Week 11 Flashcards
what is a multinational enterprise?
businesses that own and control foreign subsidiaries in more than one country
what is a transnational index?
its an index of the global presence of multinational corporations (MNCs) based on the 3 ratios
1. of foreign assets to total assets,
2. foreign sales to total sales and
3. foreign employment to total employment
what are the two ways to measure and rank MNE’s?
a method of measuring and ranking MNE’s:
they either mount under MNE’s control OR transnational index
what three types of MNE’s can they be?
horizontally integrated multinational: a multinational that produces the same product in many different countries
vertically integrated multinational: a multinational that undertakes the various stages of production for a given product in different countries
conglomerate multinational: a multinational that produces different products in different countries
what are equity and non-equity MNE?
equity: foreign direct investments (FDI) - include joint ventures, wholly owned subsidiary,
non-equity: contractual agreements, cross-shareholdings -> exporting, licensing, franchising, strategic alliances
why do firms become MNEs?
a. Cost-orientated MNE:
- these usually try to reduce their costs of production by integrating vertically to secure cheap raw materials or labour.
b. Market orientated MNE:
- motivated by the promise of new markets.
- Tend to be Horizontally integrated.
c. Higher/ more secure profits in the long run
what is Vernon’s product life cycle and MNE theory:
- Launch: This will tend to see the new product produced in the economy where the product is developed. It will be exported to the rest of the world. the monopoly position of the producer enable the business to charge high prices and make high profits.
- Growth: As the market begins to grow, other producers will seek to copy or imitate the new product. Prices begin to fall. To maintain competitiveness, the business will reduce costs and, might consider shifting production overseas to lower-cost production centres.
- Maturity. At the early stage, the business is still looking to sell its product in the markets of the developed economies. it may still be happy to locate some of its plants in such economies. As the original market becomes increasingly saturated, the MNC will seek to expand into markets overseas which are at an earlier stage of development.
- Part of this expansion will be by the MNC simply exporting to these economies, but, increasingly, it will involve relocating its production there too. - Maturity and decline: When original markets are fully mature and moving into decline, the only way to extend the product’s life is to cut costs and sell the product in the markets of developing countries. The location of production may shift to even lower-cost countries. the country in which the product was developed will be a net importer (if there is a market left for the product), but it may be importing the product from a subsidiary of the same company that produced it within that country in the first place!
what does Vernon’s MNE product life cycle explain?
- how firms might first export and then engage in FDI.
- how firms transfer production to different locations to reduce costs and enable profits to be made from a product that could have become unprofitable if its production had continued from its original production base.
- It can be useful in explaining horizontally and vertically integrated MNCs, but it cannot explain the more modern forms of MNC growth through strategic alliances. We thus turn to the second theory.
what is Dunning’s eclectic Paradigm:
helps to explain the pattern and growth of international production as well as identifying the gains to firms from being MNEs
what are the three categories of gains in Dunnings eclectic Paradigm?
- MNCs can exploit their core competencies in competing with companies in other countries. These are described as OWNERSHIP advantages’: in other words, advantages deriving from ownership-specific assets .
- They can exploit LOCATIONAL advantages in host countries, such as the availability of key raw materials or high demand for the good.
- They may also derive INTERNATIONALISATION advantages . These occur when the MNC gains from investing overseas rather than exporting to an overseas agent or licensing a foreign firm (i.e. using a market solution). In other words, the MNC gains from keeping control of the product within its organisation
describe ownership advantages further?
- The ownership of superior technology:
Such ownership will not only enhance the productivity levels of the MNC, but probably also contribute to the production of superior-quality products. - Research and development capacity: MNCs are likely to invest heavily in R&D in an attempt to maintain their global competitiveness. The global scale of their operations allows the R&D to have a low average fixed cost. MNCs, are often world leaders in process innovation and product development.
3.Product differentiation. MNCs often combine innovation with successful product differentiation in international markets. They may invest heavily in advertising and often develop global brand names - Entrepreneurial and managerial skills. Managers in MNCs are often innovative in the way they do business and organise the value chain.
- Advertising/Branding – mainly applies to consumer goods
- Asset-based – company owns some asset, usually intangible (e.g. Goodwill). Dunning distinguishes between 2 kinds:
- Asset-based ownership (O-a) advantages based on possession of some, usually intangible asset, and
- Transaction-based (O-t) advantages where the firm is better able to co-ordinate activity than the market.
describe the 3 COST-BASED locational advantages further?
there are 3 broad COST-BASED advantages:
1.The availability of raw materials: individual nations might have specific advantages over others. Because such factors of production are largely immobile, businesses respond by becoming multinational: they locate where the necessary factors of production they require can be found. In the case of a business that wishes to extract raw materials, it has little choice but to do this.
2. The relative cost of inputs: Although it is possible that firms seek out lower-cost land and capital, perhaps because of host government subsidies, one of the main reasons firms want to move overseas is because labour is relatively cheaper. to many customer complaints, a number of large companies are bringing their call centres back to the UK, including BT, Santander and EE.
3. Avoiding transport and tariff costs: Locating production in a foreign country can also reduce costs in other ways. A business locating production overseas would be able to reduce transport costs if those overseas plants served local or regional markets or used local
what are MARKET-BASED locational advantages?
- Government policy towards FDI: In order to attract FDI, a government might offer an MNC a whole range of financial and cost-reducing incentives, many of which help reduce the fixed (or ‘sunk’) costs of the investment, thereby reducing the investment’s risk.
Eg. The granting of favourable tax differentials and depreciation allowances, are widely used government strategies to attract foreign business. - The general economic climate in host nations. FDI is more likely to occur if a nation has buoyant economic growth, large market size, high disposable income, an appropriate demographic mix, low inflation, low taxation, few restrictive regulations on business, a good transport network, an excellent education system, a significant research culture, etc.
- Better serve larger or potentially faster growing markets by locating there. Particularly important for horizontal MNEs.
- Growth rate of GDP is consistently associated with FDI.
what are the internationalisation advantages?
Accords with Coase (1937) theory of the scope of firms which minimizes transaction costs (costs of using the market).
- A horizontal MNE - firm essentially produces the same product in different locations, investment decision based on the fundamental paradox of information:
- Arrow’s information paradox – a key asset giving a firm competitive advantage is information or know-how, in order to contract you need to share the information – but this is the competitive advantage!
why do horizontal firms becomes horizontally integrated MNEs/internalise?
- Firms initially may manufacture in their home nation and export to a foreign location but then decide to switch out of exporting and establish a subsidiary producing the same product overseas. Thus, FDI may be part of a sequence of expansion into new markets. The sequence may begin with exporting and then involve investment in one or more countries.
- Firms see that by combining their ownership-specific assets (e.g. technology and managerial skills) with locational advantages in the host nation (e.g. market size and government grants) their revenue streams will be greatest from internalising those assets and establishing an overseas subsidiary instead of exporting to it.
- Ensure trade secrets kept as potentially divulging to a
licensee may create a future competitor. - Technology (processes) may be difficult to sell or licence if difficult to codify tacit knowledge (knowledge that cannot
easily be transferred).
