MNCs and FDI
Definition of MNCs
An MNC is an enterprise that engages in foreign direct investment (FDI) and that owns or controls value-added activities in more than one country.
MNCs are concerned about securing the least costly production of goods for world markets, making profits, increasing market share, and corporate growth This goal may be achieved through acquiring the most efficient locations for production facilities or obtaining taxation concessions from host government.
Key decisions involving foreign activities, such as the location of production facilities, distribution of markets, location of R&D, capital investment, etc are made by the parent company.
MNCs have a large pool of managerial talent, financial assets, and technical resources, and they run their gigantic operations with a coordinated global strategy.
Characteristics of MNCs
An MNC is among the world’s largest firms.
The sales of each of the top ten MNC in 1992 were over $59 billion, more than the GDP of at least 100 countries;
General Motors’ 1992 sales ($134 billion) were well ahead of Denmark ($124 billion), Norway ($113 billion), Saudi Arabia ($111 billion)
MNCs tend to be oligopolistic corporations in which ownership, management, production, and sales activities extend over several countries.
By 2003, there were 63,000 firms with business activities in foreign countries, controlling over 800,000 subsidiaries or foreign affiliates.
Ways of assessing the degree of multinationality of a firm
they have many foreign affiliates or subsidiaries in foreign countries.
they operate in a wide variety of countries around the globe.
the proportion of assets, revenues, or profits accounted for by overseas operations relative to total assets, revenues or profits is high.
their employees, stockholders, owners, and managers are from many different countries.
their overseas operations are much more ambitious than just sales offices, including a full range of manufacturing and research and development (R&D) activities.
Why Do Firms Invest Overseas?
Trade Barriers
- Government action leads to market imperfections.
- Tariffs, quotas, and other restrictions on the free flow of goods, services and people.
Labor Market Imperfections
Among all factor markets, the labor market is the least perfect, supposed that the factors of production are land, labor, capital, and entrepreneurial ability.
Persistent wage differentials across countries exist. This is one on the main reasons MNCs are making substantial FDIs in less developed nations.
Why Do Firms Invest Overseas?
Intangible Assets
Coca-Cola has a very valuable asset in its closely guarded “secret formula”.
To protect that proprietary information, Coca-Cola has chosen FDI over licensing.
Since intangible assets are difficult to package and sell to foreigners, MNCs often enjoy a comparative advantage with FDI.
Elementary Theories for MNCs
Product Life Cycle
’s OLI Paradigm
Product Life Cycle
. firms develop new products in the developed world for the domestic market, and then markets expand overseas.
FDI takes place when product maturity hits and cost becomes an increasingly important consideration for the MNC.
It should be noted that the Product Life Cycle theory was developed in the 1960s when the . was the unquestioned leader in R&D and product innovation.
Increasingly product innovations are taking place outside the United States as well, and new products are being introduced simultaneously in many advanced countries.
J. H. Dunning’s OLI Paradigm
The OLI paradigm offers an analytical framework for incorporating a variety of operationally testable economic theories of the determinants of FDI and the international activities of MNEs.
It sets out to explain the MNE in terms of three sets of advantages:
ownership (O) advantage: MNEs’capacity to engage competitively in the foreign value-added activities against competitors.
locational (L) advantage: MNEs’wish to locate those foreign value-added activities and/or those relating to the creation of ownership advantage in a host country.
internalisation (I) advantage: MNEs’desire and opportunity to internalise the market for the ownership advantage.
Motives of MNCs
Broadly speaking, the motives for firms to engage in international production can be classified in four groups:
Resources Seeking
Markets Seeking
Efficiency Seeking
Strategic-Assets Seeking
Resource-Seeking MNEs
Firms gain access to resources which tend to be location specific.
Natural resources (The traditional form of resource-seeking): Firms seek new supplies of raw materials.
Cost, skills and productivity of local labour force: Firms extend the international division of labour by seeking appropriate labour force in manufacturing and/or services.
Expertise and technology: Firms seek foreign technological capability, management and operational expertise and organisational know-how which are unavailable or too costly to obtain at home.
Market-Seeking MNEs
Firms seek to improve market access via proximity to demand.
Transaction Cost-Reducing: High transportation costs and transaction costs mean that proximity to the market may be crucial to supplying the market competitively.
Adapting to Local Preferences: Firms may need to be ‘close’ to the market so as to adapt their products effectively to strong differences in culture and tastes.
Efficiency-Seeking MNEs
Firms attempt to rationalise the operations of their value added activities and exploit advantages due to internationalisation
International differences in product and factor prices
Economies of scale and scope
Global sourcing
Strategic Asset-Seeking MNEs
Firms increasingly use FDI to obtain strategic assets (tangible or intangible) that may be critical to their long-term strategy but are not available or costly at home.
Organizational Forms
Vertically integrated MNCs
Horizontally integrated MNCs
Conglomerate firms
Organizational Forms
Vertically integrated MNCs -----in manufacturing, they place the various stages of production in different locations throughout the world
Take BMW as an example:
Designed in Germany—assembled in Mexico—with components from Japan—the material of steel from Korean and rubber from Malaysian—the worker working in the rubber factory from China .
Horizontally integrated MNCs-----have the same sort of plant in many countries (plants to make the same or similar goods everywhere)
Example:
Union Carbide(联合碳化物公司) which has many chemical subsidiaries around the globe.
Conglomerate firms have interests in many sectors. It mainly has two forms:
Joint ventures
Strategic alliances
Joint ventures
the various partners own less than 100% of the equity of the joint venture firm
Collaborative arrangements exist in Conglomerate firms
- While these kind of arrangements reduce risks and realize economies of scale, they also promote tendencies towards concentration and oligopoly
Strategic alliances
partnerships between separate, sometimes competing companies. They are drawn together because each needs the complementary technology, skills or facilities of the other; but the scope of the relationship is strictly defined, leaving the companies free to compete outside the relationship. MNCs are engaged either in extraction (extract raw material), or in manufacturing (manufacture consumer goods, high technology), or more recently in services (such as insurance or banking)
Case Study
---福特汽车公司内部的生产分工
1. What is the influence of MNCs on the world economy?
2. What is the influence of MNCs on the parent country?
3. What is the influence of MNCs on the host country?
A to Q1
MNCs speed up the process of world economy integration
MNCs accelerate the internationalization of production
MNCs promote the development of international trade
MNCs accelerate the flow of international capitals
MNCs stimulate the innovation of R&D
A to Q2
It is advantageous for the parent country to expand the international market, improve the industrial competitiveness and stimulate its economic growth
The reduction of transaction costs resulted from the internal trade of MNCs can produce the same effects resulted from international trade and economies of scale
For the host country:
It is advantageous for the host country to accumulate capitals
MNCs can make contribution to optimize the industrial structure.
The introducing of MNCs’ investment, can enlarge the industrial space of the host country, thus improve the capabilities of production and international competitiveness, and also enlarge the sales market for the host country’s products.
MNCs can accelerate the technological progress
Case Study
---Cultural Differences at ABB
How can ABB’s culturally diverse management team be a source of competitive strength?
What barriers are likely to stand in the way of Percy Barnevik’s attempt to make his culturally diverse management team a source of competitive strength?
