Multinationals

Question 1

Multinational

Answer 1

controls operations or income-generating assets in more than one country

Question 2

Multinationals primary driver of ?

Answer 2

flows of investment, trade and knowledge

Question 3

What are global companies?

Answer 3

firm with extensive international operations

Question 4

What is not a multinational?

Answer 4

a firm whose sole international involvement is the exporting of goods

Question 5

2 types of foreign investment

Answer 5

1) Portfolio investment: acquisition of foreign securities without any control over the management
2)Foreign direct investment (FDI): management control
FDI proxy to quantify multinational investment

Question 6

Equity and non-equity arrangements

Answer 6

equity: joint venture

non-equity:

• licensing (transfer technologies, rights, or resources)
• franchising (right to do business in a certain way over a certain period of time in a specified place)
• strategic alliances (share facilities or cooperate)

Question 7

Multinationals have grown more rapidly than international trade

Answer 7

true

Question 8

Are multinationals huge firms with a lot of employees?

Answer 8

no, they employed around 250 people

Question 9

Which organizations have been seen as “proto-multinationals” ?

Answer 9

English and Dutch East India companies

Question 10

When did MODERN multinational enterprises begin?

Answer 10

last decades of the 19th century due to the emergence of communication and transportation facilities

Question 11

What are free-standing companies

Answer 11

companies that were formed exclusively to operate internationally with no prior domestic business

legally incorporated in their home economy
and typically specialized in one single commodity in a single overseas country

Question 12

Situation in 1914

Answer 12

dominant sources of FDI:
Western Europe, Britain (US the remainder)

Host countries:
US and Canada

Host economies:
Latin America and Asia

1/2 invested in natural resources
1/3 in services

manufacturing: Western Europe, North America

Question 13

After WWI

Answer 13

US emerged as the most dynamic direct investor

US, Britain and the Netherlands together 3/4 of total world stock of FDI

Question 14

Great Depression (1940s)

Answer 14

decreasing growth of world FDI

because exchange controls meant that dividends and profits could not be repatriated (could give rise to “enforced investment”)

Question 15

Period 1950-1980

Answer 15

US accounted for 85% of new FDI flows
by 1980: 40% of total stock

Latin America and Asia declined as host economies

Question 16

Period 1980- today

Answer 16

globalization intensified
M&A: principle vehicle of FDI
2004: US largest home economy (Britain and other European firms good as well)
China second largest recipient of FDI (first: US, 3: Western Europe)
Services: 1/2

Question 17

Multinationals in theory

Answer 17

• might seem obvious because profits
• not all firms are multinationals because crossing borders raises major strategic and organizational issues (“Liability of foreignness”)

Question 18

Ownership advantages

Answer 18

• access to superior technology, information and knowledge
• new products and processes
• brands
• superior management and organization techniques
• access to financial markets
• market power (high capacity to influence policy decisions)

Question 19

Why does the existence of ownership advantage alone not provide a convincing explanation for multinationals

Answer 19

Because then firms could just export

Question 20

Locational factors

Answer 20

• legal framework offering security to foreign investors
• size and income level, growth and stage of development
• differences in labor costs
• resource endowments
• tarrif and non-tarrif barriers to trade: measures that make exporting difficult will encourage local production (incentive to invest in that country)

Question 21

Internalization

Answer 21

following the transaction cost theory:

transactions in Intermediate goods, where intangible assets are crucial, will be undertaken through hierarchy rather than market exchange
(problems of information asymmetry, enforcement of patents imperfect)

Question 22

Eclectic Paradigm

Answer 22

firms will engage in international production if:

• ownership advantage
• location advantage
• in best interest to add value to ownership advantages rather than sell them to foreign firms (internalization)

Question 23

Internalization incentive advantages

Answer 23

-avoid search and negotiation costs
- avoid cost of broken contracts and ensuring litigation
-avoid costs of:
moral hazard (incentive to take greater risks before completion of a contract)
adverse selection (asymmetric info before a transaction)

–> Protect reputation of internalizing firm