Transcript Business Environment

Lecture 20 (L7/S2)
Multinational Corporations
Milena Malinowska
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Definitions
 MNC account for half of global GDP
 The majority of MNC assets are in foreign countries
 20% of top MNC come from developing countries
 Expanding on the international market is based on
cost reduction and risk diversification
 Barriers to MNCs are local language, culture and host
government attitude
 Host countries benefit greatly from MNC activities
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What is a MNC ?
 A company that owns a subsidiary (affiliate) in more than
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one foreign country
MNC’s size is measured in terms of revenue/profit
MNCs locate their production facilities according to factor
(resource) endowment
The ownership of resources abroad constitutes FDI
In 2008 only, 77 000 MNCs controlled 780 000 subsidiary
companies. Big MNCs have affiliates in more than 40
countries
These enterprises employed 82 million people, made FDI
worth $ 16 trillion and generated sales of $ 30 trillion = ½
world GDP
(Source: Sloman&Jones, 2011)
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Super MNCs
 A Swiss study from 2007 found out that 1318 MNCs
control 60% of the world revenues
 Less than 1% (147) are in charge of 40% of world revenue
 Top 20 of these companies is dominated by investment
banks
 Such an overdependence explains the deepness of the
2008 crisis (Source: PLoS One, The Network of Global Corporate Control, 2011)
 44 out of 100 biggest economies are companies (2009)
 These 44 MNC generated revenues of $ 6.4 trillion
(Source: The Influence of the World’s Largest 100 Economic Entities, 2009)
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Top 20 MNC (2011)
Rank
Company
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Wal-Mart Stores
Royal Dutch Shell
Exxon Mobil
BP
Sinopec Group
China National Petroleum
State Grid
Toyota Motor
Japan Post Holdings
Chevron
Total
ConocoPhillips
Volkswagen
AXA
Fannie Mae
General Electric
ING Group
Glencore International
Berkshire Hathaway
General Motors
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Revenue
($ millions)
421,849
378,152
354,674
308,928
273,422
240,192
226,294
221,760
203,958
196,337
186,055
184,966
168,041
162,236
153,825
151,628
147,052
144,978
136,185
135,592
Profits
($ millions)
16,389
20,127
30,460
-3,719
7,629
14,367
4,556
4,766
4,891
19,024
14,001
11,358
9,053
3,641
-14,014
11,644
3,678
1,291
12,967
6,17
(Source: Fortune Global 500)
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MNC by home country
Country
2003
2011
US
189
133
EU
153
150
France 35
Germany 34
Britain 30
Netherlands 12
Italy 10
Japan
82
68
China
15
61
Switzerland
12
15
(Source: Fortune Global 500)
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Global FDI ($ billion)
2.1
1.8
1.8
1.4
1.1
0.893
0.241
1990
2005
2007
2008
2009
2010
2011
(Source: UNCTAD – World Investment Report 2010)
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FDI inflows
(Source: UNCTAD – World Investment Report 2010 & Development and Globalization Report 2004)
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FDI inflows ($ billion)
(Source: UNCTAD – World Investment Report 2010)
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FDI inflows and outflows 2009
Developed
Africa
Latin America
West Asia
70
6%
233
21%
566
51%
68
6%
117
11%
59
5%
47
4%
23
2%
153
14%
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0%
51
5%
821
75%
(Source: UNCTAD – World Investment Report 2010)
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Cross border M&A
 The 1990s saw intensive M&A activity among
companies from developed countries
 During the 2000s M&A targeted companies in EastEuropean states, South-East Asia and Latin America
(Source: UNCTAD – World Investment Report 2000 & 2010)
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FDI inflows in BG (€ million)
(Source: BNB)
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Reasons to become a MNC
 Cost reduction:
 different business activities are located according to factor
endowment – cost and quality of inputs; managerial talent
 Risk spreading:
 escaping saturated home market
 falling revenues in one country can be off set by rising
revenues in another
 Access to new markets:
 gaining from competitive advantage in developing markets
 attaining knowledge from the international scene
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Multinational expansion
 Horizontal integration – produce the same product in
different markets, with minimum/some product
tailoring
 Vertical integration – different stages of production are
undertaken in different countries
 Conglomerate – produce different products in different
countries
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Degree of internationalization
 License – sell a license to a foreign
Investment/Risk
M&A
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FDI
Local packaging
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Export (subsidiary)
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Export (distributor)
License
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Time
company to produce and sell the
product abroad, obtain a fee
Export – use a foreign distributor,
or set up own distribution center
abroad
Set up own packaging unit to
finish the products abroad
FDI – set up whole production
division
M&A – acquire a whole foreign
company
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Internationalization of PLC
Strategies during PLC:
 In the Intro phase, the
new product generates
increasing revenue
and profit, exporting is
a good strategy
 In the Growth phase, substitutes will emerge, to lower costs, the firm
might shift production where inputs are cheap + exports
 At the Maturity stage, the market is almost saturated, whole production
units will be set in new, developing markets + exports
 At the Decline stage subsidiaries of the firm import the product in the
original market.
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Barriers for MNCs
 Language – in some markets English is barely spoken:
 Africa, Latin America
 Marketing – host culture needs to absorb the product:
 Carrefour &Tesco in China
 Host governments – extensive regulation for MNC
 Dubai
 Communication & coordination – too big MNC deal
with internal bureaucracy
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Advantages for host country
 Employment – MNC’s subsidiaries create many new
jobs
 Balancing the BoP – inflows of money to the economy,
import substitution and export promotion
 Technological spillover – transfer of knowledge,
practice, better production practices
 Taxation revenues – inflow of money to the economy
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Disadvantages for host country
 Uncertainty – MNC might switch host countries easily
 Tax evasion – ‘transfer’ pricing
 Power – MNC may exert power to avoid regulation in
developing countries
 Environmental damage – developing countries, rich in
natural resources, but with weak institutional
framework suffer from environmental damage
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Sources:
 Lecture is based on:
Business strategy in a global economy in
Sloman, J. and Jones, E. (2011) Economics and the Business
Environment (3rd ed) UK: Pearson
 For further reading check:
 http://american-business.org/581-multinational-corporation.html
 UNCTAD – World Investment Report 2010
 КНСБ – МУЛТИНАЦИОНАЛНИТЕ КОМПАНИИ – 2008 (европейски
аспекти на индустриалните отношения)
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