Class Notes 1 2 Chapter 8 Multinational Corporations Foreign Direct Investment Two types of private financial flows Portfolio Investment of stocks of a foreign firm Investors in one country purchase bonds money market instruments or a small amount Foreign Direct Investment establishing affiliates or subsidiary firms in host countries Involves the ownership or direct control of overseas assets Firms I the home country acquire foreign assets by investing in or a Managerial control b Foreign affiliate can be minority majority or affiliate owned What is a MNC HSBC is the biggest company in the world An oligopolistic corporation with ownership management production and sales activates extending over multiple national jurisdictions Multinational invest more when trade is more restricted MNCs and the Theoretical Perspectives Realist Liberals o MNCs as instruments of national power of the home gov t o MNCs are essentially national firms competing with other national firms around the world Positive b c it is a source of development unequivocal good o o MNCs provide external capital new technologies and modern values Marxist socialist o MNCs as the new imperialism o o Instruments of capitalist domination Predatory monopolists They overcharge for their goods services limit the flow of technology create dependency relationships Developing Developed Home X Host X Determinants of the growth of MNCs and FDI MNCs FDI expand more rapidly when There are major advances in communications transportation technology Rapid economic growth o o o National gov t the international system are receptive to such activity o o Capital controls are relaxed Trade protection increases Economic Explanations of MNCs First Locational advantages Natural resource investments Natural resource investments arise from the presence of large deposits of a particular natural resource in a foreign country pg 166 Market oriented investments Market Oriented Investments arise from large consumer markets that are expected to grow rapidly over time the existence of tariff an nontariff barriers to imports is another important consideration for this type of investment By investing inside the country firms ess Efficiency oriented investments 1 Class Notes Second Market Imperfections arise when the price mechanism fails to promote a welfare improving transaction o 2 types of assets Intangible assets Specific assets An asset whose values are derived from knowledge skills know how Difficult for the market to price An asset with a very specific use Creates possibilities for opportunistic behavior once the investment has been made A locational advantage is the necessary condition for FDI o 2 ways to expand Horizontal integration The establishment of plants to make the same or similar goods in multiple locations Vertical integration The production of outputs in some plants that serve as inputs for other plants of the firm The production of components or intermediate goods that are then shipped to another plant for further processing o We re talking about intra firms MNC FDI Vertical integration If a firm earns a substantial share of its revenue from Intangible assets then horizontal integration Specific assets then vertical integration Locational Advantages Yes Type of asset No Intangible Horizontal Specific Vertical Example Apparel MNCs Host Countries Benefits of MNCs o o o o o o o Transfer savings form one country to another Introduce new technology and managerial expertise Provide access to market networks Costs of MNCs Borrow on the Host s capital market rather than bringing investment with them Charge licensing fees and royalties for technology Internal transactions take place at prices set by the MNC o o o o Drives host country firms out of business o Managerial positions closed to host country citizens o MNC s objectives don t match governments objectives o Introduce inappropriate technology October 27 2014 Regulating MNCs Chapter 9 Developed countries have generally been more open to MNCs than developing countries Reciprocity is an element as to why developed countries are most open to Foreign direct investment Japan France are more restrictive to FDI but has changed o Countries that have industrial policies 2 Class Notes o o o o o o o o Developing Countries o What have they done to regulate FDI Expropriation nationalization Most often in extractive industries and public utilities Regulations Performance requirements Export processing zone Locational advantage Cheap labor certain incentive Set up in developing countries by the gov t to promote industrial commercial exports Developed Countries Sectorial restrictions national defense sensitive industries The Obsolescing Bargain Used to understand host state MNC relations The initial investment agreement will strongly favor the MNC over the host state Why The host state is in a week bargaining position b c the MNC can pursue other options the host may need to provide significant incentives to attract the initial investment After the investment is made the bargaining leverage shifts toward the host state Why Sunk cost idea Less likely to apply in situations That do not require large fixed investments Where the MNC is using technology unavailable to the host state Where brand identification is important Locational Incentives Reasons to be there that they are taking advantage of Cheap labor Environmental conditions A Regime for FDI 1970s What do you have to do to join the OECD rich country club G 77 advocates that the UN develop a code of conduct to regulate MNC activity OECD advocates for rules that control host country activity o Organization for economic cooperation development Outcome o Nothing Poor country club UNCTAD 1980s GATT TRIMs Trade related investment measures limited o o Having to buy more of the source material at the local markets o Regulating the host countries mainly Host countries would want to be able to prevent the companies from sending Bilateral investment treaties BITs o Most successful b c it is bilateral o Regulates activities of their firm in the others country 1995 OECD members begin negotiating a MAI o WTO was born 3 Class Notes Multilateral Agreement on Investment 3 dimensions 1 Protection for foreign investors a Compensation for expropriation seize assets b Freedom of investors to transfer profits dividends 2 Liberalization of investment a Most favored nation status b National treatment for foreign investors 3 Dispute settlement procedures a Binding