International Investment & Financial Flows

1. International Investment & Financial Flows

2. Investment & Financial Flows • How money is invested • Multinational corporations • Where the Money Flows • Evolution of MNCs • Historical Advantages of GN • GS Resistance • GS Embraces • Changes in Production

3. How Money is Invested

4. MNCs

5. About MNCs • Ownership of plants, resource extraction, processing operations, and/or services • Package of capital, technology, managerial skills, marketing skills • Measured in Gross Corporate Product (GCP) • Total value of all goods & services revenues for one year

6. Characteristics of MNCs • Lots of $ Lots of power • Transnationality= mobility • Leverage over governments • Look for favorable conditions • Influence jobs growth potential • Promote globalization • Transmitters of western culture & values • Promote capitalism & materialism • Influential actors in global system • Offer domestic/ global competition

7. Where MNCs Are Global North   • GN has majority of MNCs • Product of post-WWII US hegemony • Top 500 80% GN

8. Where MNCs Are Global South MNCs  • 69 are China (and Taiwan)= 14% • 28 owned other EE countries = 6% • Only 3 MNCs not GN or EE are petroleum companies= <1% • Colombia, Saudi Arabia, Venezuela

9. If MNCs Were Countries Rival states in power • Wal-Mart in top spot for 2nd year in 2011 • GCP of $421.8 B • Would be 24th largest economy in world • Note: not highest profit • MNCs ranked with countries

10. Where the Money Flows

11. Where the Money Flows • Trends in FDI: Capital flows • More FDI goes into which country? • The US with $201.7 B • Capital flows to EEs est. at $1.041 T in 2011 iif.com/download.php?id=kTF+Yd4yss8= • FDI in China • 30% of all FDI to EEs goes to China • What impacts investment decisions?

12. Evolution of MNCs

13. Historical Advantages of GN • Dutch East India Company • Recognized as early form of an MNC • Influenced formation of others • East India Company (British) • French East India Company • US encouraged FDI after WWII • Needed to spark growth in allied countries • Initial resistance by GS • If you’re a GS leader, why would you resist?

14. GS Resistance to MNCs Initial resistance by GS • Newly independent from colonization • Little leverage to institute regulations • Unable to collectively act to institute rules of FDI • Feared exploitation without compensation • Lacked skilled workers for higher-level employment • Repatriation of earnings • Attempted unilateral development

15. GS Embraces MNCs GS see MNCs as Development Tool • First embraced in 1960s in Asia & Central America • Focus on light industry • Set up maquilas / maquiladora as export processing zones (EPZs) in Central America • Late 1970s in Africa and China, started to see as development opportunity • In China, Special Economic Zones (SEZs) • Efforts to entice MNCs with • Over 3,000 in over 120 GS countries

16. GS Embraces MNCs China’s SEZs • 4 in 1980; now have 6 • Model for other countries • Russia • Vietnam • Philippines • India (started with 8) • Authoritarian regimes • Control • Political stability

17. GS Embraces MNCs EPZs offer • More educated population • More stable political environment • Special investment incentives and trade concessions • Exemption from domestic laws • Infrastructure • roads, power supplies, transport facilities, low cost or rent buildings • Waiver of the restrictions on foreign ownership percentages---allow 100% for foreign company

18. MNCs & Production

19. MNCs & Production • New International Division of Labor • Started with US electronics firms • Now includes processing raw materials, semi-finished, components, finished products • 3 Types Production Chains#1 Product Specialization • One product for regional market • NAFTA: ingredients in English, French, Spanish; measurements standard and metric • EU: ingredients in many languages

20. MNCs & Production 3 Types Production Chains: #2 Host-Market Production • Production for one national market • Effective for big market countries—US, China, Brazil, India • Can better cater to market country’s consumer preferences • Transportation • Size/ weight/ volume • If producing in market country, avoids tariffs and NTBs • Japanese auto factories in US • Kraft chocolate bars in Brazil

21. MNCs & Production 3 Types Production Chains #3 Transnational Vertical Integration • Gap between producer and where goods are sold • Production network • Parts and final product from different places • Output of one plant goes to one or more to complete

22. MNCs & Production 3 Types Production Chains #3 Transnational Vertical Integration • 2 types • Assembly line: Each production unit performs separate step • GM- Chassis in Canada, engine in US, interior in Mexico • Separate production: Independent units, one assembly point • IPod-parts from various countries assembled in China • Assembled in’ label • The next fashion craze

23. The Next Fashion Craze

24. MNCs & Production • Production dispersed • Other aspects in parent company or country/regional head subsidiary office • R&D, marketing, human resources, finance • Work outside of parent company • Outsourcing • Using 3rd party to complete portion of work • Offshoring /international outsourcing • Hiring a foreign company or using foreign subsidiary for portion of work

25. MNCs & Production New International Division of Labor Issues • Exploits foreign labor • MNCs generally follow set standards • Most pay above local minimum going wage rate • Intra-firm trading • Cheats subsidiary countries of profits • Trade within own set of subsidiaries to avoid taxes • Can lower value of product to pay lower taxes b/c not actually trading • Export “unfinished” product so profit is credited to parent company at home • Inflates trade statistics

26. Recap • How money is invested • Multinational corporations • Where the Money Flows • Evolution of MNCs

27. Exercise • What draws MNCs into a developing country? • What are the pros of having an MNC in your country? • What are the cons of having an MNC in your country • http://www.sallymundo.com/kimberly/ipe/mncq.html