Ch 10 International Factor Movements

1
Ch 10 International Factor Movements
Multinational Enterprises

• There's no business
• like show business,
• but there are several
• businesses like accounting.
• David Letterman

2
Ch 10 MNEs

• Multinational Enterprises (MNE)
• Operate in many countries
• Conduct various activities relating to their
  industry
• High ratio of foreign to total sales (often 25
  or more).
• Typically huge corporations
• Examples
• Coca Cola and Pepsi
• General Electric
• Chrysler-Mitsubishi
• Ford-Mazda-Nissan
• Wal-Mart

3
Ch 10 MNEs

• Multinational Enterprises (MNE)
• Three Ways MNEs Diversify
• Vertical Integration
• Parent company establishes foreign subsidiaries
  to produce intermediate goods used for production
  of final goods, or to diversify into more
  advanced step in production/use of primary good.

4
Ch 10 MNEs

• Multinational Enterprises (MNE)
• Three Ways MNEs Diversify
• Horizontal Integration
• Parent company producing in source country
  establishes production of same goods in host
  country.

Coca Cola Bottling Plants
Cairo
Beijing
Paris
Sydney
Atlanta
5
Ch 10 MNEs

• Multinational Enterprises (MNE)
• Three Ways MNEs Diversify
• Conglomerate Integration
• Ownership of subsidiaries in unrelated markets.
• Example, General Motors purchases a diaper
  factory.

6
Ch 10 MNEs

• Multinational Enterprises (MNE)
• Foreign Direct Investment
• The acquisition abroad of physical assets such as
  plant and equipment, with operating control
  residing in the parent corporation.
• Acquiring controlling interest in an overseas
  company or facility.
• Most US FDI goes to Canada and Europe.
• Four Ways
• Parent obtains enough stock in foreign company to
  have voting control.
• Parent company acquires or builds plant or
  equipment overseas.
• Parent company shifts funds overseas to finance
  expansion of foreign subsidiary.
• Earnings of foreign subsidiary are reinvested for
  expansion.

7
Ch 10 MNEs

• Multinational Enterprises (MNE)
• Why Foreign Direct Investment?
• Demand Factors
• Tapping into foreign markets and new sources of
  demand. Sometimes marketing division comes
  first, then manufacturing facility (if market is
  large enough).
• Productive capacity is already enough to meet
  domestic demand. To grow faster than domestic
  demand, parent company has to export or establish
  production facilities overseas.
• Combat market competition by foreign firms. May
  acquire existing companies (defensive move).

8
Ch 10 MNEs

• Multinational Enterprises (MNE)
• Why Foreign Direct Investment?
• Cost Factors
• Supply advantages acquire raw materials or
  locate in advantageous climates.
• Labor costs may be able to use cheaper foreign
  labor.
• Transport costs particularly when transport
  costs are a high fraction of product value.
• Weight gaining industries will locate closer to
  final market (Coke, Pepsi)
• Weight losing industries will locate closer to
  inputs (lumber, steel)
• Government enticements subsidies, tax breaks.
• Avoidance of trade barriers.

9
Ch 10 MNEs

• Multinational Enterprises (MNE)
• Arguments Against FDI
• Inward flows of FDI bring bad jobs here, and
  outward flows of FDI send good jobs elsewhere.
• This is a contradiction. In reality, foreign
  multinationals pay higher than average wages in
  US.

• US industries will leave US for low foreign
  wages.
• Same argument weve seen before. Wages are
  linked to productivity.

10
Ch 10 MNEs

• Multinational Enterprises (MNE)
• Arguments Against FDI
• US foreign direct investment is investment that
  is NOT taking place here.
• In many cases, the company would not have
  invested anything if it didnt do so to expand
  into another nation. Also, much of FDI is
  reinvestment into existing foreign firm. Would
  not have been invested here.

• As traditional trade theory similarly suggests,
  FDI is NOT a zero sum game both sides win.