Business Environment

1. Business Environment Lecture 20 (L7/S2) Multinational Corporations MilenaMalinowska

2. Definitions • MNC account for half of global GDP • The majority of MNC assets are in foreign countries • 20% of top MNC come from developing countries • Expanding on the international market is based on cost reduction and risk diversification • Barriers to MNCs are local language, culture and host government attitude • Host countries benefit greatly from MNC activities

3. What is a MNC ? • A company that owns a subsidiary (affiliate) in more than one foreign country • MNC’s size is measured in terms of revenue/profit • MNCs locate their production facilities according to factor (resource) endowment • The ownership of resources abroad constitutes FDI • In 2008 only, 77 000 MNCs controlled 780 000 subsidiary companies. Big MNCs have affiliates in more than 40 countries • These enterprises employed 82 million people, made FDI worth $ 16 trillion and generated sales of $ 30 trillion = ½ world GDP (Source: Sloman&Jones, 2011)

4. Super MNCs • A Swiss study from 2007 found out that 1318 MNCs control 60% of the world revenues • Less than 1% (147) are in charge of 40% of world revenue • Top 20 of these companies is dominated by investment banks • Such an overdependence explains the deepness of the 2008 crisis (Source: PLoS One, The Network of Global Corporate Control, 2011) • 44 out of 100 biggest economies are companies (2009) • These 44 MNC generated revenues of $ 6.4 trillion (Source: The Influence of the World’s Largest 100 Economic Entities, 2009)

5. Top 20 MNC (2011) Rank Company Revenue Profits ($ millions) ($ millions) • 1 Wal-Mart Stores 421,849 16,389 • 2 Royal Dutch Shell 378,152 20,127 • 3 Exxon Mobil 354,674 30,460 • 4 BP 308,928 -3,719 • 5 Sinopec Group 273,422 7,629 • 6 China National Petroleum 240,192 14,367 • 7 State Grid 226,294 4,556 • 8 Toyota Motor 221,760 4,766 • 9 Japan Post Holdings 203,958 4,891 • 10 Chevron 196,337 19,024 • 11 Total 186,055 14,001 • 12 ConocoPhillips 184,966 11,358 • 13 Volkswagen 168,041 9,053 • 14 AXA 162,236 3,641 • 15 Fannie Mae 153,825 -14,014 • 16 General Electric 151,628 11,644 • 17 ING Group 147,052 3,678 • 18 Glencore International 144,978 1,291 • 19 Berkshire Hathaway 136,185 12,967 • 20 General Motors 135,592 6,17 (Source: Fortune Global 500)

6. MNC by home country (Source: Fortune Global 500)

7. Global FDI ($ billion) (Source: UNCTAD – World Investment Report 2010)

8. FDI inflows (Source: UNCTAD – World Investment Report 2010 & Development and Globalization Report 2004)

9. FDI inflows ($ billion) (Source: UNCTAD – World Investment Report 2010)

10. FDI inflows and outflows 2009 (Source: UNCTAD – World Investment Report 2010)

11. Cross border M&A • The 1990s saw intensive M&A activity among companies from developed countries • During the 2000s M&A targeted companies in East-European states, South-East Asia and Latin America (Source: UNCTAD – World Investment Report 2000 & 2010)

12. FDI inflows in BG (€ million) (Source: BNB)

13. Reasons to become a MNC • Cost reduction: • different business activities are located according to factor endowment – cost and quality of inputs; managerial talent • Risk spreading: • escaping saturated home market • falling revenues in one country can be off set by rising revenues in another • Access to new markets: • gaining from competitive advantage in developing markets • attaining knowledge from the international scene

14. Multinational expansion • Horizontal integration – produce the same product in different markets, with minimum/some product tailoring • Vertical integration – different stages of production are undertaken in different countries • Conglomerate – produce different products in different countries

15. Degree of internationalization • License – sell a license to a foreign company to produce and sell the product abroad, obtain a fee • Export – use a foreign distributor, or set up own distribution center abroad • Set up own packaging unit to finish the products abroad • FDI – set up whole production division • M&A – acquire a whole foreign company Investment/Risk M&A FDI Local packaging Export (subsidiary) Export (distributor) License Time

16. Internationalization of PLC • In the Growth phase, substitutes will emerge, to lower costs, the firm might shift production where inputs are cheap + exports • At the Maturity stage, the market is almost saturated, whole production units will be set in new, developing markets + exports • At the Decline stage subsidiaries of the firm import the product in the original market. Strategies during PLC: • In the Intro phase, the new product generates increasing revenue and profit, exporting is a good strategy

17. Barriers for MNCs • Language – in some markets English is barely spoken: • Africa, Latin America • Marketing – host culture needs to absorb the product: • Carrefour &Tesco in China • Host governments – extensive regulation for MNC • Dubai • Communication & coordination – too big MNC deal with internal bureaucracy

18. Advantages for host country • Employment – MNC’s subsidiaries create many new jobs • Balancing the BoP – inflows of money to the economy, import substitution and export promotion • Technological spillover – transfer of knowledge, practice, better production practices • Taxation revenues – inflow of money to the economy

19. Disadvantages for host country • Uncertainty – MNC might switch host countries easily • Tax evasion – ‘transfer’ pricing • Power – MNC may exert power to avoid regulation in developing countries • Environmental damage – developing countries, rich in natural resources, but with weak institutional framework suffer from environmental damage

20. Sources: • Lecture is based on: Business strategy in a global economy in Sloman, J. and Jones, E. (2011) Economics and the Business Environment (3rd ed) UK: Pearson • For further reading check: • http://american-business.org/581-multinational-corporation.html • UNCTAD – World Investment Report 2010 • КНСБ – МУЛТИНАЦИОНАЛНИТЕ КОМПАНИИ – 2008 (европейски аспекти на индустриалните отношения)