Multinational Corporations in the Global Economy

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Multinational Corporations in the Global Economy
Elisa Giuliani Contact giulel_at_ec.unipi.it
http//www.dea.unipi.it/staff/e.giuliani/trimest
er.htm
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Introduction to the course

• 4 Lectures
• Final exam
• Written exam only 10 questions (multiple choice
  true/false, fill in blanks, open questions) in 20
  minutes
• Based on readings class material
• Same schedule/room of Economia e Gestione delle
  Imprese (corso B)
• See the webpage
• www.dea.unipi.it/staff/e.giuliani/trimester.htm

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Lecture 1

• 1. Why firms become multinational?
• This lecture will discuss the theoretical
  underpinnings of what a multinational corporation
  (MNC) is, why a firm becomes multinational, what
  types of strategies do MNC follow in their
  international expansion. Also, we will analyse
  how multinational corporations work. Finally,
  we will look at statistics about foreign direct
  investments (FDI) worldwide.
• Reading
• Dunning J.H. (2000) The eclectic paradigm as an
  envelope for economic and business theories of
  MNC activity, International Business Review, 9
  163-190. ONLY SECTION 1 (INTRODUCTION)
  (Downloadable from my website or from the
  E-Library in campus).
• Other recommended readings (not compulsory for
  students attending Lecture 1, but recommended for
  those not attending the lecture)
• Perlmutter H. (1969) The tortuous evolution of
  the Multinational Corporation, Columbia Journal
  of World Business, 4 8-18.
• Ghoshal S. (1987) Global strategy an organizing
  framework, Strategic Management Journal, 8 (5).
• Nobel R., Birkinshaw J. (1998) Innovation in
  Multinational Corporations Control and
  Communication in International RD Operations,
  Strategic Management Journal, 19 (5) 479-496.

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What do you think a MNC is?

• A corporation that has its facilities and other
  assets in at least one country other than its
  home country.
• Such companies have offices and/or factories in
  different countries and usually have centralised
  head office where they coordinate global
  management (headquarters)
• Very large multinationals have budgets that
  exceed those of many small countries.
• Sometimes referred to as transnational
  corporations

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Subsidiaries/Affiliates
Headquarters
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How does it occur?
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Why are they important?

• In 1969 Howard Perlmutter wrote
• multinational corporation is a new kind of
  institution - a new type of industrial social
  achitecture particularly suitable for the latter
  third of the twentieth century. (p. 10)
• This type of institution could make a valuable
  contribution to world order and conceivably
  excercise a constructive impact on the
  nation-state (p. 10)
• The geocentric enterprise a type of MNC offers
  an institutional and supra-national framework
  which could conceivably make war less likely, on
  the assumption that bombing costumers, suppliers
  and employees is in nobodys interest (p. 18)

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Statistics
FDI Foreign Direct Investment (measure of
foreign ownership of productive assets, such as
factories, mines and land. )
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Statistics
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Statistics
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StatisticsTransnationality index
Average of the four shares FDI inflows as a
percentage of gross fixed capital formation for
the past three years 2001-2003 FDI inward stocks
as a percentage of GDP in 2003 value added of
foreign affiliates as a percentage of GDP
in 2003 and employment of foreign affiliates as
a percentage of total employment in 2003. For
Belgium and Luxembourg, the corresponding ratio
of FDI inflows to gross fixed capital formation
refers only to 2002-2003.
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Goverments attitudes towards FDI
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Goverments attitudes towards FDI
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Why firms become multinational?1. The OLI
Paradigm (Dunning J.)

• One of the dominant frameworks for explaining the
  existence of MNCs and the determinants of FDI
• O Ownership
• L Location
• I Internalization

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Ownership

• The firm that invests abroad has a competitive
  advantage (to exploit) and out-compete the firms
  that operate in the country where the investment
  is done
• Economies of scale connected to large-sized
  company
• Possess technologies that give an advantage on
  the subsidiary abroad
• Monopolistic advantages in terms of priviledged
  access to inputs or outputs markets
• Skills of management

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Location

• Advantages of the foreign location
• Different nations have different factor
  endowments
• Natural resources
• Cheap labour force
• Skills and capabilities
• Country characteristics (political stability,
  regulations, cultural distance)

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Bolivia happens to possess up to 54 of the
world's Lithium deposits
Underneath the salt lies the world's largest
lithium reserves
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Internalization

• Internalization occurs when a firm expands its
  operations in another country, by acquiring the
  property of the assets that are abroad
• Ownership of foreign assets more convenient than
  the market
• Why?
• Information asymmetries (transaction costs can be
  too high) -gt Market failures
• Keeping skills and capabilities internal to the
  firm

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Why firms become multinational?2. Ghoshal (1987)

• Becoming multinational to search a competitive
  advantage
• National differences Exploiting national
  differences in factor costs
• Scale Economies
• Scope Economies

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1. National differences

• Different nations have different factor
  endowments
• A firm can gain cost advantages by configuring
  its value chain so that each activity is located
  in the country which has the least cost for the
  factor that the activity uses most intensively
• E.g. Land in Honduras, cheap labour force in
  China, cheap but skilled engineers in
  India...(changing over time)

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2. Scale economies

• A firm expanding its total volume of sales,
  reduces its average costs in a given period of
  time
• It is thus important to expand to several markets
  as to produce more of a product
• Higher volumes also favour experience economies
  (learning by doing)
• However, large scale also implies higher
  complexity and organization is critical

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3. Scope economies

• Scope economies when the cost of the joint
  production of two or more products can be less
  than producing them separately
• Scope economies achieved though
• Shared equipment, brands, and other assets
• Shared external relations
• Shared knowledge

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Main strategies for setting up subsidiaries
(Dunning)

• Natural-resource seeking
• Efficiency seeking
• Market seeking
• Capability seeking

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Venezuela
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How do they operate?

• MNC are very different one to another
• Perlmutter (1969) has been among the first to
  identify this heterogeneity and he distinguished
  between three types
• Ethnocentric
• Polycentric
• Geocentric

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Ethnocentric
Headquarters
Subsidiary (Argentina)
Subsidiary (Brazil)
Subsidiary (Korea)
Subsidiary (SouthAfrica)
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Polycentric
Headquarters
Subsidiary (Argentina)
Subsidiary (Brazil)
Subsidiary (Korea)
Subsidiary (SouthAfrica)
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Geocentric
Headquarter
Subsidiary (Argentina)
Subsidiary (Brazil)
Subsidiary (Korea)
Subsidiary (SouthAfrica)
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There are also different types of subsidiaries

• Nobel and Birkinshaw (1998) distinguish between 3
  different attitudes and modes of learning
• Local adaptor limited mandate, only minor
  adaptation at the local level
• International adaptor more creative local
  laboratories, eg. To adapt technologies for a
  continent (Latin America, Asia) not just a
  country
• International creator Internationally
  interdependent laboratories which provide inputs
  into a centrally coordinated RD program

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Subsidiaries/Affiliates
Headquarters
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Example

• Local adaptor AVON

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• International
• adaptor
• AMANCO

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Intel Research Center Opens Its Doors (China
Daily May 13, 2005 ) The Intel Corporation
yesterday unveiled a research and development
centre in Shanghai's Waigaoqiao Free Trade
Zone. The newest centre, entitled Intel
Technology Development (Shanghai) Ltd, was set up
with an investment of US39 million. "The
establishment of the centre in Shanghai is a new
chapter of Intel's development in China," he
added. The new centre demonstrates Intel's
ongoing commitment to invest in China and promote
new technologies, he said. The centre will
develop cutting-edge technology and platforms for
Intel's flash products group, assembly technology
development division, user-centered platform
solutions division and assembly capital equipment
development. "We develop products according to
market demands, serving not only the Chinese
market but worldwide," Soon said. The centre will
develop and promote advanced cutting-edge
technology to push forward the country's IT
industry, he said. "Our objective is to
continually improve local technical capabilities
to drive industrial and technological
development," Soon said.

• International
• creator
• INTEL

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UNCTAD World Investment Report (2005)
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Some MNC have their RD labs in
developing/emerging countries
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