Free Trade Zones – Definition and Meaning

In simple words, free trade means free international trade. The classical economists like Adam Smith, Ricardo and others strongly favored free trade and this doctrine held the field for nearly one hundred years. How ever later, the countries all over the world began to adhere to the policy of imposing restrictions in one form or other.

History and Development of Free Trade Zones

During the last 20 years, the labor charges in developed countries have increased substantially. According to a recent estimate, the labor cost is nearly 1 USD per hour for semi-skilled workers in most European Countries, U.S and Japan. This high labor cost was due to the acute shortage of both skilled and unskilled labor in most of these countries. Countries like Germany, France, Switzerland, Sweden, Austria, Belgium and England even imported laborers from other countries. Therefore, the cost of production involving a considerable labor content has become noncompetitive in these countries. Therefore, these countries prefer to send the raw materials and components to developing countries where trained man power and skill are available at a comparatively lower cost. So that they may have finished products which they can market at competitive prices.

In order to take advantage of this situation, various developing countries which have strong labour force began to organize Free Trade Zones (FTZs) in their countries. These FTZs not only provide employment to millions of people in these under developed countries and improve their economy, but also provide an opportunity to earn foreign exchanges to the extent of the conversion costs.… Read the rest

Issues of International Technology Transfers

International technology transfer is the process by which a technology, expertise, know how or facilities developed by one business organization (MNC in the case of international business) is transferred to another business organization. There are many issues associated with the international technology transfer. The most important international technology transfer issues are; ways of technology acquisition, choice of technology, terms of technology transfer, and creating local capability.

Modes of Foreign Technology Acquisition

One of the major issues in technology transfer relates to the mode of acquisition. Developing new technology may conjure up visions of scientists and product developers working in R&D laboratories. In reality, new technology comes from many different sources, including suppliers, manufactures, users, other industries, universities, government, and MNCs . While every source needs to be explored, each firm has specific sources for most of the new technologies. For example, because of the limited size of most farming operations, innovations in farming mainly come from manufacturers, suppliers, and government agencies. In many industries, however, the primary sources of new technologies are the organizations that use the technology. Broadly the acquisition routes are three:

  1. Internal Technology Acquisition: This is result of technology development efforts that are initiated and controlled by the firm itself. Internal acquisition requires the existence of a technology capability in the company. This capability could vary from one expert who understands the technology application well enough to manage a project conducted by an outside research and development (R&D) group to full blown R&D department. Internal technology acquisition options have the advantages that any innovation becomes the exclusive property of the firm.
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Technology Transfer in International Business

Technology is a new variable in the equation of economic relations. Traditional theories of international business assumes that all nations have equal access to technology and, therefore, that there is no need to transfer technology from one county to another. Recent research findings have invalidated this assumption. In addition, they point to  technology differences as primary cause of international inequalities in economic achievements. To reduce the inequalities, technology capabilities of the backward nations must be strengthened. The quickest way to do so is to transfer technology from the developed to the developing nations.

Technology is any device or process used for productive purposes. In its broadest sense, it is the sum of the ways in which a given group provides itself with good and services, the group being a nation, an industry, or a single firm. There is a fundamental characteristic of technology that demands clear recognition. Q unites unlike commodities and capital, technology is not depleted or its supply diminished when it is transferred or used. It is usable but not consumable. Once created, technology is inexhaustible until it becomes obsolete. Therefore; export of technology need not cause the source country to reduce its use of the technology. Indirectly, a decline may result if the recipient country creates an industry large to change the global supply and demand equilibrium of the goods produced by the technology involved. For most technology sought by the developing nations this is not the case.

Contrary to the classical assumption, technology is not a free good but a valuable property, nor is it evenly distributed around the globe.… Read the rest

Multinational Corporations and Home Country Relations

Public attitudes toward Multinational Corporations (MNCs) are biased by a nation’s position as a home or host country. Historically, home countries have perceived MNC activities as desirable extensions of their domestic business systems. Conversely host countries have viewed MNCs as agents of foreign influenced and exploitation. This historic dichotomy is now shot through with conflicting perceptions of the MNCs. Different segments of society, such as labor, investors, consumers, traders, and farmers, see their interests affected in different ways. As a result, a multi-sided controversy about the societal merits and demerits of MNCs has grown in both host and home countries.

The most aggressive challenge to the traditionally supportive home country policies towards MNCs has come from organized labor.

Labor Conflict

Multi-nationalization has created for management new mobility and flexibility that have greatly enhanced its bargaining power vis-à-vis labor. Since the sourcing base of the multinational firm knows no national boundaries – it can draw anywhere in the world the capital, technology, raw materials, ideas, and labor that it needs – management is not dependent on any one country’s labor supply or labor union’s policies, but can choose from among a number of potential hosts for any particular operation. In the short run, this new managerial latitude may be limited by the relative immobility of investment in given facilities – the sunk cost constraint – but in the long run nearly all operations can be transferred from one location to another. More significantly, all new investment, whether for replacement or for replacement or for expansion of plant capacity, is internationally footloose and will seek domicile wherever the comparative advantages happen to lie.… Read the rest

Conflicts Between Multinational Corporations and Host Countries

Although the Multinational Corporations (MNCs) has no power over the host government, if may have considerable power under that government. By being able to influence certain factors, the MNC has the opportunity to help or harm national economics; in this sense, it may be said to have power against host governments. Critics of the MNC perceive these powers as potential perils to host societies. The strategic aspects of a host country’s national policy that are subject to the influence of the MNC include:

1. Planning and Direction of Industrial Growth

Host nations have viewed with concern the tendencies of many MNCs to centralize strategic decisions in their headquarters. For the host governments this signifies loss of control over industrial strategy to the foreign-based MNC. The MNCs allegiances are geocentric; their overall objectives are growth and profits globally rather than in the host economy. These objectives require efficiency in the functional areas of management – production, marketing, finance, and so on. Many MNCs have sought greater efficiency through centralization, with headquarters domination of affiliates as the unavoidable result.

  1. Risks of Excessive Centralization: Empirical evidence indicates that a high degree of centralization tends to lead to inflexibility of parent company polices. Decisions are made in headquarters regarding the product mix for each affiliate, extent of inter-affiliate sales of semi finished and finished products, export pricing, inter-affiliate sales, input procurement, packaging, long-rang planning, research and development, and particularly, financial management. When the authority over these vital business decisions is located beyond their jurisdictions, local authorities counter with restrictions on affiliate activities.
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Multinational Corporations Adaptability to Host Environments

All Multinational Corporations (MNCs) are not equally likely to cause friction and tension in their host economies. Some adapt with relative ease and become closely integrated with their host environment, both economically and socio-culturally; others remain isolated and insulated, often forming alien enclaves in the host society. There appears to be a causal relationship between the MNC’s organizational structure that is, its organizational design as well as its underlying objectives and strategies and its capacity for social adaptation to host country conditions. In terms of inducement to social conflict, MNCs fall into three categories: home dominated, host dominated, and internationally integrated.

Home or Parent Dominated MNCs

These enterprises are organized and managed in such a way that the foreign based subsidiaries and other affiliates, whatever their specific legal form, serve primarily in a complementary support role. Their function is to help the parent company achieve its business objectives in the headquarters country. The subsidiaries have an entirely dependent role. Their local interests and needs, including social adjustment, are subordinated to and, if necessary, sacrificed for the parent company’s home operations. Highly centralized, run by absentee decision makers, and serving purposes external to the host countries, the home dominated MNC is very likely to cause host country conflict. Its insensitivity toward host nation needs is compounded by its ethnocentric managerial behavior. This type of MNC has been particularly, but not exclusively, characteristic of extractive industries and notice entrants into multinational operations. Increasing self-assertion of host country governments has put home dominated MNCs under increasing pressure to reform or divest.… Read the rest