The beginning of 20-th century is known as the period of Mass Production in Europe. It is known that scale economies and intra-industry trade require simultaneous existence of two conditions — technologies of production and Mass marketing. Early scale economies of this period occur without Mass Marketing that is anticipated to develop after approximately fifty years the mass production started to take place. It led to the emergence of “reciprocal dumping” — mutual exchange of goods at prices below costs.

National firms tried to create world cartels that, in turn, blocked development of scale economies and product specialization. Another feature of this period is the emergence of multinational corporations or multinationalization. “Firms enjoying scale economies not so much in production per se as in financing, management, distribution, or marketing

opened production units in protected foreign markets.” (Verdier, Daniel, 1998, p.14)

After World War II the number of Foreign investment abroad increased, particularly from the US that invest in manufacturing, in contrast to previous investment that were directed to agriculture, raw materials, retailing and banking. Since 1960-s, other industrialized states started to be involved.

Nowadays, MNCs, along with World Bank and IMF, are considered to be the main institutions of Globalization. Thus, Howard J. Wiarda ranks film industry, international broadcasting agencies (ex: BBC, Sky News), international airlines, international hotel chains, banks, restaurants and automobile companies (ex: Chrysler, Toyota, BMW) to main agents of Globalization.

The aim of this essay is to study the MNCs as the entities of International Political and Economic processes and to assess the role they play in globalization and their effect on nation-state. The first part includes main concepts and definitions. The second part

addresses to the main theories that concern the factors that contribute to the expansion of MNCs and FDI. The third part covers negative and positive views about the spread of MNCs. The fourth part focuses on politics of “host” and home countries, how they influence existence of MNCs and on MNCs-state relations.

Definitions and Concepts.

“Multinational Corporations (MNCs) are economic organizations engaged in productive activities in two or more countries” (Balaam and Veseth, p.347). MNCs operate in the framework “parent” — “host” relations transferring funds in forms of technology, products, services and finances to subsidiaries located abroad. These transferred funds are Foreign Direct Investments (FDI) that allows control overseas assets.

“...Firms are considered to be more multinational if (1) they have many foreign affil-iates or subsidiaries in foreign countries; (2) they operate in a wide variety of countries around the globe; (3) the proportion of assets, revenues, or profits accounted for by overseas operations relative to total assets, revenues, or profits is high; (4) their employees, stockholders, owners, and managers are from many different countries; and

(5) their overseas operations are much more ambitious than just sales offices, including a full range of manufacturing and research and development activities.” (Spero J.E and Hart, J.A., 1997,p.96)

Theories of MNCs and FDI

Among the number of theories that address to the expansion of MNCs and FDI with the focus on those factors that contribute to the MNCs activity are the following: Internalization Theory, Product Cycle Theory, Obsolescing Bargain Theory, Oligopoly Theory, Tariff-jumping Hypothesis.

The Internalization Theory focuses on the market imperfection and transactions costs. In short, when market is saturated with products and cannot bring desired profit, the firm will try to expand abroad in order to “internalize” activities. However, the

problems arise when the firm is trying to make business abroad. Among such a problems are: difficulties in organization of large markets based on long-term contracts, creation of accurate prices of technologies, the asymmetry of knowledge between the participants. Therefore, there should be some factors that should have allowed the firm to compete in the international market. John Dunning added this theory with such a

conditions known as the OLI model (ownership, location, industrialization. “(1) it (the firm) must have market power that derives from ownership of some specialized knowledge, (2) it must consider the particular foreign location advantageous for new investments relative to alternative locations including its home market, and (3) it must prefer FDI over exporting and licensing by the usual internalization logic.” (Spero and Hart,1997, p.110)

Product Cycle Theory, in general, concerns with domestic market, product “maturity” and changes over time. As addressed to FDI and MNCs, this theory somehow adds to OLI model but it is never used as the general theory.

The Obsolescing Bargain Theory contends that the firm investing in a host country has the advantage in bargaining position when it starts the business due to advanced technology, access to capital market and to final product markets. However, with time, the firm may loose this position of favorable negotiations because the technology and knowledge become mature and accessible.

“The Oligopoly Theory of foreign investment contends that firms move abroad to exploit the monopoly power they possess through such factors as unique products, marketing expertise, control of technology and managerial skills, or access to capital.”

(Spero and Hart,1997,p.111).This theory support the statement of OLI model about the power of firm in order to be competitive when it entry the foreign market.

The Tariff- Jumping Hypothesis explain FDI flows as the attempts of MNCs to avoid imposed restrictions such as tariff and non-tariff barriers. As such, MNCs transfer their capital in more “friendly” environment such as “offshore areas” where taxes and payments are lower and there are more incentives for investment of capital.

The effects of MNCs

Evaluations of the impact of the MNCs may address to assessment of the effect on economic performance. However, the effect of FDI and MNCs activities could be mixed with other factors and are difficult to separate from those. Empirically, the measurement of the FDI flows could consider the situation with domestic investment levels in case if inflows would have been absent.

The main critique of the activity of MNCs is that they create “the race to the

bottom” (Jaghdish, Bhagwati, 2004, p.164); contribute to profit of local elites and of their own due to exploitation of local labor, eroding tax and wage bases, environment and social protection. Contrary, in the support of MNCs stand such factors as stable capital flows, bringing technologies and investment, more employment and jobs. In that way, Gerald Epstein divides the factors of impact on the “host” countries into possible positive and possible negative.

Possible positive effects

The first possible positive factor is that FDI are more stable than “portfolio investments”. Asian financial crisis, to some extent, support this argument, when

fluctuations of FDI were smaller than of portfolio investments. However, the costs and benefits of attracting the FDI might not bring such net profit that portfolio investments may bring. The second positive factor is the creation of new workplaces and generating

employment. The main concern there — the impact on the whole economy and employment when other indirect effects are taken into account. The third factor is the impact on wages. Some limited researches have been done in developing countries on this. The findings showed that FDI have positive impact on wages; that this positive impact is true only in developing countries and only for the period of 1968—1987 (Paus and Robinson, 1998). Another findings obtained from comparative study of Mexico, United States and Venezuela by Aitken et.al (1995) showed that increase in wages is associated with FDI inflow, but in Mexico and Venezuela, this increase proceeds in foreign-owned firms rather than in domestically-owned. Another researches on the impact of FDI on wages were done by Hanson and Harrison (1995) and Feenstra and Hanson (1997) who revealed “that FDI growth is positively correlated with the relative demand for skilled labor in Mexico” (Epstein, Gerald, 2003). As such, demand and wages for skilled labor were higher in exporting firms and joint ventures than in others. The fourth factor is that FDI create positive demand for domestic investments or “crowd in”. The results of researches on this argument show weak correlation between the two (FDI and “crowd in”) and, also, are different in Latin America and Asia (Agosin and Mayer (2000)) while absent in China (Braunstein and Epstein (2002)). The fifth factor is the impact of FDI on productivity, growth and technological upgrading. The views on this factor are controversial. As such, the surveys of Hanson, 2001 and Braunstein and Epstein, 2002 have shown positive impact of FDI on productivity. Contrary, Gordon Hanson (2001) challenged the optimistic views on the impact of MNCs. He claims that firstly, countries already possessing high economic growth obtain more FDI and in such countries very difficult to follow the link between the two- FDI and country’s productivity; secondly, others indirect factors may affect productivity such as education, industrial policy, etc. In conclusion of his analysis, Hanson claims “that micro-level data

undermines empirical support for productivity spillovers from FDI, perhaps indicating that MNCs confine competing domestic firms to less profitable segments of industry” (Epstein, Gerald, 2003, p.156).

Possible negative effects

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