Multinational Corporations

InternationalEconomicsandMultinationalCorporations“IhavelongdreamedofbuyinganislandownedbynonationandofestablishingtheworldheadquartersoftheDowcompanyonthetrulyneutralgroundofsuchanisland,beholdentononationorsociety…”CarlAGerstacker-ChaimanoftheDowChemicalCompnyTheNatureofMNC’sMultinationalCorporations(MNC’s)areeconomicorganisationsengagedinproductiveactivitiesintwoormorecountries.TypicallyhaveHeadquarters(HQ)inthecountryoforiginBuildoracquireaffiliatesorsubsidiariesinothercountries(thehostnation)ThiskindofexpansionisreferredtoasForeignDirectInvestment(FDI)WhatisaMNC?DefinitionAcorporationthatownsandoperatesproductionfacilitiesintwoormorecountriesAcorporationwithpowertocoordinateandcontroloperationsintwoormorecountrieswithoutowningthem.WhatisaMNC?MNC’scandevelopthroughmergersandacquisitions(example:TataSteelandCorus,$13,2billionacquisition)Ortheycanevolvethroughstrategicalliances(TPCA)ScaleofInternationalProductionIn2003,MNCsnumbered64,000parentfirmscontrolling870,000foreignaffiliates.MNCsemployed53millionpeopleabroad.Salesofforeignaffiliates($18trillionin2002)aretwotimesglobalexportsGlobalsalesofMNCsin2002reached$18trillion,comparedwithworldexportsof$8trillion.UNCTAD,WorldInvestmentReport,2003.FDIproliferationWhichregionintheworldhasconsistentlyexperiencedthehighestinflowofFDIinlastdecade?WhichregionhasrecentlyexperiencedthehighestgrowthofinflowofFDI?SpatialFragmentation(anditstradeconsequences)HorizontalMNCsFirmsreplicateproductionprocessathomeandabroadMostcommonbetweenequallydevelopedcountriesVerticalMNCsFirmsdivideproductionintostagesandundertakeeachstagewhereitisrelativelycheaperMostcommonbetweencountriesatdifferentlevelsofdevelopmentIntra-firmtradeTradebetweenaffiliatesofthesameMNCAccountsforone-thirdoftotalworldtradeTheInternationalisationofProductionInternationalProductLifeCycleTheory(IPLC)1)Release:AscompetitioninIndustrialisedcountriestendstobefierce,‘Manufacturesarethereforeforcedtosearchconstantlyforbetterwaystosatisfytheircustomerneeds.’(Balletal,1999).ThecoreelementsinnewproductdesignaregainedfromcustomerfeedbackfrompreviousmodelsOncetheproductentersthedomesticmarketandbeginstocreateapositivereputation,thedemandincreasesandhencewecometoanendofthefirststageoftheIPLC2)ExportsAstheproductreceivespositivecustomerresponse,theinternationaldemandfortheproductbegins.ThemanufacturerbeginsexportingtoincreaseitsmarketshareExample:personalcomputer(PC)crazeoftheearly1980’sIn1980,55,000PCssoldintheUSBy1984theindustryexperienceda136-foldincreaseto7millionPCs(Richter-Buttery,1998)3)ForeignProductionbeginsAsdemandincreaseswiththenewglobalmarket,itbecomeseconomicallyfeasibletobeginlocalproductioninvariousnationsBysharingtechnologyonthemanufacturingoftheproduct,thecompanyhaslostanadvantageTheendofthisstagesignifiesthehighestpointintheInternationalProductLifeCycleTheory4)ForeignCompetitioninexportsmarketsThreateningstageforthecompanyLocalmanufacturesgainedexperienceinproducingandsellingtheirproducttheircostshavefallenOncesaturatedtheirinitialmarket,theymaybegintolookelsewhere(i.e..othernations)topromotetheirproductIfthisothernation/producerhadacompetitiveadvantagethreateningtotheinitialproducer’sowndomesticmarketshare5)ImportCompetitioninHomeMarketIfthenewcompetitorshaveacompetitiveadvantage,ortheyreachtheeconomiesofscaleneeded,theywillentertheoriginalhomemarketAtthisstagethecompetitorswillhaveaqualityproductwhichwillbeabletounderselltheoriginalmanufactures.‘Withfutureinnovationsandnewproductsandservicestheeventualityisthatit’svalueandhenceitspricearelikelytodiminish’(Lendrum,1995).TheIPLCtheorydoeshaveitsdisadvantages.Perhapsthemostrecognisableistheassumptionthatproductsarereleasedinitiallyinthedomesticmarkets.Manyglobalizedcompaniestendtoreleasetheirnewproductlinesinternationally,notdomestically.EverybodylikesFDI?NationalRegulatoryChanges(Numberofcountriesmakingchangesandnumberofchangesmade.UNCTAD,WorldInvestmentReport,2003SourcesandDistributionofFDIareHighlyConcentratedDevelopedcountriesaccountforabouttwo-thirdsofworldFDIstock(bothownershipandlocation)About3/4ofworldtotalFDIflowstodevelopedcountrieseachyearTendevelopingcountriesannuallyreceiveabout80%oftotalFDIflowstothedevelopingworld(SEAsia,Mexico…)Chinain2002receivedone-thirdofallFDIflowingtothedevelopingcountries-UNCTAD,WorldInvestmentReport,2003FDIInflows,byRegion(millionsofdollars)UNCTAD,WorldInvestmentReport,2003RegionalSharesofFDIFlows,2001WhatInfluencesGrowthofFDIInflowTechnologicalenvironmentLawsandregulationsofpotentialhostsOpennesstocapitalflowsExchangerateregimeInternationalsecurity,stabilityCompetitionforcesMNCtoseeknewmarkets(horizontalexpansion)andlowercostsofproduction(verticalexpansion).Productcycletheory:MNCmaypossessanownership-specificadvantage;seekstorealizegreatestprofitbyinternalizingtheuseofitsadvantage;andlocation-specificfactorsmakeitmoreprofitableforfirmtoexploititsassetabroadthanathome.WhyLocateProductionAbroad?Negativeeffectsofoutsourcingforthehomemarket?(economicandsocialimpact)Isverti