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Lesson 1 Multinational Corporations TEXT One of the most significant international economic developments of the postwar period is the proliferation of multinational corporations (MNCs). These are firms that own, control, or manage production facilities in several countries. Today MNCs account for over 20 percent of world output, and intrafirm trade (i.e., trade among the parent firm and its foreign affiliates) is more than 25 percent of world trade in manufacturing. Some MNCs, such as Exxon and General Motors, are truly giants with yearly sales in the tens of billions of dollars and exceeding the total national income of all but a handful of nations. Furthermore, most international direct investments today are undertaken by MNCs. In the process, the parent firm usually provides its foreign affiliates with managerial expertise, technology, parts, and a marketing organization in return for some of the affiliates output and earnings. The basic reason for the existence of MNCs is the competitive advantage of a global network of production and distribution. This competitive advantage arises in part from vertical and horizontal integration with foreign affiliates. By vertical integration, most MNCs can ensure their supply of foreign raw materials and intermediate products and circumvent (with more efficient intrafirm trade )the imperfections often found in foreign markets. They can also provide better distribution and service networks. By horizontal integration through foreign, affiliates, MNCs can better protect and exploit their monopoly power, adapt their products to local conditions and tastes, and ensure consistent product quality. The competitive advantage of MNCs is also based on economies of scale in production, financing, research and development(R D), and the gathering of market information. The large output of MNCs allows them to carry division of labor and specialization in production much further than smaller national firms. Product componen