The Problems with MNCs and FDIs

http://www.libertytimes.com.tw/2010/new/apr/24/today-o5.htm
 
I have to say this is a good point.  It’s an important issue that people don’t pay attention to.  Here I just want to write down some thoughts regarding Foreign Direct Investment (FDI) created by multinational corporations (MNCs), that is not mentioned in the article.

Economic activities, trade and investment etc brings wealth and prosperity to a country.  That is the most fundamental concept envisioned by such person as Adam Smith.  However, this concept came out more than 200 years ago, and probably even Adam Smith did not foresee the advent of MNCs, although he did warn that merchants’ interest not always aligned with society/country’s interest.  This point is important and obvious, but people often forget about it.

FDI now a days are very common among nations.  Taiwan has a huge amount of FDI into China since 1989.  Other countries also have joint venture and FDI ect into China.  However, FDI has a lot of problems and drawbacks for the countries that invest abroad:

  1. It drains capitals (this I realized even before I took MBA)
  2. It creates unemployment and downward pressure against salaries (this is now a huge problem in Taiwan)
  3. The country will almost certainly loss revenue.  First of all, government can only tax the headquarter of MNEs, they cannot tax the subsidiaries overseas, only the host countries of subsidiaries can tax them.  Because otherwise you create double taxing problems.  So for example, China is taxing on all the profit generated by Taiwanese factories in China, while Taiwan government can only tax the headquarters in Taiwan.  This also create a second problem.  MNEs can easily avoid tax using different techniques to shift revenue from place of high tax to place of low tax.  This is certainly a problem in Taiwan, in which large MNEs pay extremely low tax that just does not make any sense.
  4. Technologies diffusion.  Technologies and know-how will get spreaded, therefore losing the technological edge of the country.  This might not be a problem in the past, during the time Japan and the US FDI Taiwan and Korea, when the receivers of this FDI  still need to rely on the FDI givers that still hold key components.  Furthermore, the amount of FDI is actually not that great comparing to the ones received by China, and a lot of technical development etc are done indigenously within Taiwan and Korea.  Furthermore, Korea and Taiwan are no threat to Japan and the US, while China is a threat to Taiwan.  So this problem is very significant.

In summary, the MNCs create a situation in which  there will be outflow of capitals, human resources and technologies.  In Taiwan’s case, it’s even worse, it flows to China, and I can see how ultimately this will lead to Taiwan’s destruction.  MNCs though of course will benefit from these activities, and their shareholders will be happy.  But once again, who have these shares in Taiwan’s MNCs?  The shares of companies concentrated in a few individuals or families.  People like Mr. Kuo for example, and judging by his action, he has done more harm than good to Taiwan. 

The fact that a few people hold the power over the whole economy of a country is always disturbing.  With Communism and Nazi, economic power are held by the government, and that have not turn out well.  Now the MNCs hold economic power.  With their economic power, they gradually gain political power, in the end create the similar result of a few holding power.  This seems to be happening in Taiwan.
 
In fact, now we have a funny situation in which Taiwan practically has to beg Taiwanese MNE to stay in Taiwan, while China is using all sort of incentive and BSs to lure more MNE investment.  It’s like Taiwan and China is competing to gain MNE business.  Of course, with Ma, it’s a different game, because he practically just surrender and encouraging more FDI into China.

Looking at it another way however, we can also see that the success and failure of MNCs such as Mr. Kuo’s Foxconn is actually quite inconsequential to Taiwan’s success, because it has invested so much outside of Taiwan, and most of its operations are in China.  What is left in Taiwan is more or less an empty shell.  To call it a Taiwanese company now might actually be a very inaccurate description.  In fact I can’t see any major effect for Taiwan’s economy even if Foxonn bankrupts and Mr. Kuo lost his shirts. 

On the other hand, Taiwan needs MNCs.  Because it’s an island with small domestic market.  It needs enterprises that can go beyond the border.  However, the type of MNCs it needs is probably not the kinds we commonly see in Taiwan now.  However, what kind of MNCs, how to avoid the side effects of MNCs, how to limit their powers, how to make their success also beneficial to Taiwan etc are big problems which I have no clue.  I will have to think more about it, but probably can’t figure it out anyway.

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