Global Business and International Trade · 2020-02-13 · 2015 2016 2017 FDI in! ows 205 1 415 1 921 1 868 1 430 FDI out! ows 244 1 452 1 622 1 473 1 430 FDI inward stock 2 196 14

Global Business and International Trade

Multinational corporations

Outline of today’s seminar

1) Multinational corporations2) Small case study

© Radek Čajka, Ph.D., 2015

Brand value

• How can you measure the value of a brand?• What are the most valuable brands?


Brand value

• http://www.millwardbrown.com/brandz/Top_100_Global_Brands.aspx


http://www.millwardbrown.com/brandz/Top_100_Global_Brands.aspx

Question

• What can be the definition of a multinational corporation?


Definition of an MNC

• There is no formal definition, but several of them using different criteria

1) MNC is a firm that is structured so that business is conducted or ownership is held across a number of countries or organized into global product divisions.

2) MNC is a firm that has a specific ratio of foreign business activities or assets to total firm activities or assets.

3) Based on the perspective of the corporation, that is, its behavior and its thinking (if managers think that company they run is multinational, then it is).



• Howard Perlmutter differentiates (based on the attitude held by the decision makers of an organization) among 3 types:

1) Ethnocentric2) Polycentric3) Geocentric



• Ethnocentric organizations focus on home or domestic environment, which excludes the possibility to characterize them as MNCs.

• Polycentric organizations have investment, operations or markets in several countries, but do not integrate the management of these international functions.



• Geocentric organizations are integrated and have a world perspective regarding the breadth and reach of possible organizational operations.

• UN calls such organizations not multinational, but transnational corporations, but both terms describe the same



• They began to flourish in the decade following WW2, primarily in the United States.

• It was spurred by reconstruction efforts in Europe and an inflow of USD geared to take advantage of new opportunities, as countries of the ravaged continent attempted to rebuild their economies.

• Since the 1970s USA has lost its dominance in this field.






1. Key indicators of international production

International production continues to expand, but the rate of expansion is slowing down, and the modalities of cross-border transactions and exchanges of goods, services and factors of production are shifting. Table I.6 provides key indicators of international production (see box I.3 on the use of FDI statistics to measure international production).

The gradual growth in the sales and value added of MNE foreign af!liates, as reported in UNCTAD’s annual statistics, is inherent in the functioning of international production networks. Existing stocks of investment, accumulated in af!liates already located overseas, generate returns that can be reinvested in foreign markets. Approximately 50 per cent of the income of foreign af!liates is reinvested, on average.

The average annual growth rates over the last !ve years of foreign af!liates’ sales (1.5 per cent), value added (1.5 per cent) and employment (2.5 per cent) were all lower than during

C. INTERNATIONAL PRODUCTION

Table I.6. Selected indicators of FDI and international production,2017 and selected years

ItemValue at current prices (Billions of dollars)

1990 2005–2007(pre-crisis average) 2015 2016 2017

FDI in! ows 205 1 415 1 921 1 868 1 430FDI out! ows 244 1 452 1 622 1 473 1 430FDI inward stock 2 196 14 487 25 665 27 663 31 524FDI outward stock 2 255 15 188 25 514 26 826 30 838Income on inward FDIa 82 1 027 1 461 1 564 1 581

Rate of return on inward FDI b 5.4 9.2 6.8 7.0 6.7Income on outward FDIa 128 1 101 1 394 1 387 1 553

Rate of return on outward FDI b 7.8 9.5 6.1 5.8 6.2Net cross-border M&As 98 729 735 887 694

Sales of foreign af" liates 6 755 24 217 27 559 29 057c 30 823c

Value added (product) of foreign af" liates 1 264 5 264 6 457 6 950c 7 317c

Total assets of foreign af" liates 5 871 54 791 94 781 98 758c 103 429c

Employment by foreign af" liates (thousands) 27 034 57 392 69 683 71 157c 73 209c

MemorandumGDPd 23 433 52 383 74 407 75 463 79 841Gross " xed capital formationd 5 812 12 426 18 561 18 616 19 764Royalties and licence fee receipts 31 174 299 312 333Exports of goods and servicesd 4 414 14 957 20 953 20 555 22 558

Source: UNCTAD.Note: Not included in this table are the value of worldwide sales by foreign affiliates associated with their parent firms through non-equity relationships and of the sales of the parent

firms themselves. Worldwide sales, gross product, total assets, and employment of foreign affiliates are estimated by extrapolating the worldwide data of foreign affiliates of MNEs from Australia, Austria, Belgium, Canada, Czech Republic, Finland, France, Germany, Greece, Israel, Italy, Japan, Latvia, Lithuania, Luxembourg, Portugal, Slovenia, Sweden, and the United States for sales; those from the Czech Republic, France, Israel, Japan, Portugal, Slovenia, Sweden, and the United States for value-added (product); those from United Kingdom and the United States (excluding financials) for assets; those from Czech Republic, Japan, Portugal, Slovenia, Sweden, and the United States for exports; and those from Australia, Austria, Belgium, Canada, Czech Republic, Finland, France, Germany, Italy, Japan, Latvia, Lithuania, Luxembourg, Macao (China), Portugal, Slovenia, Sweden, Switzerland, and the United States for employment.

a Based on data from 180 countries for income on inward FDI and 156 countries for income on outward FDI in 2017, in both cases representing more than 90 per cent of global inward and outward FDI stocks.

b Calculated only for countries with both FDI income and stock data. The stock is measured in book value.c Data for 2016 and 2017 are estimated based on a fixed effects panel regression of each variable against outward stock measured in book value and a lagged dependent variable for

the period 1980–2015.d Data from IMF (2018).

20 World Investment Report 2018 Investment and New Industrial Policies

Task

• Try to find out in teams at least 5 advantages and disadvantages of the working of a MNC based on an example of two companies described in the text.

• Try to apply them to any existing MNC.



• Advantages and disadvantages– Arise from the fact that operations are not only

domestically oriented.– The international success of MNCs is primarily

because of their ability to overcome the disadvantages and capitalize on the advantages.

– Depend to a large extent on the nature of individual corporations themselves and types of businesses.


Multinational corporationsAdvantages

• Advanced technical know-how– One of the most important advantages, enables

MNC to compete internationally.– Can be either developed or acquired by the

corporation.– In most cases is technology patented (additional

revenue).– Gives the MNC the advantage in the areas of

production, management, services or processes.



• Large size and economies of scale– Most MNCs tend to be large (some of them have larger

sales or revenues than the GDP of many countries).– This confers the advantage of significant economies of

scale.– The high volume of production lowers per-unit fixed costs

for the company‘s products, which are reflected in lower final costs.

– This is especially important in industries that are capital-intensive (steel, cars, chemicals), in which fixed costs form a substantial proportion of total costs.



• Lower input costs– Lower input costs can be achieved again due to

larger size.– Large production levels necessitate the purchase of

inputs in large volumes.– This enables MNCs to bargain for lower input costs

(or volume discounts), which makes the final production also cheaper (and thus more price competitive).

– System of purchase can be also more efficient due to effective inventory control.



• Ability to access raw materials in other regions– This may lower input and production costs.– In many cases, MNCs also supply the needed

technology, which may give them monopolistic control over the raw materials, because they often supply technology only in exchange for such a control.



• Ability to shift production to other locations– One of the most important advantages.– MNCs can relocate their production facilities and

thus take advantage of lower costs for labor, raw materials (or other inputs), and sometimes they even utilize incentives offered by host countries.

– This all raise international competitiveness of MNCs (they can export lower-cost goods to other markets) and gives them a distinct edge over purely domestic corporations.



• Scale economies in shipment, distribution and promotion– Scale economies allow MNCs to achieve lower costs

in shipping – large volumes of freight permit them to negotiate lower rates.

– Some very large corporations (oil industry) purchase their own ships, which is even more effective.

– Distribution and promotion costs are also lower due to high volumes of production.

– More important, MNCs are often able to standardize a promotional message and use it in different countries (global communication strategy).



• Brand image and goodwill advantages– Many of the MNCs possess product lines that

have established a good reputation for quality, performance, value and service.

– This can be used to differentiate from other, by introduction of new products.

– It can lead to cost reduction for communication of new products (or products in new markets), because part of the message is being told by known brand.



• Access to low-cost financing– MNCs require large amounts of financing and

generally they are excellent credit risks (they are favored customers of financial institutions, which lend them at best rates).

– They also have access to different financial markets, which allows them to find the best offer (then funds are transferred internally to required locations).



• Financial flexibility– MNCs can manipulate their profits and shift

them to lower-tax locations.– The manipulation of profits to save taxes is

generally accomplished through transfer pricing or other financial mechanism.

– This greater financial leverage can be used to artificially lower prices to enter new markets or to increase market shares in existing ones.



• Information advantages– MNCs have a global market view and are able to

collect, process, analyze and exploit their knowledge of worldwide markets.

– It is advantage not only in marketing, but also in all other aspects of operations.

– Access to this information provides MNCs with the opportunity to position themselves appropriately to respond to contingencies and exploit opportunities.



• Managerial experience and expertise– MNCs are able to assimilate a wealth of valuable

managerial experience.– They acquire expertise in different ways of

approaching business problems and can effectively apply this knowledge to multiple locations.



• Diversification of risks– Simultaneous presence in different countries

allows MNCs to more effectively bear the risk of cyclic economic declines, which are not the same in different countries.

– Thus, losses in one country can be offset by gains in other countries.

– It allows diversification of political, economic and other risks.


Multinational corporationsDisadvantages

• Business risks– Several risks are not borne by companies whose

operations are purely domestic in nature.– MNCs have to deal with currencies of other

countries, which renders them vulnerable to fluctuations in exchange rates.

– This can wipe out the entire profit of a particular business activity (and expenses to eliminate such a negative development over the long run are often very high).

– Over the short run, several hedging mechanisms exists.



• Host-country regulations– MNCs are often subject to regulations that vary

from country to country and it can be quite expensive to get familiar with these regulations and modify operations to ensure not overstepping them.

– These regulations very often change, which makes it even more difficult to adapt.

– Bans on imports, exports, availability of credits, necessity of government approval.



• Different legal systems– MNCs must operate under the different legal

systems of different countries.– In some countries the legislative and judicial

processes are extremely cumbersome and contain many nuances that are not easily understood by non-natives.

– Some legislation can also prohibit the type of business activity regarded by MNC as normal.



• Political risks– MNCs can‘t do much if a host country decides to

take action that is not fully in the interest of the corporation.

– They increases in countries whose government tend to be unstable or change frequently.



• Operational difficulties– These can be created by working in a wide

variety of business environments.– Unwritten business practice and market

conventions often prevail (then lack of familiarity with them causes difficulties to conduct business in accordance with them).

– Often the normal methods of operation of an MNC can be quite contrary to a country‘s business practices.



• Cultural differences– Can lead to major problems.– Employees are sometimes not able to adjust to the

local culture (personally or professionally), which reduces their optimal performance.

– Manager often have troubles in dealing with local offices because of culturally based communication problems.

– Inability to understand and respond appropriately to local cultures has often led MNCs products to fail, to problems with local customers, business partners, governments or own employees.


Documents

Global Business and International Trade · 2020-02-13 · 2015 2016 2017 FDI in! ows 205 1 415 1 921 1 868 1 430 FDI out! ows 244 1 452 1 622 1 473 1 430 FDI inward stock 2 196 14