Multinational Corporations in the Global Economy

1. 1 Multinational Corporations in the Global Economy

2. 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. 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. 4 What 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�

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6. 6 How does it occur?

7. 7 Why 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 nobody�s interest� (p. 18)

8. 8 Statistics

9. 9 Statistics

10. 10 Statistics

11. 11 Statistics:Transnationality index

12. 12 Goverments attitudes towards FDI

13. 13 Goverments attitudes towards FDI

14. 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. 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. 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)

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18. 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. 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. 20 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) 1. National differences

21. 21 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 2. Scale economies

22. 22 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 3. Scope economies

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

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28. 28 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 How do they operate?

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30. 30 Ethnocentric Very hierarchical. But, how much technology will they be able to transfer if nothing happens in their subsidiaries?6Very hierarchical. But, how much technology will they be able to transfer if nothing happens in their subsidiaries?6

31. 31 Polycentric

32. 32 Geocentric

33. 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

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35. 35 Example Local adaptor: AVON

36. 36 International adaptor: AMANCO

37. 37 International creator: INTEL

38. 38 UNCTAD World Investment Report (2005)

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

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