Multinational Corporations in the Global Economy

1. Multinational Corporations in the Global Economy Elisa Giuliani Contact: giulel@ec.unipi.it http://www.dea.unipi.it/staff/e.giuliani/trimester.htm

2. 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

3. 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 R&D Operations, Strategic Management Journal, 19 (5): 479-496.

4. 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” What do you think a MNC is?

5. Subsidiaries/Affiliates Headquarters

6. How does it occur?

7. 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 nobody’s interest” (p. 18) Why are they important?

8. FDI = Foreign Direct Investment (measure of foreign ownership of productive assets, such as factories, mines and land. ) Statistics

9. Statistics

10. Statistics

11. Statistics:Transnationality 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.

12. Goverments attitudes towards FDI

13. Goverments attitudes towards FDI

14. 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

15. 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

16. 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)

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

18. 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) -> Market failures • Keeping skills and capabilities internal to the firm

19. 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

20. 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)

21. 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

22. 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

23. Main strategies for setting up subsidiaries (Dunning) • Natural-resource seeking • Efficiency seeking • Market seeking • Capability seeking

24. Venezuela

28. 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

30. Ethnocentric Headquarters Subsidiary (Argentina) Subsidiary (Brazil) Subsidiary (Korea) Subsidiary (SouthAfrica)

31. Polycentric Headquarters Subsidiary (Argentina) Subsidiary (Brazil) Subsidiary (Korea) Subsidiary (SouthAfrica)

32. Geocentric Headquarter Subsidiary (Argentina) Subsidiary (Brazil) Subsidiary (Korea) Subsidiary (SouthAfrica)

33. 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 R&D program

34. Subsidiaries/Affiliates Headquarters

35. Example • Local adaptor:AVON

36. International adaptor: AMANCO

37. 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 US$39 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

38. UNCTAD World Investment Report (2005)

39. Some MNC have their R&D labs in developing/emerging countries