Title: Multinational Corporations in the Global Economy
1Multinational Corporations in the Global Economy
Elisa Giuliani Contact giulel_at_ec.unipi.it
http//www.dea.unipi.it/staff/e.giuliani/trimest
er.htm
2Introduction 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
3Lecture 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 RD Operations,
Strategic Management Journal, 19 (5) 479-496.
4What do you think a MNC is?
- 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
5Subsidiaries/Affiliates
Headquarters
6How does it occur?
7Why are they important?
- 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 nobodys interest (p. 18)
8Statistics
FDI Foreign Direct Investment (measure of
foreign ownership of productive assets, such as
factories, mines and land. )
9Statistics
10Statistics
11StatisticsTransnationality 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.
12Goverments attitudes towards FDI
13Goverments attitudes towards FDI
14Why 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
15Ownership
- 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
16Location
- 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)
17Bolivia happens to possess up to 54 of the
world's Lithium deposits
Underneath the salt lies the world's largest
lithium reserves
18Internalization
- 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) -gt Market failures - Keeping skills and capabilities internal to the
firm
19Why 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
201. 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)
212. 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
223. 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
23Main strategies for setting up subsidiaries
(Dunning)
- Natural-resource seeking
- Efficiency seeking
- Market seeking
- Capability seeking
24Venezuela
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28How 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
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30Ethnocentric
Headquarters
Subsidiary (Argentina)
Subsidiary (Brazil)
Subsidiary (Korea)
Subsidiary (SouthAfrica)
31Polycentric
Headquarters
Subsidiary (Argentina)
Subsidiary (Brazil)
Subsidiary (Korea)
Subsidiary (SouthAfrica)
32Geocentric
Headquarter
Subsidiary (Argentina)
Subsidiary (Brazil)
Subsidiary (Korea)
Subsidiary (SouthAfrica)
33There 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 RD program
34Subsidiaries/Affiliates
Headquarters
35Example
36- International
- adaptor
- AMANCO
37Intel 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 US39 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
38UNCTAD World Investment Report (2005)
39Some MNC have their RD labs in
developing/emerging countries
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