4.4.3: Controlling MNCs

power of MNCs

• powerful

• contribute significantly to global wealth and job creation

• help with inward investment and building foreign currency reserves for developing nations

• benefits consumers

• effectively use world resources

• profits invested in useful R&D

• criticised for being too powerful and exploiting stakeholders

• operate as monopolists

• exploit consumers through high prices

• dominate markets

• make it difficult for small firms to survive

• maximimise profits

• use working practices polluting the environment or consuming large quantities of non renewable resources

• control flows of profit and revenue through countries with low tax rates and avoid tax payments

• difficult for national governments to control MNCs

  • can easily relocate and take FDI, tax revenue and employment

political influence

SOEs:

• large MNCs owned by the state - state owned enterprises SOEs

• effective method of control

• political power exercised to create, manage and end a business

• extensive political influence over organisations

• lead to commercial and ethical issues

• drawbacks of state ownership:

  • corruption - SOEs might be favoured by powerful politicians

  • state owned operations may take the capital other firms might better employ

    • politicians or regulators decide where funding should go

    • inefficient businesses may be given more money than they need and not be subject to competitive forces that reduce price and improve efficiency

  • shareholders and other investor rights ignored

    • mot true beneficiaries of the business

    • actual beneficiaries - politicians

  • ignores investment expenditure

    • less competitive pressure from other firms with state ownership

    • less incentive

non SOEs:

• also important for non SOEs

• national strategic priorities, boost employment or regulate financial institutions

• privately owned businesses controlled using a number of political initatives:

  • tarrifs

  • quotas

  • regulations

  • local content requirement

  • direct/indirect ownership restrictions

  • support domestic industries through subsidies or tax breaks

  • lobbying by politicians to influence business decisions

  • politicians retiring to seats on the boards of plcs

legal control

• competition policy

  • exists to promote competition

  • ensures markets operate as efficiently as possible

  • specialised agencies set up to protect producers and consumers from unfair or anti-competitive practices

    • ensures firms don’t abuse market power, fix prices, or use pricing strategies to drive out competition, and don’t work together illegally

• taxation policy

  • used to raise revenue

  • may help control MNC activities

  • low corporate tax = attracts huge FDI

    • may upset politicians in other countries

  • tax avoidance = big companies use differing systems to avoid tax

• legislation

  • provide legal framework for business operations

  • system of incentives and penalties to ensure at-risk groups

  • too much intervention = discourages enterprise, deters foreign investment

    • prevents growth in income

    • reduces job creation

    • decreases tax revenue

    • reduces consumer choice

  • too little intervention = may not give attention to stakeholders best interest

  • legislation to penalise companies damaging environment, exploiting employees, engaging in anti-competitive practices, bullying suppliers and exploiting consumers

consumer pressure

• apply pressure by avoiding products

• forced to consider a wide range of social, political and historical sensitivities when marketing products in ethnically and culturally diverse regions

• use of review systems allows customers to write freely about their experiences

• companies want to avoid bad reviews

pressure groups

• company behaviour may violate what many people consider acceptable but not break any laws

• publicise bad behaviour and threaten to damage the image of form

• voluntary organisations

• methods to control MNCs:

  • boycotting - withdrawing from commercial or social relations

  • media criticism - criticised in the media, protest movements

  • direct action - demonstrations, protests, strikes or sabotage to achieve a political or social goal

  • lobbying - taking issues directly to government in an effort to influence change

social media

• interaction between electronic and mobile devices, applications and people, that allows users to create content

• controls MNC behaviour by:

  • making information collection easier

  • increasing social awareness

  • ensuring greater transparency

  • bringing together people to create social authority to challenge large companies

self-regulation

• group of firms in the same industry agree to follow a set of rules and guidelines to ensure proper conduct

• guidelines specific to industry

• designed to ensure companies maintain common standards

• address issues such as health and safety, ethical behaviour, responsibility to employees and consumers and environmental practices

• code of practice

• these companies also practice self-policing

  • signed up businesses monitor their own activities

  • set performance targets

• advantages of self-regulation:

  • avoids rigorous, expensive government regulation and compliance costs

  • needs of stakeholders better served

  • improved image and reputation

  • easier for business to encourage its employees to adopt ethical behaviour and principles

  • benefits taxpayers

• disadvantage: conflict of interest - difficult to comply if financial performance is threatened