GLOBAL FINANCE

extending a company's reach beyond its home ground is the search
for higher and/or more stable profits over the long term, either by
increasing sales or reducing costs.

Cost-focused MNCs tend to grow internationally by buying suppliers

(``vertical integration'') in the hope of cheaper raw materials or a more
secure supply. The classic example is the major oil companies who set
up long-term extraction arrangements around the world after the end
of the First World War to ensure their supply of crude oil. In the 1980s
and 1990s many manufacturers in the developed world set up assembly
plants in areas such as South-East Asia and China, often exporting
parts for assembly and then reimporting them into their own countries
for sale. The developing world offers an abundance of high quality
labor in countries that do not demand substantial additional payments
beyond wages paid for work done, unlike the developed world, where
non-wage elements (such as social security contributions) range from
50%80% of the total in many countries.

Market-focused MNCs tend to spread ``horizontally,'' seeking new

markets in other regions. While long range forecasts are notoriously
inaccurate, many, including the World Bank, believe that by 2020
markets such as China and India will be larger than those of most
developed countries today (see Fig. 5.1), and many MNCs are seeking
to establish their presence in these promising areas.

MNCS VS. GOVERNMENTS

The staggering scale of MNC operations causes unease amongst govern-
ments, particularly those of poorer nations, for a number of reasons.

One is the effect on the balance of payments. A foreign MNC may

bring capital into the country, in which case there is an initial gain,
or it may borrow or raise equity locally. Ultimately, however, the
MNC hopes to repatriate far more profits than the amount it invests,
negatively affecting the balance of payments.

Another difficulty is the so-called ``Trojan Horse'' effect. Western

European countries with high unemployment have tried to create jobs
by encouraging foreign multinationals to set up business. Efficient MNCs
that have done so have been criticized because they have outcompeted
less efficient domestic rivals, thus causing job losses. A variation on this
theme is some EU member states' fears that non-EU MNCs invited into