Term Paper on "Multinational Corporations and Ender Developed"

Term Paper 8 pages (2290 words) Sources: 15 Style: APA

[EXCERPT] . . . .

Political Science

International Relations

Definitions of Beneficial and Detrimental

Investing in North Korea by South Korean Companies

Case Where the Company Alone Benefited

Case Where both the Country and the Company Benefited

Measurement of Benefits -- Political Considerations

Corporations and Ethical Practices

Egregious Failures, Notable Successes

This paper covers three investments in underdeveloped countries with varying experiences on the part of the companies and the countries involved. It will then discuss the relative advantages of FDI (foreign direct investment) on countries and their citizens in light of these experiences and those with other similar types of investments. Three types of examples will be used: an example in which the country benefited but the company investing did not, a case where the company investing reaped all or most of the benefits and the country was bereft, and an example where both the company and the country benefited from the FDI.

Definitions of Beneficial and Detrimental

Economists would argue that FDI and free trade benefit the populace generally. The same may not appear to be so in the country at the time of FDI or the imposition of free trade. The problem is that free trade disadvantages specific interests while benefiting the populace overall (Feulner, 2007). if, for example, foreign coal is less expensive than British coal, the public benefits through relatively lower heating costs, and industry from lower fuel costs. But at the same time, those who toil underground in the UK, their unions and the coal mine owners are disadvantaged. To the degree that these groups have political clout, they can skew the system to bring them specific advantage, even if the rest of society loses the benefit.

In this paper, beneficial must therefore be properly defined: of benefit to the greatest number in a society (even if some individuals are hurt).

On the other side, beneficial to a government may not be beneficial to the citizens. In the example of North Korea, it is clear that Kim Jong Il and his cohorts benefited greatly by an under-the-table payment of $500 million. The people of North Korea, on the other hand, were not helped at all. Benefits came to a select few, at the expense of the corporation doing business with that country.

Investing in North Korea by South Korean Companies

North Korea, desperate for liquid currency and cognizant of South Korea's wish to open doors with the North, decided to acquiesce to a South Korean request to develop a "free trade zone" in the North. Led largely by Hyundai, a major South Korean "Chaebol," or business conglomerate, the firm decided to create such a zone with a significant investment.

Hyundai developed a resort in North Korea with an investment of $500 million. The company brings tourists from the South and shows them to a mountain resort, and complete the tour at an industrial park where tourists can buy kitchen utensils and clothing made in the park by North Korean workers (Song-Hun, 2005).

Although the government of North Korea promised additional development and franchise rights to Hyundai, little has materialised from Hyundai's investment so far. Its mountain resort, called Mount Kumgang, loses money. It has not worked as a way for South Koreans to meet North Koreans, as the resort is fenced and guarded from outside intrusion by North Korean troops. Most of the money which Hyundai invested with the North Korean government to build and maintain the facility is suspected to have gone into the pockets of North Korea's leader, Kim Jong Il.

Hyundai needs 1 million visitors per year, but has had only 550,000 total visitors since 1998. Attempts to increase traffic, through completion of a cross-border railway and overland routes, has been halted by the North Korean government with no notice.

Hyundai has paid $942 million to obtain 'exclusive' rights to develop seven projects around the country of North Korea, plus $500 million in a bribe to the central government in order to ensure that Kim Il Sung would agree to the deal (Lakschamanan, 2003).

By 2005,the relationship between Hyundai and the North Korean regime reached an even lower point. Top officials announced a review in that year of all concession rights. At the same time, the government opened secret talks with the Lotte Group, a South Korean competitor of Hyundai (Faiola, 2005). For understandable reasons, Lotte managers decided not to continue the discussions.

Why would Hyundai consider such a large investment in an unstable and clearly hostile country? Furthermore, why would it rely on the promises of North Korea to deliver a 50-year concession for a series of developments in the country? Several reasons suggest themselves, including government prodding, nationalist feeling and hubris on the part of Hyundai executives.

Hyundai had made the decision to invest at a time when relations were thawing between the two countries. The announced "Sunshine Policy," led by South Korea, posited that the North would be more receptive to "soft" tactics than hard tactics, despite the reservations of its close ally, the United States. Hyundai, a family-controlled company, was doubtless thinking of the advantage that it could obtain over other South Korean rivals by being first into the country. The fact that Lotte let its name be circulated in the news shows the extent to which the Chaebols compete with one another.

Case Where the Company Alone Benefited

Standard Oil was a virtual monopoly in the United States until the Trust Busters broke their 30-year lock on transportation. Oil was first discovered in Pennsylvania and the Ohio Valley in the 1860's. At that time, it was viewed as a replacement for whale oil in lamps, and kerosene was by far the most sought-after petroleum product.

Standard Oil pioneered many practices which led to the widespread use of petroleum products, but its masterstroke was the shipping concession on the Ohio River, which was the gateway to the Mississippi. John Rockefeller arranged secret transport deals with railroads and shipping companies which gave him significant competitive advantage over smaller competitors. By they buying some of his competitors, he ended up with a monopoly on shipping at reasonable cost, which drove all other competitors out of business (Schifferes, 2000) (Weinberg, 2001)

The nation was clearly disadvantaged by Rockefeller's moves. The Trust built by Standard Oil required that competitors play along, be acquired, or go out of business (Chase, 1947). Since, at that time, oil was relatively concentrated in areas where Standard Oil could impose monopoly or exclusive shipping arrangements, the company earned outsized profits as a result of its situation.

Case Where both the Country and the Company Benefited

China emerged from the Cultural Revolution in 1977 as an impoverished and demoralized state. The powers-that-be, led by Deng Xiao Ping, recognised that the nation needed outside help if it were to pull its over 1 billion people out of poverty. The first moves of the government were to expand the peasant private lots program, which resulted in a significant increase in agricultural, peasant income over the succeeding 20 years.

The second change was to encourage joint ventures. The Central Communist Party created a joint venture law in 1981 which established a general structure to allow foreign companies to enter the market and, in a limited way, work with local companies.

The first entrant was (then) American Motors. The executives of AM negotiated with the central government for 4 years, finally concluding a deal to produce the Jeep in an existing Beijing Motors plant. The resulting JV was called Jeep Beijing Motors. The venture failed, due to misunderstandings and poor goal matching between the central government and the executives of AM.

The second venture, Volkswagen's with Shanghai Motors, has developed into a win for both the Shanghai regional government and for Volkswagen, which has established an important market share in one of the largest and fastest-growing markets in the world.

The general assumption on Volkswagen's part was that the Chinese venture should be more than an opportunity to ship in car parts and have them finally assembled in-country (Chunli, 2003). Although that was how the Santana -- VW's first Chinese car -- started, VW brought in stamping, foundry and other capacity to significantly increase the local content of their cars. In addition, VW attracted major parts suppliers, such as Bosch and Continental, to establish similar joint ventures in China. Thus VW-Shanghai Motors was assured of world-class parts and encouraging the local economy (People's Daily, 2004).

The magnitude of VW's task cannot be underestimated (Chunli, 2003). It had to train an entire generation of former Communist-era managers in the ways of efficient, customer-oriented production and quality. To VW's credit, they put Chinese managers in positions of power, and trained them intensely.

The proof of VW's effectiveness is that many of its executives, both German and Chinese, have moved on to become heads of major automobile and parts companies in the country. VW thus helped to form the basis for China's crude start in 1985 to today's production of over 6 million vehicles per year.

Measurement of Benefits… READ MORE

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