international business and finance
rishabbiyani
WEEK3LECTURESLIDE.pptWeek 3:
MNE paradigms in historical/political context
Section I. Multinational enterprise (MNE) paradigms
Section II. Interactions w/host governments (FDI)
Not MNEs are global giants
Small and medium-sized enterprises (SMEs)
- Defined in part by European Commission as firms employing up to 250 persons
- Prime example: German ‘Mittelstand’ firms >60% of that country’s exports/jobs. Advantages:
- Operate in niches too narrow to be exploited by large MNEs
- Some involve intermediary goods, others consumer products
- Specialized in knowledge activities – flexibility, human capital
Obstacles for SMEs’ internationalization
- External, including
- Paperwork (same amount but lesser volumes)
- Product range (narrower portfolios)
- Linguistic/cultural barriers (less human capital)
- Retailing (less able to pressure vendors)
- Internal, including
- Managerial skills (big firms recruit many top graduates)
- Funding (banks often squeeze MNEs)
- Quality control (insufficient staff size)
- Trade documentation (hard to justify hiring specialists)
Historical variables
Political and economic conditions
- Funding: state/private sources
- Political environment: treatment of foreign firms
Technology
- Logistics: ships trains/cars/planes computers
- Communications: integration of operations
knowledge transfers
Management paradigms
- Partially a reflection of historical circumstances
Section I. Early MNE paradigms
- Much early IB = horizontal integration where MNE establishes presence in new market by running activities similar to the ones it manages in its home market
- Rise of Fordist mass production led to rise of vertical integration approach where MNE controls both upstream and downstream.
(Practical application Adam Smith’s international division of labour: rise of intra-firm trade, which accounts for up to 60% of all IB today)
- De-globalisation mid 20th century): Barriers to trade meant many MNE subsidiaries worked on standalone “multi-domestic” basis. Business vision became hyper-local (bad for coordination)
Shaping of the modern MNE
- Bretton Woods/GATT negotiations barriers to trade
- 1960s ‘Big is beautiful’ paradigm. Economies of scale via vertical integration/global expansion (i.e. consolidation European MNEs)
- Rise of ‘offshoring’ solutions (Where MNE moves domestic activity to wholly owned foreign subsidiary to cut costs)
- 1970s Toyotaist revolution = Rise of ‘outsourcing’ solutions. MNE serves as ‘prime contractor’, for network of tiered subcontractors. “Small is beautiful” paradigm. Vertical disintegration
- Today’s international value chains are very fragmented. How long will this last? (i.e. 3D printing)
Regional paradigms?
- Asian MNEs
- Very strong corporate research spending
- Emergence of new centres (China/India)
- European MNEs
- Relatively weak corporate research spending
- Varying performance: German exports/Russian natural
resources but general lower productivity
- North American MNEs
- Strong corporate research spending
- Focus on short-term ROE (“Financialisation” paradigm)
Avoid over-stating globalisation…
…to reduce people’s fear of MNEs?
https://www.ted.com/talks/pankaj_ghemawat_actually_the_world_isn_t_flat (17.03)
Section II. MNE interactions with host governments
Quick checklist of how MNE activities affect local economies
Investment/divestment policies (flows capital/goods)
Employment policy (wage rates, job creation/cuts)
Know-How, technology transfer
Industrialisation
Infrastructure
Environment/pollution
Cultural (international division of labour)
Control of resources/competition)
Foreign Direct Investment
Defined by OECD as a situation where a foreign owner has at least 10% equity interest in a company’s ordinary shares and aims to establish ‘lasting interest’ in host country
- Distinction between ‘market-seeking’ horizontal FDI and ‘efficiency-seeking’ vertical FDI
- Distinction between ‘backward’ and ‘forward’ vertical integration
- Distinction between active and passive (financial) investments
FDI from a corporate perspective
( Note country-level FDI analysis in Economics module)
FDI as a positive decision:
Vertical integration competitive advantage?
Proximity to resources (labour, materials, etc.)
Proximity to customers (emerging markets, follow sourcing)
International economies of scale: sheer size
Government FDI incentives (grants, tax holidays, etc.)
cf. Choi (2015). “quality of human capital influences horizontal FDI”
FDI from a corporate perspective (cont.)
FDI to minimize disadvantages:
Bypass government interference in trade
Lack of domestic capacities
Overcome xenophobia
Diversify exposures (product life cycle, foreign exchange)
Undermine competitors
Frequency/depth of FDI involvement
Gattai and Sali (2018)
“Re: depth of FDI involvement… number of firms involved in inward/outward FDI is quite notable. However, firms’ actual involvement is rather low, meaning that FDI involvement in the EU is widespread, but not deep.
Re: the relationship between FDI involvement and firm-level performance…better enterprises experience some inward/outward FDI rather than none. Moreover, the deeper the FDI involvement, the wider is the gap with domestic firms”
Lobbying
- By domestic firm? By MNE?
- In OECD country? In LDC?
- Transatlantic Business Dialogue (http://www.tabd.com/)
- Culturally-based reactions to lobbying
Scandinavia
K Street
cf Rönnbäck (2015) Lobbying not always protectionist – quite the contrary!
Examples of MNE lobbying
- Intellectual property rights (WIPO/TRIPS)
- To remove ad hoc restrictions
- Chiquita pushing US into banana war vs. EU
- Monsanto vs. EU opposition to GM seeds
- Going as far as military action! (ITT in Chile)
Ethics of lobbying?
Recent trends in FDI
Recent years: rise in FDI > rise in trade
General downtrend in wealthier countries’ share of global FDI inflows. Different sectors dominate different eras
Emergence South-South flows, now South-North
Most FDI flows remain North-North, as per gravity model. Reflects comfort with legal framework?
