Multinational Corporation Internationalisation of corporations
Exercise
For companies the whole world became both the potential production place and the potential market place. Almost every company (like apple) has production process spread all over the world- each part of a product is produced somewhere else, and then once the product is finalised it is then sold all over the world as well. Which changes made it possible?
The drivers of globalisation different- similar (culture)- technology isolated- integrated (distance, time, barriers)- technology, decreasing barriers Drivers: - technology (information, communication, transportation) - Declining barriers to movement of goods, service, capital and labour (liberalisation)
Aspects of Globalisation: Globalisation of markets - markets for goods and services (tastes and preferences are merging- global customer, global product, global brands/advertising, global competitions (firms facilitate this by following each other) - growth of world trade - labour market- migration
Aspects of Globalisation: Globalisation of production growth of multinational corporations, increasing international specialisation, growth of the volume of production and consumption
Foreign direct investment A company becomes a Multinational company by undertaking foreign direct investment - setting up subsidiary (affiliate, associate enterprise) abroad.
What is MNC? A company that is physically active in more than one country- i.e. possesses plant, technology and labour resources. This definition applies to small companies, services, publicly owned concerns and charities, as well as international corporations.
The rise of multinational corporations Firms that engaged in FDI were relative rarities before 1945. In the post-1945 period, however, FDI has surged, growing more rapidly than either production or international trade. By 2009, it was estimated that there were 82,000 multinationals in operation, controlling more than 810,000 subsidiaries worldwide. Upwards of two-thirds of world trade now takes place within multinational companies or their suppliers underlining the growing importance of global supply chains.
Why do companies set up subsidiaries abroad?
FDI motivation Horizontal investment (market seeking) access to market, customers decreasing the transport costs overcoming the trade barriers competition (strategic behaviour theory- oligopolistic industries- firm imitate (follow) each other. Rival cannot gain a commanding position in one market and use it for other markets.) Vertical investment (resource seeking) Access to better/ cheaper/more available production factors- raw materials, labour, other lower costs, ability to produce more, economies of scale, performing activity at the optimal location- global web (product life cycle theory- home market, HFDI, VFDI)
Additional benefits Experience curve- cost decline each time cumulative output doubles - learning effects (increasing labour productivity, efficiency) - economies of scale (bargaining power, buying in bulk, fixed costs spread) Using skills from other subsidiaries
Exercise Why are the market seeking investments called horizontal and the resource seeking investments called vertical?
Exercise determinants prediction horizontal vertical Differences in factor intensities + Transport costs + - Trade barriers + - Market size + Differences in factor prices +
Global Value chain analysis Steps that contribute to customer value (primary activities): R&D, manufacturing, distribution, sales/marketing, customer support Functions supporting the steps: (support activities) Finance, Legal, IT, HR, logistics Value chain analysis: where (offshoring), who (outsourcing)- international fragmentation of value chain Nearshoring, backshoring (re-shoring) Costs vs. the most valuable steps for customers- (focusing on activities contributing to superior value)
New trends in offshoring- offshoring service Shared service centres- companies` internal service provider- one part of the organisation provides services to the rest of the subsidiaries. Departments of organisation, which used to be in each subsidiary (HR, accounting, ) are moved to one place to serve the rest of subsidiaries Contact centres- provide services for clients (call centres)
Exercise: Logitech case study How did Logitech configured its global value chain? What determined their selection of particular countries? How is the money consumers are paying distributed among those contributing to the value chain?
Where?
Exercise Your company is successful and wants to expand to a new market- make a list of criteria based on which you will select a country where you are going to set up a subsidiary. Your company is internationally successful and others start to imitate, follow you- what will you do?
Market attributes - market size - market growth - customer requirements and preferences - access to local knowledge of markets - proximity to other markets and its customers - competitors
Resources/costs Labour Costs - the wage scale for the different levels of staff to be hired, other costs of employment - benefits mandated by law, hiring costs, hidden costs Availability and quality of labour - availability of qualified staff, technical and language skills, competitiveness of the market for the required skills, expected turnover rate, unemployment rate
Resources/costs Other costs: - Infrastructure costs - rental costs, electricity and telecommunication costs, travel costs - Tax and regulatory costs - costs of setting up in the host country, tax burden, corruption perception, currency appreciation and depreciation
Environment Economic and political environment business friendly institutional framework appropriate legal and regulatory framework, not overly restrictive, political and economic stability, consistency of policies, rules and regulations intellectual property protection Business environment - availability of support services, investment parks, quality of infrastructure, innovation potential of the economy and infrastructure, cooperation with universities and knowledge institutions, existence of clusters, size, character and growth of particular sector
Environment Cultural and geographical conditions - cultural affinity, living/working environment for expatriates, physical proximity to home country (international accessibility), time zone difference between the services company and the source of the business being processed Government investment incentives and government support
Developing countries- lack of regulation In many developing countries environmental and labour standards are too lax or not enforced USA is pushing for core labour standards, EU is pushing for environmental standards If developing countries implemented the same regulations as the west, part of the business ethics problem would be solved- why don t they?
Developing countries- lack of regulation Developing countries strongly oppose on the grounds that they will be used by some developed countries in an effort to block imports of manufactured goods in which the developing countries have a comparative advantage. Lack of regulations is one of the location advantages, which they can offer to a foreign investor.
Relationship between income and environmental policies Environmental policies pursued by governments reflect the relative value the society places on environment Growth of income leads to demand for greater environmental protection sufficient wealth and technology allows nations to adopt clean production methods and move towards a service-based economy In developed countries, the costs of complying with environmental regulations have been steadily increasing.
Environmental Kuznets curve $8,000 CO2 emission
Pollution Haven Hypothesis in real income low income levels high income levels Weak policie s Strong policie s in the demand for environmental quality in pollution Low income countries as the most likely and convenient location for the manufacturing of goods made through polluting processes. Pollution grows in South- will become Pollution Haven High income countries as the less likely and convenient location for the manufacturing of goods made through polluting processes. Pollution decreases in North- will specialise in clean production
Factor endowments hypothesis South- labour abundant- would specialise in relatively clean, labour-intensive production North- capital abundant- would increase its specialisation in capital intensive, and therefore pollution intensive, production North will see its pollution levels grow South will see an increase in environmental quality
Location factors Market seeking (horizontal) - market attributes Resource seeking (vertical)- costs, quality and availability of factors of production Environment: important for both - economic and political environment - business environment - geographical and cultural conditions
What makes corporations so powerful?
Pharmaceutical companies (employing 3000 lobbyists) spent 759 million to influence 1400 congressional bills- 1998-2004. In 2004, the revenues of general motors were 191.4 billion, greater than GDP of more than 148 countries. In 2005, Wal- Mart`s revenues were 285.2 billion, larger than combined GDP of sub-saharan Africa. Profits of world s ten largest firms equal to GDP of 29 African countries. 41 companies contributed 150 million to political parties for US federal candidates between 1991-2000, enjoyed 55 billion in tax breaks.
MNCs versus countries- an economic comparison Sources; Sales Fortune, 31/7/00; Country GDP World Bank, World Bank Development Report 2000 GDP ($million) Corporation Sales ($million) 1. Denmark 174,363.0 General Motors 176,558.0 2. Poland 154,146.0 Wal-Mart 166,809.0 3. South Africa 131,127.0 Exxon Mobil 163,881.0 4. Israel 99,068.0 Royal Dutch/ Shell 105,366.0 5. Ireland 84,861.0 IBM 87,548.0 6. Malaysia 74,634.0 Siemens 75,337.0 7. Chile 71,092.0 Hitachi 71,858.5 8. Pakistan 59,880.0 Sony 60,052.7 9. New Zealand 53,622.0 Honda Motor 54,773.5 10. Hungary 48,355.0 Credit Suisse 49,362.0
Tanzania- GNP 2,2 bil- 25 mil. people Goldman Sachs- annual profit 2,2 bil- 161 partners
CEO pay in the US in the 1990s went from 85 times what blue collar received, to 475 times (Frank, 2002). Business providing products and services that were once the domain of the state (e.g. prisons, health and education). The 12 most important global industries, such as textiles and the media, are each more that 40% controlled by five or fewer corporations (McIntosh et. al.,1998).
Corporate cross-shareholding super entity of interconnected transnationals dominate the world economy- 147 transnational companies extreme interconnectedness between the financial and industrial sector 28 out of the top 50 being American companies, 8 came from the UK, 4 from Japan and 1 from China.
IMF, WB paths the way for FDI Countries compete to attract FDI- no regulations, race to the bottom- fight for jobs Companies have globalised but there is nobody to regulate them Diffuse patterns of international control/ subcontracting/ outsourcing etc
Where does the power come from? Scale of activities, sales, profits, number of employees, capital, (internationalisation), bargaining power, partners, fear, lobby gaps in legislation, lack of regulation, privatisation of essential services, Cross- shareholding, oligopolisation, international institutions, countries desperate for jobs
Transnationality index Average of the following three ratios The share of foreign assets to total assets The share of foreign sales to total sales The share of foreign employment to total employment. All three are given the same weight and it is given as a percentage
FDI stats Global FDI fell by 18 per cent to $1.35 trillion in 2012; forecasts FDI in 2013 to remain close to the 2012 level, with an upper range of $1.45 trillion In 2012 for the first time ever developing economies absorbed more FDI than developed countries (52%) (with FDI inflows to least developed countries hitting a record high), generated almost one third of global FDI outflows. Within developing countries, Latin Americas share of FDI has fallen from 52% in 1970s to 33% since 1990s. Asia`s share of inflows has risen from 25% to 60% during the same period.
Conclusions Globalisation- internationalisation of corporations- enabled them to gain power Globalisation of production- growth of resource seeking FDIs and offshore outsourcing- exploitative
Reading list The laptop trail- implications for ethical behaviour? Stiglitz- Regulating multinational corporations Me - Offshoring and outsourcing business services Outsized offshore outsourcing Ft global 2013 WIR 2013