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DefinitionsMNC account for half of global GDPThe majority of MNC assets are in foreign

countries20% of top MNC come from developing countriesExpanding on the international market is based

on cost reduction and risk diversificationBarriers to MNCs are local language, culture and

host government attitudeHost countries benefit greatly from MNC

activities

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What is a MNC ?A company that owns a subsidiary (affiliate) in

more than one foreign countryMNC’s size is measured in terms of revenue/profitMNCs locate their production facilities according

to factor (resource) endowmentThe ownership of resources abroad constitutes

FDIIn 2008 only, 77 000 MNCs controlled 780 000

subsidiary companies. Big MNCs have affiliates in more than 40 countries

These enterprises employed 82 million people, made FDI worth $ 16 trillion and generated sales of $ 30 trillion = ½ world GDP

3(Source: Sloman&Jones, 2011)

Super MNCsA Swiss study from 2007 found out that 1318 MNCs

control 60% of the world revenuesLess than 1% (147) are in charge of 40% of world

revenueTop 20 of these companies is dominated by

investment banksSuch an overdependence explains the deepness of

the 2008 crisis (Source: PLoS One, The Network of Global Corporate Control, 2011) 44 out of 100 biggest economies are companies

(2009)These 44 MNC generated revenues of $ 6.4 trillion

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(Source: The Influence of the World’s Largest 100 Economic Entities, 2009)

Top 20 MNC (2011)RankRank CompanyCompany RevenueRevenue ProfitsProfits

($ millions)($ millions) ($ millions)($ millions)11 Wal-Mart StoresWal-Mart Stores 421,849421,849 16,38916,38922 Royal Dutch ShellRoyal Dutch Shell 378,152378,152 20,12720,12733 Exxon MobilExxon Mobil 354,674354,674 30,46030,46044 BPBP 308,928308,928 -3,719-3,71955 Sinopec GroupSinopec Group 273,422273,422 7,6297,62966 China National PetroleumChina National Petroleum 240,192240,192 14,36714,36777 State GridState Grid 226,294226,294 4,5564,55688 Toyota MotorToyota Motor 221,760221,760 4,7664,76699 Japan Post HoldingsJapan Post Holdings 203,958203,958 4,8914,8911010 ChevronChevron 196,337196,337 19,02419,0241111 TotalTotal 186,055186,055 14,00114,0011212 ConocoPhillipsConocoPhillips 184,966184,966 11,35811,3581313 VolkswagenVolkswagen 168,041168,041 9,0539,0531414 AXAAXA 162,236162,236 3,6413,6411515 Fannie MaeFannie Mae 153,825153,825 -14,014-14,0141616 General ElectricGeneral Electric 151,628151,628 11,64411,6441717 ING GroupING Group 147,052147,052 3,6783,6781818 Glencore InternationalGlencore International 144,978144,978 1,2911,2911919 Berkshire HathawayBerkshire Hathaway 136,185136,185 12,96712,9672020 General MotorsGeneral Motors 135,592135,592 6,176,17

5(Source: Fortune Global 500)

MNC by home countryCountry 2003 2011

US 189 133

EU 153 150France 35

Germany 34Britain 30

Netherlands 12Italy 10

Japan 82 68

China 15 61

Switzerland 12 15

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(Source: Fortune Global 500)

Global FDI ($ billion)

7(Source: UNCTAD – World Investment Report 2010)

FDI inflows

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(Source: UNCTAD – World Investment Report 2010 & Development and Globalization Report 2004)

FDI inflows ($ billion)

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(Source: UNCTAD – World Investment Report 2010)

FDI inflows and outflows 2009

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(Source: UNCTAD – World Investment Report 2010)

Cross border M&AThe 1990s saw intensive M&A activity among

companies from developed countriesDuring the 2000s M&A targeted companies

in East-European states, South-East Asia and Latin America

11(Source: UNCTAD – World Investment Report 2000 & 2010)

FDI inflows in BG (€ million)

12(Source: BNB)

Reasons to become a MNCCost reduction: different business activities are located according to

factor endowment – cost and quality of inputs; managerial talent

Risk spreading: escaping saturated home market falling revenues in one country can be off set by rising

revenues in anotherAccess to new markets: gaining from competitive advantage in developing

markets attaining knowledge from the international scene

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Multinational expansionHorizontal integration – produce the same

product in different markets, with minimum/some product tailoring

Vertical integration – different stages of production are undertaken in different countries

Conglomerate – produce different products in different countries

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Degree of internationalizationLicense – sell a license to a

foreign company to produce and sell the product abroad, obtain a fee

Export – use a foreign distributor, or set up own distribution center abroad

Set up own packaging unit to finish the products abroad

FDI – set up whole production division

M&A – acquire a whole foreign company

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LicenseLicense

Export Export (distributor)(distributor)

Export Export (subsidiary)(subsidiary)

Local Local packagingpackaging

FDIFDI

M&AM&A

Investment/Risk

Time

Internationalization of PLC

In the Growth phase, substitutes will emerge, to lower costs, the firm might shift production where inputs are cheap + exports

At the Maturity stage, the market is almost saturated, whole production units will be set in new, developing markets + exports

At the Decline stage subsidiaries of the firm import the product in the original market.

Strategies during PLC:

In the Intro phase, the new product generates increasing revenue and profit, exporting is a good strategy

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Barriers for MNCsLanguage – in some markets English is barely

spoken: Africa, Latin America

Marketing – host culture needs to absorb the product:

Carrefour &Tesco in China

Host governments – extensive regulation for MNC

Dubai

Communication & coordination – too big MNC deal with internal bureaucracy

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Advantages for host countryEmployment – MNC’s subsidiaries create

many new jobs Balancing the BoP – inflows of money to the

economy, import substitution and export promotion

Technological spillover – transfer of knowledge, practice, better production practices

Taxation revenues – inflow of money to the economy

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Disadvantages for host countryUncertainty – MNC might switch host

countries easilyTax evasion – ‘transfer’ pricingPower – MNC may exert power to avoid

regulation in developing countriesEnvironmental damage – developing

countries, rich in natural resources, but with weak institutional framework suffer from environmental damage

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Sources:Lecture is based on:Business strategy in a global economy in Sloman, J. and Jones, E. (2011) Economics and the

Business Environment (3rd ed) UK: Pearson For further reading check: http://american-business.org/581-multinational-corporation.html UNCTAD – World Investment Report 2010 КНСБ – МУЛТИНАЦИОНАЛНИТЕ КОМПАНИИ – 2008

(европейски аспекти на индустриалните отношения)

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