FDI investment flows theory and evidence

7IB003 International Business Environment Lecture 5

Objectives for this session

Examine the differing definitions of multinational companies or enterprises (MNCs or MNEs)

Critically examine the methods for internationalisation of firms

Assess the different motives for firms becoming multinational Evaluate the financial benefits, challenges and risks for MNEs

Definitions of MNEs

A firm that owns and controls activities in two or more different countries (Buckley and Casson, 1976; 2009: 1564)
A coordinated system of cross-border value-creating activities, some of which are carried out within the hierarchy of the firm, and some of which are carried out through informal social ties or contractual relationships (Dunning and Lundan, 2008; Cantwell et al., 2010: 569) An enterprise that has operating subsidiaries, branches, or affiliates located in foreign countries (Eiteman et al., 2010: 2)

Definitions of MNEs
A company that has headquarters in
one country but has operations in other countries (Wall and Rees, 2004: 23) countries

Stakeholders are from different

Worlds leading MNEs in 2012 (source: Fortune Global 500)

Rank 1 2 3 4 5 6 7 8 9 10 Company Country Main sector Revenues ($m) 484,400 452,900 446,900 386,400 375,200 352, 300 259,100 263,159 237,272 235,364 Profits ($m) 30,918 41,060 15,699 25,700 9,453 16,317 5,678 26,895 12,436 3,591

Royal Dutch Shell UK/Netherlands Oil refining Exxon Mobil Walmart BP Sinopec China National Petroleum Corp USA USA UK China China Oil refining Retail Oil refining Oil refining Petroleum Power Automobile Oil refining Automobile

State Grid Corp. of China China Chevron ConocoPhillips Toyota Motor USA USA Japan

Selected Countries GDP in 2011 (in $m)

IMF list Hong Kong New Zealand Bangladesh Kiribati 243,302 161,851 113,032 167 World Bank List CIA World Factbook 243,666 142,477 110,612 178 243,300 161,900 113,000 167

Data illustrates many MNEs have larger revenues than many countries GDPs.

Chinas leading MNEs in 2011 (source: Fortune Global 500)

Rank
1 2 3 Sinopec China National Petroleum State Grid Industrial & Commercial Bank of China

Company

Global Rank
5 6 7

Revenues Global ($m) Rank 2005

375,214 352,338 259,142 31 46 40

4 5
6 7 8 9 10

54 77
81 84 91 93 100

109,040 89,648
87,544 84,803 80,732 80,230 76,024

229 315
224 397 339 -

China Construction Bank

China Mobile Communications Agricultural Bank of China Noble Group Bank of China China State Construction Engineering

Indias leading MNEs in 2011 (source: Fortune Global 500)

Ran k
1 2 3

Company
Indian Oil Reliance Industries Bharat Petroleum

Global Rank
83 99 225

Revenues ($m)
86,016 76,119 44,582

4 5
6 7 8

Hindustan Petroleum State Bank of India

Tata Motors Oil and Natural Gas Tata Steel

267 285
314 357 401

38,885 36,950
34,575 30,746 27,739

 The rankings of global MNEs, depend upon

the measurement of MNEs.

Rankings of MNEs

Revenue Profits Internationalisation (number of affiliates) Employment

Methods of Internationalisation

Export-based methods
Indirect exporting - through intermediaries
Direct exporting

Non-equity based methods

Licensing
Franchising

Equity-based methods
Strategic alliances Joint ventures Merger & acquisitions

 Market seekers Raw material seekers Production material seekers Knowledge seekers Political safety seekers Brand seekers

Why do firms become MNEs (Eiteman et al., 2010)

Dunnings View
The drivers of FDI(MNE) activity are: The Search for markets The search for resources Agglomeration economies Efficiency seeking motives

Potential Financial Benefits of MNEs (Butler, 2004)

Enhancing Revenues
Global branding The advantages of size

Flexibility in marketing and distribution

Reducing Costs
Low-cost raw materials Low-cost labour

Flexibility in global site selection

Flexibility in sourcing and production Economies of scale Economies of vertical and horizontal integration

Other benefits from being an MNE

To save on transport costs To develop an international brand

Employment and Health and Safety legislation in other countries may be more relaxed
Reduce a companys tax bill To take advantage of government grants

The Challenges of MNEs (Butler, 2004)

Differences in marketing Differences in distribution Differences in personnel management Differences in legal, accounting, and tax systems Differences in financial markets Differences in corporate governance and institutions

Risks of MNEs (Butler, 2004; Eiteman et al., 2010)

Country Risk - risk that business environment in host country will unexpectedly change- sometimes thought of as economic risk
Political Risk - risk that business environment in a host country will change due to political events Financial Risk - risk of unexpected change in the financial or economic environment of a host country Currency risks - transaction exposure; operating exposure; translation exposure

References

Buckley, P.J., & Casson, M.C. (1976) The future of the multinational enterprise, London:Macmillan Buckley, P.J., & Casson, M.C. (2009) The internationalisation theory of the multinational enterprise: A review of the progress of a research agenda after 30 years, Journal of International Business Studies, 40, 1563-1580

Butler, K.C. (2004) Multinational Finance, 3rd ed., Mason, Ohio: Thomson South-Western
Cantwell, J., Dunning, J.H., & Lundan, S.M., (2010) An evolutionary approach to understanding international business activity: The coevolution of MNEs and the institutional environment, Journal of International Business Studies, 41, 567-586 Eiteman, D.K., Stonehill, A.I., & Moffett, M.H. (2010) Multinational Business Finance, 12th ed., Boston, MA: Pearson Education, Ltd. Wall, S., & Rees, B. (2004) International Business, 2nd ed., Harlow, Essex: Pearson Education Limited