MGRECON401 Economics of International Business and Multinationals LECTURE 1

1. MGRECON401Economics of International Business and MultinationalsLECTURE 1 Multinationals and the Modern Firm

2. What is a Multinational?

3. What do we need to know to efficiently manage a multinational?

4. What is Globalization?

5. Markets “The shift toward a more integrated and interdependent world economy.” Production What is “Globalization?”

6. Globalization of Markets

7. Globalization of Production Swan Optical Manufacturing Design

8. International Trade: When a firm exports goods or services to consumers in another country. Foreign Direct Investment: When a firm invests resources in business activities outside its home country.

9. The Growth of World Trade and Output Trade GDP

10. Growth in FDI

11. Driver’s of Globalization

12. Macro Factors Decline in Trade Barriers Globalization Technological Change

13. Average Tariff Rates on Manufactured Products as Percent of Value

14. Fewer FDI Restrictions  Between 1991 and 2000 of the 1,121 changes worldwide in laws governing FDI, 95% created a more favorable investment environment.  During 2000, 69 countries made 150 changes to FDI regulations, 147 or 98% were more favorable to investment.

15. The Role of Technological Change • Microprocessors and Telecommunications • The Internet and World Wide Web

16. The Shrinking Globe

17. Changing Technology • Between 1920 and 1990 the average ocean freight and port charges per short ton of US import and export cargo fell from $95 to $29 (in 1990 dollars). • Between 1930 and 1990, average air transport revenue per passenger mile fell from $0.68 to $0.11. • Between 1930 and 1998 the cost of a 3-minute telephone call from New York to London fell from $244.65 to $0.36. Source: Frankel Globalization of the Economy, 2000.

18. Emergence of Global Institutions • Globalization has created the need for institutions to help manage, regulate and police the global marketplace • GATT • WTO • IMF • World bank • United Nations

19. Globalization and the Changing World

20. The Industrial Revolution

21. Output Shares in the Long Run?

22.  Output measured by GNP. The Changing Pattern of World Output and Trade

23. BRIC’s and World Output BRICS’s = Brazil, Russia, India, and China. Source: Goldman Sachs, Global Economics, Paper No. 99

24. The National Composition of the 100 Largest Multinationals Table 1.3

25. Percentage share of total FDI stock(by source)

26. Volume of FDI inflows, 1994-2002($ billions)

27. Globalization and Multinationals

28. Multinationals and Missing Markets • Efficient use of resources sometimes requires inputs from various countries. • Unskilled labor in poor countries and managerial talent in rich countries. • Natural resources in poor countries and technology in rich countries. • Multinationals coordinate the efficient use of resources: missing markets. • Multinationals also offer more product variety at a lower price (product differentiation).

29. Multinationalsand Intra-Industry Trade • Intra-industry trade is trade within an industry. • A significant portion of world trade is intra-industry trade. Why? • What is the significance of this for firm strategy?

30. Index of Intra-Industry Trade for US Industries Index = 1 - |Imports-Exports|/(Imports+Exports)

31. Characteristics of Intra-Industry Trade • Sophisticated manufactured goods. • Subject to important economies of scale in production. • Industries with little intra-industry trade are labor intensive products (trade due to comparative advantage).

32. Intra-Industry Tradeand Market Structure • Economies of scale in production • Average cost falls with more production • TVs and Automobiles • Leads to a few large firms, each with some market power • Monopolistic competition • Product differentiation • Fixed cost of introducing a new product variety • Firms specialize in producing a few varieties • Different countries specialize in different varieties • Leads to intra-industry trade • Example of Canada and the North American Auto Pact

33. Implications of Monopolistic Competition • What is the relation between the number of firms and average cost? • What is the relation between the number of firms and the average price? • What determines the equilibrium number of firms? • What is the relation between market size, average price, and product variety?

34. The Emergenceof Multinationals • Creating a unique product requires significant R&D. • Large fixed cost leads to economies of scale in production. • Requires a global market to recoup gains from R&D.

35. Nokia • How did Nokia’s vision that “voice will go wireless” play into its global strategy? • How did Nokia achieve a balance between innovation and execution? • What organizational architecture did Nokia choose to achieve this balance? • How did Nokia encourage innovation? • How much of Nokia’s organizational design is due to its focus on innovations and high growth?

36. Overview of the Course • Multinationals and the Modern Firm (Nokia) • Global Sourcing Decisions (Caterpillar) • Multinationals and Global Trade Agreements (Toyota) • Multinational Investments, Outsourcing, and Ethics (Nike) • Formulating a Global Strategy (Komatsu)

37. Overview of the Course • Choosing an Optimal Organizational Architecture (BP) • Motivating Employees and Performance Evaluation in a Complex Organization (BMG) • Entry Strategy and Strategic Alliances (Xerox) • Financial Management in Multinationals (GM) • Leadership in a Multinational (GE and Jack Welch)