Multinationals and Foreign Direct Investment

Question 1

Multinational Corporations (MNCs)

Answer 1

(a) about 82,000 worldwide, accounting for 1/3 of world trade
(b) operate in many countries, often with integrated production chains

(c) opposing views: agents of their home state v. powerful actors beholden to no country
(c. i) reality: contribute to global interdependence –> have a stake in an efficient international financial system (liberalism)

Question 2

Direct Investment

Answer 2

(a) ownership of a branch or participation in a partnership –> at least 10% of voting rights in a local organization; actual physical presence
(b) relatively more stable; one of the biggest factors of a country’s growth

(c) technology transfer
(c. i) however, extent of technology transfer depends on a welcoming environment (high levels of competition, good human resources, good financial infrastructures)

(d) aside from tech transfer, FDI is more resilient to adverse economic shocks and currency depreciation than other forms of finance –> exporters with foreign ownership are able to access credit through the parent company in times of financial turmoil (important recovery mechanism for developing countries)
(e) can potentially increase employment (contingent on labor regulations of host country)
(f) most research also finds that foreign firms pay more than domestic firms (sharp contrast to sweatshop argument)

Question 3

Portfolio

Answer 3

(a) investing <10% with the main goal of making a profit (buying bonds and stocks and selling them as soon as the market dives)
(b) relatively low level of involvement and commitment

Question 4

Private Equity Funds

Answer 4

(a) middle ground between Direct Investment and Portfolio in terms of commitment
(b) “flipping” a business: making it more efficient, profitable

Question 5

Horizontal v. Vertical FDI

Answer 5

(a) horizontal: buying in the same industry
(a. i) ex: GM buys BMW

(b) vertical: buying across the supply chain
(b. i) ex: GM buys tire factory

(c) conglomerate: GM buys banana farm (not for fuel/car-making purposes)

Question 6

Potential Costs of FDI

Answer 6

(a) can crowd out domestic investment in lesser-developed countries –> high technology gap between local and domestic firms would put local firms under significant pressure
(a. i) however, may be beneficial in long term by weeding out relatively inefficient domestic firms)

(b) loss of local control of cultural and strategic activities (worry about foreign ownership of strategic activities, such as US port system)
(c) as a result of these costs, sometimes conflict arises between host countries and MNCs (ex: Venezuela’s expropriation)
(d) occasionally conflict occurs between MNCs and their home country (ex: US taxing on a resident basis)

Question 7

South-South FDI

Answer 7

(a) until recently most FDI was North-North or North-South

(b) last two decades: rise in investment between developing countries
(b. i) more labor and export intensive –> increase employment and foreign reserves
(b. ii) less corporatized and better suited to developing country environment (ex: Haier and Whirlpool washing machines)
(b. iii) experience operating in developing country environment (ex: poor infrastructure); although this could put them at a competitive disadvantage in developed markets, it maya give them an edge in emerging markets
(b. iv) lower level of technology may be easier to absorb