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Multinational Corporations in the Global Economy. Elisa Giuliani Contact: [email protected] http://www.dea.unipi.it/staff/e.giuliani/trimester.htm. Introduction to the course. 4 Lectures Final exam:

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Multinational corporations in the global economy l.jpg

Multinational Corporations in the Global Economy

Elisa Giuliani

Contact: [email protected]

http://www.dea.unipi.it/staff/e.giuliani/trimester.htm


Introduction to the course l.jpg
Introduction to the course

  • 4 Lectures

  • Final exam:

    • Written exam only: 10 questions (multiple choice; true/false, fill in blanks, open questions) in 20 minutes

    • Based on readings + class material

    • Same schedule/room of Economia e Gestione delle Imprese (corso B)

  • See the webpage:

    www.dea.unipi.it/staff/e.giuliani/trimester.htm


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Lecture 1

  • 1. Why firms become multinational?

  • This lecture will discuss the theoretical underpinnings of what a multinational corporation (MNC) is, why a firm becomes multinational, what types of strategies do MNC follow in their international expansion. Also, we will analyse how multinational corporations “work”. Finally, we will look at statistics about foreign direct investments (FDI) worldwide.

    Reading:

  • Dunning J.H. (2000) The eclectic paradigm as an envelope for economic and business theories of MNC activity, International Business Review, 9: 163-190. ONLY SECTION 1 (INTRODUCTION) (Downloadable from my website or from the E-Library in campus).

    Other recommended readings (not compulsory for students attending Lecture 1, but recommended for those not attending the lecture):

  • Perlmutter H. (1969) The tortuous evolution of the Multinational Corporation, Columbia Journal of World Business, 4: 8-18.

  • Ghoshal S. (1987) Global strategy: an organizing framework, Strategic Management Journal, 8 (5).

  • Nobel R., Birkinshaw J. (1998) Innovation in Multinational Corporations: Control and Communication in International R&D Operations, Strategic Management Journal, 19 (5): 479-496.


What do you think a mnc is l.jpg

A corporation that has its facilities and other assets in at least one country other than its home country.

Such companies have offices and/or factories in different countries and usually have centralised head office where they coordinate global management (headquarters)

Very large multinationals have budgets that exceed those of many small countries.

Sometimes referred to as “transnational corporations”

What do you think a MNC is?


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Subsidiaries/ least one country other than its home country. Affiliates

Headquarters


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How does it occur? least one country other than its home country.


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In 1969 Howard Perlmutter wrote: least one country other than its home country.

“multinational corporation is a new kind of institution - a new type of industrial social achitecture particularly suitable for the latter third of the twentieth century.” (p. 10)

“This type of institution could make a valuable contribution to world order and conceivably excercise a constructive impact on the nation-state” (p. 10)

“The geocentric enterprise [a type of MNC] offers an institutional and supra-national framework which could conceivably make war less likely, on the assumption that bombing costumers, suppliers and employees is in nobody’s interest” (p. 18)

Why are they important?


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FDI least one country other than its home country. = Foreign Direct Investment

(measure of foreign ownership of productive assets, such as factories, mines and land. )

Statistics


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Statistics least one country other than its home country.


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Statistics least one country other than its home country.


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Statistics: least one country other than its home country. Transnationality index

Average of the four shares : FDI inflows as a percentage of gross fixed capital formation for the past three years 2001-2003; FDI inward stocks as a percentage of GDP in 2003; value added of foreign affiliates as a percentage of GDP in

2003; and employment of foreign affiliates as a percentage of total employment in 2003. For Belgium and Luxembourg, the corresponding ratio of FDI inflows to gross fixed capital formation refers only to 2002-2003.


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Goverments attitudes towards FDI least one country other than its home country.


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Goverments attitudes towards FDI least one country other than its home country.


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Why firms become multinational? least one country other than its home country. 1. The OLI Paradigm (Dunning J.)

  • One of the dominant frameworks for explaining the existence of MNCs and the determinants of FDI

  • O = Ownership

  • L = Location

  • I = Internalization


Ownership l.jpg
Ownership least one country other than its home country.

  • The firm that invests abroad has a competitive advantage (to exploit) and out-compete the firms that operate in the country where the investment is done

    • Economies of scale connected to large-sized company

    • Possess technologies that give an advantage on the subsidiary abroad

    • Monopolistic advantages in terms of priviledged access to inputs or outputs markets

    • Skills of management


Location l.jpg
Location least one country other than its home country.

  • Advantages of the foreign location:

    • Different nations have different factor endowments:

      • Natural resources:

      • Cheap labour force

      • Skills and capabilities

    • Country characteristics (political stability, regulations, cultural distance)


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Bolivia least one country other than its home country. happens to possess up to 54% of the world's Lithium deposits

Underneath the salt lies the world's largest lithium reserves


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Internalization least one country other than its home country.

  • Internalization occurs when a firm expands its operations in another country, by acquiring the property of the assets that are abroad

  • Ownership of foreign assets more convenient than the market

  • Why?

    • Information asymmetries (transaction costs can be too high) -> Market failures

    • Keeping skills and capabilities internal to the firm


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Why firms become multinational? least one country other than its home country. 2. Ghoshal (1987)

  • Becoming multinational to search a competitive advantage:

    • National differences: Exploiting national differences in factor costs

    • Scale Economies

    • Scope Economies


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1. National differences least one country other than its home country.

  • Different nations have different factor endowments:

    • A firm can gain cost advantages by configuring its value chain so that each activity is located in the country which has the least cost for the factor that the activity uses most intensively

    • E.g. Land in Honduras, cheap labour force in China, cheap but skilled engineers in India...(changing over time)


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2. Scale economies least one country other than its home country.

  • A firm expanding its total volume of sales, reduces its average costs in a given period of time

  • It is thus important to expand to several markets as to produce more of a product

  • Higher volumes also favour experience economies (learning by doing)

  • However, large scale also implies higher complexity and organization is critical


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3. Scope economies least one country other than its home country.

  • Scope economies: when the cost of the joint production of two or more products can be less than producing them separately

  • Scope economies achieved though:

    • Shared equipment, brands, and other assets

    • Shared external relations

    • Shared knowledge


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Main strategies for setting up subsidiaries least one country other than its home country. (Dunning)

  • Natural-resource seeking

  • Efficiency seeking

  • Market seeking

  • Capability seeking


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Venezuela least one country other than its home country.


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How do they operate? least one country other than its home country.

  • MNC are very different one to another

  • Perlmutter (1969) has been among the first to identify this heterogeneity and he distinguished between three types

    • Ethnocentric

    • Polycentric

    • Geocentric


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Ethnocentric least one country other than its home country.

Headquarters

Subsidiary

(Argentina)

Subsidiary

(Brazil)

Subsidiary

(Korea)

Subsidiary

(SouthAfrica)


Polycentric l.jpg
Polycentric least one country other than its home country.

Headquarters

Subsidiary

(Argentina)

Subsidiary

(Brazil)

Subsidiary

(Korea)

Subsidiary

(SouthAfrica)


Geocentric l.jpg
Geocentric least one country other than its home country.

Headquarter

Subsidiary

(Argentina)

Subsidiary

(Brazil)

Subsidiary

(Korea)

Subsidiary

(SouthAfrica)


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There are also least one country other than its home country. different types of subsidiaries

  • Nobel and Birkinshaw (1998) distinguish between 3 different attitudes and modes of learning:

    • Local adaptor: limited mandate, only minor adaptation at the local level

    • International adaptor: more creative local laboratories, eg. To adapt technologies for a continent (Latin America, Asia) not just a country

    • International creator: Internationally interdependent laboratories which provide inputs into a centrally coordinated R&D program


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Subsidiaries/ least one country other than its home country. Affiliates

Headquarters


Example l.jpg
Example least one country other than its home country.

  • Local adaptor:AVON


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  • International least one country other than its home country.

    adaptor:

    AMANCO


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Intel Research Center Opens Its Doors least one country other than its home country.

(China Daily May 13, 2005 )

The Intel Corporation yesterday unveiled a research and development centre in Shanghai's Waigaoqiao Free Trade Zone.

The newest centre, entitled Intel Technology Development (Shanghai) Ltd, was set up with an investment of US$39 million.

"The establishment of the centre in Shanghai is a new chapter of Intel's development in China," he added.

The new centre demonstrates Intel's ongoing commitment to invest in China and promote new technologies, he said.

The centre will develop cutting-edge technology and platforms for Intel's flash products group, assembly technology development division, user-centered platform solutions division and assembly capital equipment development.

"We develop products according to market demands, serving not only the Chinese market but worldwide," Soon said.

The centre will develop and promote advanced cutting-edge technology to push forward the country's IT industry, he said.

"Our objective is to continually improve local technical capabilities to drive industrial and technological development," Soon said.

  • International

    creator:

    INTEL


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UNCTAD World Investment Report (2005) least one country other than its home country.



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