This action might not be possible to undo. Are you sure you want to continue?
I have long dreamed of buying an island owned by no nation and of establishing the world headquarters of the Dow company on the truly neutral ground of such an island, beholden to no nation or society Carl A
GerstackerGerstacker-Chaiman of the Dow Chemical Compny
The Nature of MNC s
Multinational Corporations (MNC s) are economic organisations engaged in productive activities in two or more countries. Typically have Headquarters (HQ) in the Headquarters (HQ country of origin Build or acquire affiliates or subsidiaries in other countries (the host nation) This kind of expansion is referred to as Foreign Direct Investment (FDI)
What is a MNC?
Definition A corporation that owns and operates production facilities in two or more countries A corporation with power to coordinate and control operations in two or more countries without owning them. them.
What is a MNC?
can develop through mergers and acquisitions (example: Tata Steel and Corus, $13,2 billion acquisition)
they can evolve through strategic alliances (TPCA)
2003. UNCTAD. World Investment Report. compared with world exports of $8 trillion. . 2003.000 parent firms numbered controlling 870. MNCs employed 53 million people abroad. MNCs numbered 64. employed Sales of foreign affiliates ($18 trillion in 2002) are two times global exports Global sales of MNCs in 2002 reached $18 trillion.Scale of International Production In 2003.000 foreign affiliates.
FDI proliferation Which region in the world has consistently experienced the highest inflow of FDI in last decade? region has recently experienced the highest growth of inflow of FDI? Which .
Spatial Fragmentation (and its trade consequences) Horizontal MNCs Firms replicate production process at home and abroad Most common between equally developed countries Vertical MNCs Firms divide production into stages and undertake each stage where it is relatively cheaper Most common between countries at different levels of development IntraIntra-firm trade Trade between affiliates of the same MNC Accounts for one-third of total world trade one- .
The Internationalisation of Production .
(Ball et al. the demand increases and hence we come to an end of the first stage of the IPLC .International Product Life Cycle Theory (IPLC) 1) Release: As competition in Industrialised countries tends to be fierce. 1999). Manufactures are therefore forced to search constantly for better ways to satisfy their customer needs. The core elements in new product design are gained from customer feedback from previous models Once the product enters the domestic market and begins to create a positive reputation.
2)Exports 2)Exports As the product receives positive customer response. the international demand for the product begins. The manufacturer begins exporting to increase its market share Example: personal computer (PC) craze of the early 1980 s In 1980. 1998) (Richter- .000 PCs sold in the US By 1984 the industry experienced a 136-fold 136increase to 7 million PCs (Richter-Buttery. 55.
it becomes economically feasible to begin local production in various nations By sharing technology on the manufacturing of the product.3)Foreign Production begins 3)Foreign As demand increases with the new global market. the company has lost an advantage The end of this stage signifies the highest point in the International Product Life Cycle Theory .
they may begin to look elsewhere (i.4)Foreign 4)Foreign Competition in exports markets Threatening stage for the company Local manufactures gained experience in producing and selling their product their costs have fallen Once saturated their initial market.e. other nations) to promote their product If this other nation/producer had a competitive advantage threatening to the initial producer¶s own domestic market share ..
5)Import 5)Import Competition in Home Market If the new competitors have a competitive advantage. or they reach the economies of scale needed. µWith future innovations and new products and services the eventuality is that it¶s value and hence its price are likely to diminish¶ (Lendrum. . they will enter the original home market At this stage the competitors will have a quality product which will be able to undersell the original manufactures. 1995).
Perhaps the most recognisable is the assumption that products are released initially in the domestic markets. not domestically. . The IPLC theory does have its disadvantages. Many globalized companies tend to release their new product lines internationally.
Everybody likes FDI? .
UNCTAD.National Regulatory Changes (Number of countries making changes and number of changes made. 2003 . World Investment Report.
Sources and Distribution of FDI are Highly Concentrated Developed countries account for about twotwothirds of world FDI stock (both ownership and location) About 3/4 of world total FDI flows to developed countries each year Ten developing countries annually receive about 80% of total FDI flows to the developing world (SE Asia. 2003 . Mexico ) China in 2002 received one-third of all FDI oneflowing to the developing countriescountries- UNCTAD. World Investment Report.
2003 . by Region (millions of dollars) UNCTAD.FDI Inflows. World Investment Report.
2001 .Regional Shares of FDI Flows.
stability hosts Openness Exchange International .What Influences Growth of FDI Inflow Technological Laws environment and regulations of potential to capital flows rate regime security.
location-specific location- . seeks to ownershipadvantage. realize greatest profit by internalizing the use of its advantage. Product cycle theory: MNC may possess an ownership-specific advantage. and factors make it more profitable for firm to exploit its asset abroad than at home.Why Locate Production Abroad? Competition forces MNC to seek new markets (horizontal expansion) and lower costs of production (vertical expansion).
Negative effects of outsourcing for the home market? (economic and social impact) Is vertical expansion more harmful than horizontal one? How can be the negative effects on home market moderated? .
What makes a corporation truly multinational ? .
controlled by British and Dutch interests. very few multinationals are multinational.Ownership criterion economists argue that ownership is a key criterion. A firm becomes multinational only when the headquarter or parent company is effectively owned by nationals of two or more countries. are good examples. by ownership test. Shell and Unilever. Some . For example. However.
Very few companies pass this test currently. Others .Nationality mix of headquarter managers: argue that an international an company is multinational if the managers of the parent company are nationals of several countries. Usually. This may be a transitional phenomenon. managers of the headquarters are nationals of the home country.
countryworld-oriented. However. polycentric and geocentric. whereas "polycentric" loses its meaning when the MNCs operate only in one or two foreign countries.Business Strategy Usually assumed to be global profit maximization According to Howard Perlmutter (1969)*: Multinational companies may pursue policies that are home country-oriented. . especially when the home country itself is populated by many different races (example: HP). Perlmutter uses such terms as ethnocentric. or host country-oriented or world-oriented. "ethnocentric" is misleading because it focuses on race or ethnicity. country-oriented.
3. pp. an MNC is a parent company that 1. engages in foreign production through its affiliates located in several countries. *Howard V. exercises direct control over the policies of its affiliates. MNCs exhibit no loyalty to the country in which they are incorporated. "The Tortuous Evolution of the Multinational Corporation. incorporated.Business Strategy Franklin Root (1994). finance and staffing that transcend national boundaries (geocentric)." Columbia Journal of World Business. Perlmutter. 9- . implements business strategies in production. 2. 9-18. marketing. In other words. 1969.
Evolution of MNCs .
Export stage initial inquiries => firms rely on export agents expansion of export sales further expansion of foreign sales branch or assembly operations (to save transport cost) .Three Stages of Evolution 1.
NTBs) FDI versus Licensing Once the firm chooses foreign production as a method of delivering goods to foreign markets. it must decide whether to establish a foreign production subsidiary or license the technology to a foreign firm. .Three Stages of Evolution 2. Foreign Production Stage There is a limit to foreign sales (tariffs.
thereby creating a rival.g. .Three Stages of Evolution Licensing Licensing is usually first experience (because it is easy) e. it does not require any capital expenditure it is not risky payment = a fixed % of sales Problem: the mother firm cannot exercise any managerial control over the licensee (it is independent) The licensee may transfer industrial secrets to another independent firm.K.: Kentucky Fried Chicken in the U.
) Rep.Three Stages of Evolution Direct Investment It requires the decision of top management because it is a critical step. export continues . Toyota Czech Rep.) plants are established in several countries licensing is switched from independent producers to its subsidiaries. it is risky (lack of information) (US Canada vs.
organize and coordinate production. Multinational Stage The company becomes a multinational enterprise when it begins to plan. financing. For each of these operations.S.Three Stages of Evolution 3. and staffing internationally. . 9 in Japan 6 in Germany. marketing. Examples: Manufacturing MNCs 24 of top fifty firms are located in the U. R&D. the firm must find the best location. Petroleum companies: 6/10 located in the U.S. Rule of Thumb A company whose foreign affiliates sales are 25% or more of total sales.
which is not growing.Motives for Direct Foreign Investment New MNCs do not pop up randomly in foreign nations. Looking for new markets. Growth motive: A company may have reached a plateau satisfying domestic demand. It is the result of conscious planning by corporate managers. . returns. Investment flows from regions of low anticipated profits to those of high returns.
to bypass non-tariff barriers non . Japanese corporations located auto assembly plants in the US.Motives for Direct Foreign Investment Protection in the importing countries Foreign direct investment is one way to expand bypassing protective instruments in the importing country EU: imposed common external tariff against EU: outsiders. US companies circumvent these barriers by setting up subsidiaries Dell in Ireland etc.
Motives for Direct Foreign Investment 1. GM purchased Monarch (GM Canada) and Opel (GM Germany). They later became competitors. Datsun (Nissan) and Volkswagen. . It did not buy Toyota. Market competition The most certain method of preventing actual or potential competition is to acquire foreign businesses.
Cheap foreign labour. (Maquildoras) 1. labou 2. MNCs can hold down costs by locating part of all their productive facilities abroad. . Labour costs tend to differ Labou among nations.Motives for Direct Foreign Investment Cost reduction United Fruit has established bananabanana-producing facilities in Honduras.
however. if there exists excess capacity. why not utilize it and export outputs to other countries? There is no point in creating another plant overseas when domestic capacity is not fully utilized. then firms will export In other words. then FDI will be the favoured option . If. foreign demand exceeds the minimum efficient scale. If minimum efficient scale (MES) is not achieved.Supplying Products to Foreign Buyers Export versus Direct Foreign Investment Minimum Efficient Scale (MES) is the minimum (MES) rate of output at which Average Cost (AC) is minimized.
A JV is formed by two businesses that conduct business in a third country (French firm + Japanese firm jointly operate in the Central Europe . joint venture with a local firm (Copirisco [POR] + Cautor [CZ] 3.TPCA) 2. Germany => Iran Oil Investment Company + National Iranian Oil Company . joint venture includes local government (Messerschmitt-Boelkow(Messerschmitt-Boelkow-Blom.International Joint Ventures (IJVs) An IJV is a business organization established by two or more companies that combines their skills and assets. 1.
Share know-how know Problems .g.Control is divided. The venture .LDC governments close their borders to foreign companies bypass protectionism. The finished goods are sold to the US consumers.: US workers assemble Japanese parts. e.International Joint Ventures (IJVs) Why? Large capital costs .costs are too large for a single company Protection .Control serves "two masters" .
lowers prices to prices consumers The new business is able to enter the market that neither parent could have entered separately Cost reductions (otherwise.International Joint Ventures (IJVs) Welfare Effects of IJV s The new venture increases production. no joint ventures will be formed) increased market power => not necessarily good .
Critique of MNCs .
example: Haas Fertigbau) to environment (same reasons) of brand-power (often brand- Disregard Exploitation ignored) . Exploitation of bargaining power (especially vis-à-vis weak governments) vis- Exploitation of local labour force (usually due to non-existing or poorly enforced nonlabour laws.
a critique of MNC s Naomi Klein argues in her book No Logo: Taking Aim at the Brand Bullies that the astronomical growth of the wealth and cultural influence of multinational companies over the last 15 years can be traced back to an idea developed by management theorists in the mid-1980s: mid'successful corporations must primarily produce brands. as opposed to products' .Naomi Klein NO LOGO .
innovation and expansion Importance of synergies ± buying up distribution and retail networks ± to get MNCs brands to as wide a market as possible. lay in marketing and not manufacturing things Corporations had to concentrate their resources on building up their brand through sponsorships. advertising. packaging. The brand image is primary.NO LOGO CRITIQUE MNC¶s real work. Compare with µGlobalisation of media¶ . the product secondary.
Chief Executive Officer (CEO) of Nike sums up their rationale: 'There is no value in making things any more. The value is added by careful research.NO LOGO CRITIQUE Phil Knight. by innovation and marketing' Competition. therefore. comes down to a fierce battle between brands not products .
up sevenfold since 1950. growing a third faster than the world economy Little wonder that brands are expensive .NO LOGO CRITIQUE Advertising often more expensive than production US spending on marketing in 1998 at $196.5bn was nearly four times that of 1979 Global spending on marketing reached $435bn in 1996.
produce no value ± a point Phil Knight from Nike cannot grasp and No Logo fails to make They are paid for out of the consumer price increase and workers¶ wage depression The wages of the factory workers. advertising. (the real producers of the wealth) constitute an everwealth) constitute evershrinking slice of corporate budgets Marketing/sales personnel. not the production and design experts.NO LOGO CRITIQUE Marketing. and buying up brands. however. are becoming the best paid people in MNCs (just after the top managers) .
COUNTERCOUNTER-CRITIQUE Activities of multinationals result of rationalrational-actor thinking Utilization of all possible comparative advantages As long as consumers are willing to pay for brands. no reason to change strategy .
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.