Multinationals Flashcards
Multinational
controls operations or income-generating assets in more than one country
Multinationals primary driver of ?
flows of investment, trade and knowledge
What are global companies?
firm with extensive international operations
What is not a multinational?
a firm whose sole international involvement is the exporting of goods
2 types of foreign investment
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
Equity and non-equity arrangements
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)
Multinationals have grown more rapidly than international trade
true
Are multinationals huge firms with a lot of employees?
no, they employed around 250 people
Which organizations have been seen as “proto-multinationals” ?
English and Dutch East India companies
When did MODERN multinational enterprises begin?
last decades of the 19th century due to the emergence of communication and transportation facilities
What are free-standing companies
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
Situation in 1914
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
After WWI
US emerged as the most dynamic direct investor
US, Britain and the Netherlands together 3/4 of total world stock of FDI
Great Depression (1940s)
decreasing growth of world FDI
because exchange controls meant that dividends and profits could not be repatriated (could give rise to “enforced investment”)
Period 1950-1980
US accounted for 85% of new FDI flows
by 1980: 40% of total stock
Latin America and Asia declined as host economies
Period 1980- today
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
Multinationals in theory
- might seem obvious because profits
- not all firms are multinationals because crossing borders raises major strategic and organizational issues (“Liability of foreignness”)
Ownership advantages
- 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)
Why does the existence of ownership advantage alone not provide a convincing explanation for multinationals
Because then firms could just export
Locational factors
- 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)
Internalization
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)
Eclectic Paradigm
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)
Internalization incentive advantages
-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
