 1 in HK Enormous size confers great economic (and sometimes

political) power on MNCs vis-à-vis the host country & oligopolistic market positions

Major force in rapid globalization of world trade

FDI & MNCs, continued

Pros and Cons Pros: FDI could contribute to economic growth

By filling in Savings-investment gap Foreign-exchange or trade gap Tax revenue gap Management gap

By technology transfer


Against: Economic and Philosophical Arguments Economic

May lower domestic savings and investment rates by: Stifling competition through exclusive production agreements

with host government Failing to reinvest much of their profits Generating domestic incomes for groups with lower saving

propensities Inhibiting the expansion of indigenous firms that might supply

them with intermediate products by instead importing these goods from overseas affiliates

Crowding out of investment of local firms Importation of intermediate and capital goods, thus, long-run

impact may be worsening of balance of payments problems


Contribution to revenue may be less for tax concessions, the practice of transfer pricing, excessive investment allowances, tariff protection provided by the host government

May inhibit local skills as a result of MNCs dominance of local markets

Philosophical or ideological Create dualistic economic structures and exacerbate income

and rural urban inequalities Produce inappropriate products using inappropriate technology Thus, cause allocation of local resources for socially

undesirable projects Suppress domestic entrepreneurship by driving out local

competitors Influence economic policy Influence political decisions


General conclusion: Private foreign investment can be an important stimulus to

economic and social development as long as the interests of MNCs and host country governments coincide

(Please see table 15.1,pg 714)

DEPENDENT OR NON-DEPENDENT INDUSTRIAL POLICY

Dependence (economic dimension) A heavy penetration by foreign investment in the major

sectors of the economy The use of capital-intensive imported technologies Consumption patterns of domestic elites copied from the rich

countries ‘Unequal exchange’ in trade, defined in various ways Growing inequalities in income distribution

Comprehensive classification is difficult Lack of accurate data on the magnitude Difficult to determine what size of foreign presence means

dependence

Dependent or non-dependent industrial policy:TNCs

Four types of TNCs 1. Resource seeking

To exploit natural or human resources in the host economy 2. Market-seeking

To supply the host economy market by local production rather than by exports

3. Efficiency-seeking To rationalise production on a global basis by sourcing parts

from the host economy 4. Strategic asset-seeking

To acquire assets with particular advantages through the acquisition of local firms from a host country

Dependent or non-dependent industrial policy: TNCs, continued

1988 1997

Sub-Saharan Africa 940 862

Asia 42,192 555,587

Latin America & the Caribbean 26,518 32,549

Polarisation: FDI flows depends on GDP Growth, political stability, infrastructure, wage cost advantages, etc

FDI in manufacturing in developing countries

Table 1. Stock of foreign investment in manufacturing: by developing region ( million US$ )

Source: UNCTAD ( 1999b), Annex A.

Dependent or non-dependent industrial policy:TNCs, continued

Country Employment (%) Gross value of production or sales (%)

Brazil (1995) 13 -

China (1997) 4 -

Hong Kong (1994) 16 21

Indonesia (1996) 5 -

Malaysia (1994) 44 57

Mexico (1993) 18 -

Sri Lanka (1996) 54 -

Singapore (1996) 52 70

Taiwan (1995) 21 -

Turkey (1990) 3 8

Vietnam (1995) 15 -

Source: UNCTAD (1999b) Annex A.

Table 2. Share of foreign-owned or affiliated enterprises in manufacturing

Dependent or non-dependent industrial policy: TNCs, continued

Country Year Share of manufactured exports (%)

China 1996 48

H.K. 1984 17

Korea 1986 26

Taiwan 1989 18

Malaysia 1992 76

Singapore 1991 92

Philippines 1983 58

Thailand 1988 33

Note that firms in India and Korea relied heavily on technology transfer agreements and licensing rather than FDI as a means of obtaining foreign technology

Table 3. Share of foreign affiliates in exports of manufactures: East Asia

Source: Hill and Athukorala (1998)

Dependent or non-dependent industrial policy: Large domestic groups and TNCs from developing countries

Country* Groups** Specialized*** State owned TNC affiliates Total

Argentina 1 1

Brazil 1 2 4 7

India 1 2 3

Indonesia 1 1 2

Korea 26 26

Mexico 1 1 3 5

Taiwan 1 2 2 5

Thailand 1 1

Table 4. Distribution of fifty largest manufacturing enterprises (1993)

Source: Amsden (2001) Tables 8.2a and 8.2bNotes * Data on HK and S’pore are not given.

** Private sector groups with operations in more than one manufacturing branch.*** Private sector enterprises specialized in one branch.

Dependent or non-dependent industrial policy: Large domestic groups and TNCs from developing countries, continued

Region/ Country Share in total foreign assets

ASIA 65.7

of which PRC 8.8

Hong Kong 22.0

India 0.8

Korea 16.7

Malaysia 6.3

Philippines 1.5

Singapore 7.2

Taiwan 2.4

LATIN AMERICA 28.2

Of which Argentina 4.1

Brazil 7.6

Chile 3.4

Mexico 5.9

Venezuela 7.3

AFRICA 6.3

Total 100.0

Table 5.Top fifty TNCs from developing countries (1998)

Source: UNCTAD (2000) Table 3.15

Dependent or non-dependent industrial policy: FDI and economic performance

Many studies - a common finding is that high FDI inflows are generally associated with high rates of economic growth, with the possibility of dual causation

There is also evidence of threshold effect at work, which implies that a country has to achieve a minimum level of absorptive capacity

It appears that foreign capital contribute positively to growth in the more open economies

JAPANESE MNCS AND INDUSTRIAL LEARNING IN MALAYSIA

PM Mahathiar’s look-east policy in early-1980s: to learn from Japan

Next to Singapore, Japanese FDI has had the most impact in Malaysia among Pacific Asian countries in relation to employment and exports

Japanese MNCs and industrial learning in Malaysia, continued

Early Period- from the 1960 to the 1970s The first generation of Japanese electronic FDI took place

in Malaysia during the 1960s Sony & Matsushita set up JV subsidiaries Medium-scale capacity to produce consumer electronics for

local markets In the 1970s established parts and components companies

Export-oriented IC assembly by Hitachi, NEC grew rapidly During this early period

Few linkages with local subcontractors Few examples of local design and development activities Limited promotion and autonomy for Malay staff or

engineers


Despite attempts by the Malay government to bargain for better joint venture deals, head offices in Japan used and controlled their Malaysian JVs as branch plants

Minimal development of Japanese assembly factories due to Small scale of the local market Lack of suitable supply companies in Malaysia

Japanese MNCs and industrial learning in Malaysia , continued

1980s Following the rise of Yen in 1985, a new wave of large-

scale assembly production took place aimed at overseas exports markets, especially colour TV and VCRs

Changes in Malaysian investment promotion attracted further FDI by Japanese electronic companies

By 1987, due mainly to Japanese and US assembly plants, Malaysia had become

one of the world’s largest exporters of semiconductors third largest producer of VCRs after Japan & US


Late 1980s and early 1990s The local factories of Matsushita Electronics alone were

estimated in the early 1990s to account for around 4% of Malaysia’s GDP

Japanese SMEs further increased their FDI, aiming to manufacture components for local assemblers as well as for exports

General move to higher levels of investment and sophistication in the industry led to increased levels of localization in terms of design engineering capacity, but strictly within Japanese-controlled assembly firms


Malaysian government, under its sixth Malaysia Plan (1991-1995) encouraged MNCs to shift their operations from labour-intensive to more capital-intensive industries, and thus

Fuji electric: computer disk substrates for hard disk drives Sharp: camcorder assembly Hitachi & Matsushita- set up R&D centers focusing on

product design adaptations for Asian markets However, with respect to the localization of management

or suppliers there has been little progression End of 1990s, component inputs tended to involve either

links with a new generation of Japanese parts supply companies or the local operations of South Korea and Taiwan MNCs, rather than local Malaysian firms


However, from the early 1990s Some Malaysian components’ makers began to respond

generally to the growing number of Japanese assembly investments, especially in the electronic sector

A study suggests that after 1993 critical changes were observed in local procurement behaviour of Japanese firms

Greater use of non-Japanese local firms in generic parts- resistors, diodes, capacitors, transformers, power supplies, coils, filters and loudspeakers

This was due to Further cost cutting by Japanese firms Introduction of ‘vendor-development programme’, which

designed to built linkages between MNCs and local SMEs by the Malaysian Government in 1993


Examples of low-to-medium value-added local inputs Moulded compounds for plastic casings, silicon wager

packaging materials, solder for joints, spare parts, supportive tools, industrial chemicals, lubricants, ancillary materials and final packaging, and shipping materials

Japanese firms expressed considerable interest in further domestic sourcing as more materials and components of high standard became available locally

Malaysian local content rules for export-credit incentives aimed at MNCs encouraged higher local content for assembly operations


Effects on development of local worker skills: 1970s Local Japanese managers ‘idealized’ the traditional

Japanese work system, with its emphasis on firm loyalty, teamwork and dedication to work

Introduced some aspects of Japanese work places Quality control groups, kaizan or continuous improvement Seniority principles ( rejected )

In some cases, Japanese Managers were culturally inept in relation to indigenous workers as well as overall society in Malaysia

Human resource issues below management level have been generally left to indigenous directors and managers


1980s onwards Formal training and on-the-job learning increased over the

period since 1985 During the mid-1990s

Retained traditional Japanese management style and control, but

Had to increase the facilities offered to employees to compete for increasingly scarce factory labour ( e.g. gyms, restrooms during Ramadan when Muslims fast during the day)

On the other hand, ‘job hopping’ by local workers and engineers has undermined Japanese interest in long-term training programs


Late 1990s after financial crisis Labour mobility in Malaysia declined Larger companies (e.g. Hitachi) opened locally-based

training institutions for their engineers and operatives However, commitment to long-term R&D by japanese

electronic firms was still lacking By the end of 1990s

Japanese MNCs in Malaysia had committed themselves to higher value-added production and, overall, engaged in upgrading their operations


Some arguments Japanese firms have continually functioned in more

restricted ways than US electronic firms in Malaysia, with less technology spill-over effects

On the other hand, Malaysia has not yet generated an array of locally-based electronics majors, as South Korea and Taiwan did, and shift in innovation towards the technology frontier is uncertain

With little post-war experience in local industry, it may be difficult to derive useful lessons from the Japanese experience of technology acquisition

CONCLUSION

Private foreign investment can be an important stimulus to economic and social development as long as the interests of MNCs and host country governments coincide ( pg 715, Todaro & Smith )

A strengthening of the relative bargaining powers of host-country governments through their coordinated activities, while probably reducing the overall magnitude and growth of private foreign investment, might make that investment better fit the long-run development needs and priorities of poor nations while still providing profitable opportunities for foreign investors ( pg 715, Todaro & Smith )

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INTENSIVE COURSE ON MULTINATIONAL CORPORATIONS