Unit 1 Flashcards
Definition of a MNC
a firm with assets or employees in more than one country
Where are MNC’s based
80% of all MNCs are based in western europe, canada, australia and japan
in the last decades the new MNCs are emerging in countries such as south korea, taiwan, india, mexico and south africa
Why do multinational firms exist?
- Comparative advantage: production factors are lower in one place than another
- Closeness to to market: logical to produce close to the client
- ease of doing business: factors such as political stability, corruption and infrastructure may create incentives to move production abroad
- Government incentives: grants and lower tax rates
- Access to resources: better to produce closer to resource than having to transport it
- Access to knowledge and skills
- stability to resist economic shock
problems associated with MNSc
- take advantage if lower labour costs or weaker regulations
- drive local companies out of business
- damages the local economy
- controlling to so many resources give them too much political power
- the complexity of the MNCs make them difficult to regulate and
- wealth distribution is very uneven
Positives with MNCs
- Leaders of modernization
- job creators
- creates investment in local communities
- vehicles for progress
- generates overall economic growth and wealth
when creating a MNC, what must they consider?
Is it better to focus on building our local market or developing a new market?
what type of entry mode to use when expanding into other markets?
Do we centralize to gain economic scale and efficiency, or do we decentralize to offer a service adapted to each region?
What makes a multinational different from bank loans and portfolio investments?
significant degree of influence (minimum 10%) and long term relationship
What is foreign direct investment?
Setting up operations in foreign markets or buying companies into foreign markets and transferring know-how and management skills
why do firms go to multinational
to serve customers in a foreign market
to produce at a lower cost
to access certain resources
what are trade costs?
when becoming a MNC the firm needs to consider trade costs such:
- transport costs
- tariffs
- different regulations and standards
- country specific issues such as corruption or monopolistic practices
why do some companies license a local producer in the foreign market when some companies commit to a foreign investment?
It depends on what production factors are being used, (ex. Intangible assets such as brands, technlolgy, know-how, and other firm-specific skills). This may make the licenscing option too risky.
The company may not want to share some of these key reasons for its success.
Also, it may not be possible to find a partner who can produce with the quality we want
What are the trade-offs in deciding to become a horizontal MNC?
increased costs of having extra operations vs eliminating trade costs
losing economies of scale in home operations VS creating economies of scale in new foreign operations
how does trade between a company with horizontal expansion affect the gome market?
affects employment
affecting other industries that supply the company
reduces trade balance between the the two countries
Vertical multinationals
when a company decides to break up their operation into parts, one move those operations to places where the labour is cheaper or cheap energy
what do vertical multinationals need to considers
cost of transportation
additional management required for the international factories
culture differences
loss of quality control
trade-offs in deciding to be a vertical MNC
Access to lower factor costs (labour, energy, resources)
trade costs of moving product around different production centres
disintegrations costs
= if all of these are low, it creates incentives to expand vertically
trade-offs in deciding to be a vertical MNC
Access to lower factor costs (labour, energy, resources)
trade costs of moving product around different production centres
disintegrations costs
= if all of these are low, it creates incentives to expand vertically
trade issues with vertical mnc
as the product is possibly being re-imported into the home market for the final assembly and hippings, this vertical expansions doesn’t affect trade as horizontal
Outsourcing
closely related to vertical multinational activity, but in outsourcing the other companies are responsible for doing the activity. . It means the geographical separation of production taking place outside the firm
companies save money by reducing overheads and stuff numbers, and focusing on core competency
Trends in MNC activity
MNC activities is mostly horizontal and occurs between advanced economies with large markets
regional integration tends to increase horizontal FDI between blocks, bur reduce horizontal FDI within a block
north-south MNC vertical FDI activity is growing faster in recent years
outsourcing is also very problem
The value chain definition
a value chain is the whole series of activities that create and build value at every step. The total value delivered by the company is the sum total of the value built up throughout the company
Backwards vertical integration
Backward integration is a form of vertical integration in which a company expands its role to fulfill tasks formerly completed by businesses up the supply chain. In other words, backward integration is when a company buys another company that supplies the products or services needed for production.
*ex: apple plans to use its own chips in macs from 2020, replacing Intel
Forward vertical integration
to secure or guarantee an output which gives a competitive advantage.
*Heineken buys pubs to sell their beer in
reasons for backward vertical inegration
Synergies: apply our management process to the new part of our supply chain )e.g. quality, control, training)
Skills and technology: lack of reliability or skills, reluctant or inability to share advanced technology (Ex, IKEA)
Asset specify: it may be better to control an asset or input than be dependent on suppliers
Efficiency savings: combining operations can increase efficiency, reduce costs etc.
Entry barriers: increase entry barriers for others
Reasons for vertical integration
Quality control: some sectors require higher quality control on the distribution chain and company make feel obligated to take control of resource to make sure that the goods or service reach the buyer in the appropriate way (Amazon)
Relationship with customers: eliminating the middle man or communicating directly with customers can help to improve product offering. (DELL)
Entry barriers: increase entry barriers for others
Horizontal expansion
This is often referred to as diversification. It is when a company expands up or down its own value chain, the end product being produced is the same.
However, when a company expands horizontally, it is effectively moving into other value chains (although some suppliers/customers may be the same)
this example, a company which manufactures cars decide to manufacture other types of vehicles. This may have the same or different suppliers and customers (VALUE CHAIN). This is horizontal integration.
Vertical AND horizontal integration
Company which manufactures cars decided to manufacture car components, and also to rent cars. This is backward AND forwards vertical integration.
They also begin to manufacture other types of vehicles, which many have the same or different suppliers and customers. This is horizontal integration
Risks of vertical and horizontal integration
- Lack of knowledge, experience of how different parts of value chain work or how other value chains work
- Higher bureaucratic and administrative costs to manage larger, more complex company
- More conflict and less flexibility when balancing different needs
- Less competition may reduce market efficiency
