Globalisation and

Multinational Business

Globalisation: Setting the SceneGlobalisation: Setting the Scene

• Current issues in the global economy

• Defining globalisation– global economic interdependence

– implications for business

• What is driving globalisation?– market drivers

– cost drivers

– government drivers

– competitive drivers

The drivers of globalisationThe drivers of globalisation

The drivers of globalisationThe drivers of globalisation

The drivers of globalisationThe drivers of globalisation

The drivers of globalisationThe drivers of globalisation

The drivers of globalisationThe drivers of globalisation

The drivers of globalisationThe drivers of globalisation

Globalisation: Setting the SceneGlobalisation: Setting the Scene

• Current issues in the global economy

• Defining globalisation– global economic interdependence

– implications for business

• What is driving globalisation?– market drivers

– cost drivers

– government drivers

– competitive drivers

• Globalisation: the good and the bad

Multinational CorporationsMultinational Corporations

• Statistics on growth and size of MNCs– the comparative size of MNCs and

countries' GDP

Comparison of the 10 largest multinational corporations(by gross revenue) and selected countries (by GDP): 2002Comparison of the 10 largest multinational corporations

(by gross revenue) and selected countries (by GDP): 2002

Multinational CorporationsMultinational Corporations

• Statistics on growth and size of MNCs– the comparative size of MNCs and

countries' GDP

– foreign direct investment (FDI) inflows

FDI inflows ($ millions)FDI inflows ($ millions)

FDI inflows ($ millions)FDI inflows ($ millions)

FDI inflows ($ millions)FDI inflows ($ millions)

FDI inflows ($ millions)FDI inflows ($ millions)

FDI inflowsFDI inflowsF

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FD

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% o

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nFDI inflowsFDI inflows

FD

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Multinational CorporationsMultinational Corporations

• Diversity among MNCs

– size

– the nature of the business

– overseas business relative to total business

– production locations

– ownership patterns

– organisational structure

Why do Businesses go Multinational?Why do Businesses go Multinational?

• Categories of multinational organisation– horizontally integrated

– vertically integrated

– conglomerate

• Advantages to firms– reductions in costs

• international differences in factor prices

• international differences in factor productivity

• low-cost access to local markets

• spreading overheads

Why do Businesses go Multinational?Why do Businesses go Multinational?

• Advantages to firms (cont.)– government support in host countries

• lower taxes• subsidies• provision of infrastructure

– increased demand– spreading risks– can exploit advantages over local firms

• ownership of superior technology• entrepreneurial and managerial skills• R&D capacity

– access to local technology

Why do Businesses go Multinational?Why do Businesses go Multinational?

• The product life cycle and the MNC– the launch phase

– the growth phase

– maturity

– late maturity and decline

• Problems facing multinationals– language barriers

– selling and marketing

– relations with host governments

– relationships between subsidiaries

MNC Investment and the Host StateMNC Investment and the Host State

• Advantages of MNC investment– employment– balance of payments– technology transfer– tax revenues

• Disadvantages– uncertainty– power and control by the MNC over the

host– transfer pricing– the environment

MNCs and Developing CountriesMNCs and Developing Countries

• The scale of MNC investment in developing countries

• Advantages to host country

– the saving gap

• the importance of development finance

• the contribution of saving to growth

– the foreign exchange gap

– public finance gap

– skills and technology gaps

MNCs and Developing CountriesMNCs and Developing Countries

• Disadvantages to host country– MNCs may drive local firms out of business

– limited demand for local components

– repatriation of profits

– transfer pricing and effects on tax revenues• competition between developing countries to

attract MNCs

– distorting the whole pattern of development• increasing gap between rich and poor

• introducing consumerist values

• What can developing countries do?

Globalisation and Multinational Corporations

Globalisation and Multinational Corporations

Multinational CorporationsMultinational Corporations

Diversity among MNCs size

the comparative size of MNCs and countries' GDP

Diversity among MNCs size

the comparative size of MNCs and countries' GDP

Comparison of the 10 largest multinational corporations(by gross revenue) and selected countries (by GDP): 2002

Comparison of the 10 largest multinational corporations(by gross revenue) and selected countries (by GDP): 2002

Multinational CorporationsMultinational Corporations

Diversity among MNCs size the nature of the business

Diversity among MNCs size the nature of the business

Multinational CorporationsMultinational Corporations

Diversity among MNCs size the nature of the business overseas business relative to total business

Diversity among MNCs size the nature of the business overseas business relative to total business

Multinational CorporationsMultinational Corporations

Diversity among MNCs size the nature of the business overseas business relative to total business production locations

Diversity among MNCs size the nature of the business overseas business relative to total business production locations

Multinational CorporationsMultinational Corporations

Diversity among MNCs size the nature of the business overseas business relative to total business production locations ownership patterns

Diversity among MNCs size the nature of the business overseas business relative to total business production locations ownership patterns

Multinational CorporationsMultinational Corporations

Diversity among MNCs size the nature of the business overseas business relative to total business production locations ownership patterns organisational structure

Diversity among MNCs size the nature of the business overseas business relative to total business production locations ownership patterns organisational structure

Multinational CorporationsMultinational Corporations

Diversity among MNCs size the nature of the business overseas business relative to total business production locations ownership patterns organisational structure

Trends in multinational investment

Diversity among MNCs size the nature of the business overseas business relative to total business production locations ownership patterns organisational structure

Trends in multinational investment

Multinational CorporationsMultinational Corporations

Diversity among MNCs size the nature of the business overseas business relative to total business production locations ownership patterns organisational structure

Trends in multinational investment the growth and geography of FDI

Diversity among MNCs size the nature of the business overseas business relative to total business production locations ownership patterns organisational structure

Trends in multinational investment the growth and geography of FDI

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5

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1985 1990 1995 2000

FDI inflows (% of gross fixed capital formation)FDI inflows (% of gross fixed capital formation)F

DI

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1985 1990 1995 2000

FDI inflows (% of gross fixed capital formation)FDI inflows (% of gross fixed capital formation)F

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Advanced countries

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1985 1990 1995 2000

FDI inflows (% of gross fixed capital formation)FDI inflows (% of gross fixed capital formation)F

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Advanced countries

Developing countries

Multinational CorporationsMultinational Corporations

Diversity among MNCs size the nature of the business overseas business relative to total business production locations ownership patterns organisational structure

Trends in multinational investment the growth and geography of FDI FDI and the UK

Diversity among MNCs size the nature of the business overseas business relative to total business production locations ownership patterns organisational structure

Trends in multinational investment the growth and geography of FDI FDI and the UK

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1986 1988 1990 1992 1994 1996 1998 2000 2002

$ b

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nDirect investment into and out of the UKDirect investment into and out of the UK

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1986 1988 1990 1992 1994 1996 1998 2000 2002

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Inwardinvestment

Direct investment into and out of the UKDirect investment into and out of the UK

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1986 1988 1990 1992 1994 1996 1998 2000 2002

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Outwardinvestment

Inwardinvestment

Direct investment into and out of the UKDirect investment into and out of the UK

Types of multinational expansion horizontally integrated multinational vertically integrated multinational conglomerate

Going global to reduce costs international differences in input prices international differences in productivity

labour skillsentrepreneurial and managerial skills learning by doing

low-cost access to local markets economies of scale taking advantage of government policies

Types of multinational expansion horizontally integrated multinational vertically integrated multinational conglomerate

Going global to reduce costs international differences in input prices international differences in productivity

labour skillsentrepreneurial and managerial skills learning by doing

low-cost access to local markets economies of scale taking advantage of government policies

Business Strategy in a Global EconomyBusiness Strategy in a Global Economy

Going global to access new markets increased demand

spreading risks

can exploit advantages over local firmsownership of superior technology

entrepreneurial and managerial skills

R&D capacity

access to local technology

learning from experience in diverse markets

Going global to access new markets increased demand

spreading risks

can exploit advantages over local firmsownership of superior technology

entrepreneurial and managerial skills

R&D capacity

access to local technology

learning from experience in diverse markets

Business Strategy in a Global EconomyBusiness Strategy in a Global Economy

The product life cycle and the MNC the launch phase

multinational spread likely to be limited the growth phase

MNC likely to shift production abroad in order to retain cost competitiveness

maturityMNC increasingly seeks markets abroad as

growth in home market slows late maturity and decline

MNC increasingly seeks both markets and ever lower cost production abroad

The product life cycle and the MNC the launch phase

multinational spread likely to be limited the growth phase

MNC likely to shift production abroad in order to retain cost competitiveness

maturityMNC increasingly seeks markets abroad as

growth in home market slows late maturity and decline

MNC increasingly seeks both markets and ever lower cost production abroad

Business Strategy in a Global EconomyBusiness Strategy in a Global Economy

Problems facing multinationals language barriers selling and marketing

cultural issues relations with host governments relationships between subsidiaries

possible diseconomies of scaleeasier if subsidiaries are run independently

The global strategy trade-off economies of scale of standardisation or

higher costs of customisation?determinants of trade-off

Problems facing multinationals language barriers selling and marketing

cultural issues relations with host governments relationships between subsidiaries

possible diseconomies of scaleeasier if subsidiaries are run independently

The global strategy trade-off economies of scale of standardisation or

higher costs of customisation?determinants of trade-off

Problems Facing MultinationalsProblems Facing Multinationals

MNC Investment and the Host StateMNC Investment and the Host State

Advantages of MNC investment employment balance of payments technology transfer tax revenues

Disadvantages uncertainty power and control by the MNC over the host transfer pricing the environment

Advantages of MNC investment employment balance of payments technology transfer tax revenues

Disadvantages uncertainty power and control by the MNC over the host transfer pricing the environment

Is Globalisation a 'Good Thing'?Is Globalisation a 'Good Thing'?

The benefits of globalisation benefits of trade benefits of increased FDI competition reduces costs and encourages

innovation faster spread of technology political and social ties

The costs can exacerbate inequality erodes national cultures environmental costs domination by MNCs

The benefits of globalisation benefits of trade benefits of increased FDI competition reduces costs and encourages

innovation faster spread of technology political and social ties

The costs can exacerbate inequality erodes national cultures environmental costs domination by MNCs