Multinational Corporations in the Global Economy Lecture 8 Introduction and Basic Facts Irina...

Multinational Corporations

in the Global EconomyLecture 8

Introduction and Basic Facts

Irina Malganova (KFU) - Spring 2014 Economy of MNC: Lecture 1

Plan for Today

• What is MNCs about? • Basic facts about MNCs• Advantages vs Disadvantages of MNCs• Case Study • A few questions you will learn to answer Irina Malganova (KFU) - Spring 2014 Economy of MNC : Lecture 1

Main book for our course

Paul Krugman, Maurice Obstfeld, and

Marc Melitz: International Economics:

Theory and Policy 9th edition

Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

http://krugman.blogs.nytimes.com/

A Few Other Books on Reserve


Key Terms

• MNC (Multinational Corporation)

• Foreign Direct Investment (FDI)

• Horizontal FDI• Vertical FDI• The Transnationality Index

(TNI)• Employment opportunities

• Multinational Parent• Multinational Affiliates• Greenfield FDI• Brownfield FDI• Home Country• Host Country• Foreign Assets• Domestic Industry

Irina Malganova (KFU) - Spring 2014 Economy of MNC: Lecture 1

Multinational Firms

• Before 1945, multinational corporations (MNEs) played a small role in world trade

• Today 30% of US exports and 48% of US imports are sales from one division of an MNE to another

• Fragmentation of production or offshoring has been a major factor in the growth of trade and FDI

Irina Malganova (KFU) - Spring 2014 Economy of MNC : Lecture 1


Offshoring occurs when a firm moves part of the production process to a foreign country

Via a subsidiary (e.g. Intel) or subcontracting (e.g. Nike)

An Example:


Assembled in China (and now also Brazil) by Taiwan-based Foxconn and Pegatron

Fragmentation of production:the example of the Boeing 787 Dreamliner



When is a corporation multinational?

• In U.S. statistics, a U.S. company is considered foreign-controlled, and therefore a subsidiary of a foreign-based multinational,

• if 10 % or more of its stock is held by a foreign company


Why would a firm choose to operate an affiliate in a foreign location?

The production activities

(1) The affiliate replicates the production process (that the parent firm undertakes in its domestic facilities) elsewhere in the world

(2) the production chain is broken up, and parts of the production processes are transferred to the affiliate location


Horizontal FDI

Verti

cal F

DI


For example, Intel (the world’s largest computer chip manufacturer)

Verti

cal F

DI


The example of Toyota

• Profit • ¥962.1 billion (FY 2013)• Total assets • US$ 377.281 billion (2013) • Total equity ¥12.773 trillion

(FY2013)• Employees 333,498• Parent Toyota Group• Divisions Lexus Scion• Subsidiaries 522 (Toyota Group)Horizontal FDI

http://en.wikipedia.org/wiki/Net_income

http://en.wikipedia.org/wiki/Asset

http://en.wikipedia.org/wiki/Equity_(finance)

http://en.wikipedia.org/wiki/Holding_company

http://en.wikipedia.org/wiki/Toyota_Group

http://en.wikipedia.org/wiki/Division_(business)

http://en.wikipedia.org/wiki/Lexus

http://en.wikipedia.org/wiki/Scion_(automobile)

http://en.wikipedia.org/wiki/Subsidiary


Toyota Corolla 2014


According to ILO report

«for some, the multinational companies are an invaluable dynamic force and instrument

for wider distribution of capital, technology and employment »


According to ILO report

«for others they are monsters which our present institutions, national or international, cannot adequately control, a law to themselves with no reasonable concept, the

public interest or social policy can accept»


Advantages of MNC's for the host country

MNC's help the host country in the following ways1. The investment level, employment level, and

income level of the host country increases due to the operation of MNC's.

2. The industries of host country get latest technology from foreign countries through MNC's.

3. The host country's business also gets management expertise from MNC's.



MNC's help the host country in the following ways4. The domestic traders and market intermediaries of

the host country gets increased business from the operation of MNC's.

5. MNC's break protectionalism, curb local monopolies, create competition among domestic companies and thus enhance their competitiveness.

6. Domestic industries can make use of R and D outcomes of MNC's.



MNC's help the host country in the following ways

7. The host country can reduce imports and increase exports due to goods produced by MNC's in the host country. This helps to improve balance of payment.

8. Level of industrial and economic development increases due to the growth of MNC's in the host country.


Advantages of MNC's for the home country

1. MNC's create opportunities for marketing the products produced in the home country throughout the world.

2. They create employment opportunities to the people of home country both at home and abroad.

3. It gives a boost to the industrial activities of home country.


Advantages of MNC's for the home country

4. MNC's help to maintain favourable balance of payment of the home country in the long run.

5. Home country can also get the benefit of foreign culture brought by MNC's.


Disadvantages of MNC's for the host country

1. MNC's may transfer technology which has become outdated in the home country.

2. As MNC's do not operate within the national autonomy, they may pose a threat to the economic and political sovereignty of host countries.

3. MNC's may kill the domestic industry by monpolising the host country's market.


Disadvantages of MNC's for the host country

4. In order to make profit, MNC's may use natural resources of the home country indiscriminately and cause depletion of the resources.

5. A large sums of money flows to foreign countries in terms of payments towards profits, dividends and royalty.


Disadvantages of MNC's for the home country

1. MNC's transfer the capital from the home country to various host countries causing unfavourable balance of payment.

2. MNC's may not create employment opportunities to the people of home country if it adopts geocentric approach.

3. As investments in foreign countries is more profitable, MNC's may neglect the home countries industrial and economic development.


Applicability to particular business

MNC's is suitable in the following cases.1. Where the Government wants to avail of

foreign technology and foreign capital e.g.



2. Where it is desirable in the national interest to increase employment opportunities in the country



3. Where foreign management expertise is needed e.g.



4. Where it is desirable to diversify activities into untapped and priority areas like core and infrastructure industries, e.g.

ITC is more acceptable to Indians L&T



5. Pharmaceutical industries e.g.


Index of Reputation Institute-20131 BMW 78.392 The Walt Disney Company 77.763 Rolex 77.234 Google 77.155 Daimler 76.586 Sony 76.307 Microsoft 76.238 Canon 76.029 Nestle 75.2110 LEGO Group 75.02

Forbes.com The Global 2000

USA (524 companies) и

Japan (258 companies)

Forbes.com The Global 2000

•28 Russian Companies

• «Газпром» (15th place), • «Лукойл» (68), • «Роснефть» (71) и • «Сбербанк» (90).

Territorial structure of MNCs

• 733 companies from the countries of the Asia-Pacific region• 605 — Europe, Middle East and

Africa• 524 — USA• 145 — South and Central America.

Global 2000:


The World’s Top Companies

1. ExxonMobil*

Country: USAIndustry: Oil and Gas

Revenue: $ 433.5 billion Income: $ 41.1 billion Assets: $ 333.1 billion Market Cap: $ 407.4 billion

2. JPMorgan Chase*

Country: USABanking system

Revenue: $ 110.8 billion Income: $ 19 billion Assets: $ 2.265 trillion. Market Cap: $ 170.1

billion

3. General Electric*

Country: USAConglomerate

Revenue: $ 147.3 billion Income: $ 14.2 billion Assets: $ 717.2 billion Market Cap: $ 213.7

billion

4. Royal Dutch Shell*

Country: Netherlands Industry: Oil and Gas


billion

5. I C B C (Industrial & Commercial Bank of China)

Country: China Bank

Revenue: $ 82.6 billion Income: $ 25.1 billion Assets: $ 2.039 trillion. Market Cap: $ 237.4

billion

6. HSBC*

Country: United Kingdom Bank

Revenue: $ 102 billion Income: $ 16.2 billion Assets: $ 2.550 trillion.? Market Cap: $ 164.3

billion

7. PetroChina*

Country: China Industry: Oil and Gas

Revenue: $ 310.1 billion Income: $ 20.6 billion Assets: $ 304.7 billion Market Cap: $ 294.7 billion

8. Berkshire Hathaway* (Warren Buffett)

Country: United States Industry: Investment


billion $ 4.5 billion

9. Wells Fargo*

Country: United States Bank


billion

10. Petrobras - Petroleo Brasil*

Country: Brazil Industry: Oil and Gas

Revenue: $ 145.9 billion Income: $ 20.1 billion Assets: $ 319.4 billion Market Cap: $ 180 billion

11. BP*Country: United Kingdom Industry: Oil and Gas


billion

12. Chevron*

Country: United States Industry: Oil and Gas

Revenue: $ 236.3 billion Income: $ 26.9 billion Assets: $ 209.5 billion Market Cap: $ 218 billion

13. CCB (China Construction Bank)*

Country: China Bank


billion

14. Citigroup

Country: United States Bank

Revenue: $ 102.6 billion Income: $ 11.1 billion Assets: $ 1.873 trillion Market Cap: $ 107.5

billion

15. «Газпром»*

Country: Russia Industry: Oil and Gas


billion

The Transnationality Index (TNI) It is calculated as the arithmetic mean

of the following three ratios

1. the ratio of foreign assets to total assets2. the ratio of foreign sales to total sales3. the ratio of foreign employment to total

employment


ExampleTNI (Hutchison Whampoa limited) = = [ 75447/ 92762 + 21053/26924 + 198707/240000] / 3 * 100 = 80.77424 = 80.8

Summary

• Some multinationals replicate their production processes in foreign facilities located near large customer bases. This is categorized as horizontal foreign direct investment (FDI).

• An alternative is to export to a market instead of operating a foreign affiliate in that market.

• The trade-off between exports and FDI involves a lower per-unit cost for FDI (no trade cost) but an additional fixed cost associated with the foreign facility. Only firms that operate at a big enough scale will choose the FDI option over exports.



Summary

• Some multinationals break up their production chain and perform some parts of that chain in their foreign facilities. This is categorized as vertical foreign direct investment (FDI).

• One alternative is to outsource those parts of the production chain to an independent foreign firm.

• Both of those modes of operation are categorized as offshoring. Relative to the option of no offshoring, offshoring involves lower production costs but an additional fixed cost.

• Only firms that operate at a big enough scale will choose to offshore.

How to Reach Me

• Office: K.Marks str. 43 off.410 • Email: [email protected] • Please include “MNC” in subject line • Office Hours: Mondays 1-2PM • Tel. +7(843)238-08-31


Multinational Corporations in the Global Economy Lecture 8 Introduction and Basic Facts Irina...

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