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Saturday, June 26, 2010

MNCs, part II

Let’s examine frequent criticisms of MNCs.

1. MNCs are beyond the reach of the law and can do as they please. Invalid. My experience working with hundreds of lawyers worldwide is that MNCs are very mindful of the laws (intentionally plural). Until you’ve set up an office where an Indo-European language is not spoken and jurisprudence is not derived from ancient Rome, hired local employees, written sales contracts with local customers, modified products to comply with local regulations, shipped products for order fulfillment, paid local taxes, and occasionally litigated, you have no idea how complicated it is! But MNCs do it in 100+ countries, with few mistakes. Not only is it in their best interest to comply with laws, MNC executives have been personally detained and fined for nonfeasance or misfeasance – an occurrence more frequent overseas than here.

2. MNCs transfer jobs out of the first-world. Invalid, when properly measured. China and India are enormous markets for products exported from first-world countries. In order to win sales in those countries, which are regulated by their governments to an extent that few Americans imagine, an MNC must hire locally – and having done so, these employees must be made productive at something. When an MNC hires people in China to satisfy the PRC government, it’s true that jobs are created in Beijing that might have been created (or already existed) in the USA; however, jobs are also created in the USA when products are exported to China. The Chinese import almost as much as they export. Sensationalist journalists and demagogue politicians seldom mention that.

3. MNCs make excessive profits. Invalid. Few MNCs can sustain a dominant market share around the world. Competition among MNCs is ruthless and very effective at driving prices down; expenses to operate a company in 100 countries are high. I have read studies indicating that the average American believes the profit margin of MNCs, as a percentage of sales, is 25-50%. That's absurd -- and a reflection on how poorly we educate high-schoolers in economics. Most MNCs work hard to achieve after-tax margins of 5-10%.

4. MNCs interfere with, and may destroy, local culture. Valid. There is inherent imperialism when a first-world MNC does business in a third-world country. Local competitors that are less sophisticated or that have less economy of scale are driven out of business. Advertising can change consumer's preferences, just as it has here. Of course, if people in Guangzhou or Pune or Nairobi don’t wish to eat at a McDonalds restaurant, use a Microsoft product, or watch a Disney movie, they aren’t compelled to. On principle, some Americans choose not to shop at Walmart. The same happens overseas. Over the long run, an equilibrium is established.