12 7 14 1 28 PM 10 20 Multinational Corporations and FDI Chapter 8 MNC a firm that controls and manages production establishments plants in at least two countries Two types of private financial flows o Portfolio investment investors in one country purchase bonds money market instruments or a small amount of stocks in a foreign firm o FDI Firms in a home country acquire foreign assets by investing or establishing affiliates or subsidiary firms in host countries Involves the ownership or direct control of overseas assets o What is a MNC An Oligopolistic corporation with ownership management production and sales activities extending over multiple national jurisdictions MNCs theoretical perspectives Liberals MNCs as a source of development o Provide external capital new technologies and modern values Marxists MNCs and the new imperialism o Instruments of capital domination o Predatory monopolists They overcharge for their goods and services limit the flow of technology create dependency relationships Realists MNCs as instruments of national power of the home government o MNCs are essentially national firms competing with other national firms around the world 10 22 Multinational corporations and foreign direct investment Determinants of the growth of MNCs and FDI MNCs and FDI expand more rapidly when o There are major advances in communications transportation and technology o There is rapid economic growth o National governments and the international system are receptive to such activity o Capital controls are relaxed o Trade protection increases Economic explanations of MNCs First Locational Advantages o Natural resource investments o Natural resource investments arise from the presence of large deposits of a particular natural resource in a foreign country pg 166 o Market oriented investments o 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 essentially jump over such barriers to produce and sell in the local market pg 166 167 o Efficiency oriented investments o Efficiency oriented investments arise from the availability at a lower cost of the factors of production that are used intensively in the production of a specific product In these efficiency oriented investments parent firms allocate different stages of the production process to different parts of the world matching the factor intensity of a production stage to the factor abundance of particular countries pg 167 Second Market Imperfections o Two types Intangible asset and asset whose value is derived from knowledge skills know how Difficult for the market to price pg 168 Horizonal Specific assets and asset with a very specific use Creates possibilities for opportunistic behavior once the investment has been made pg 170 Vertical A Locational advantage is the necessary condition for FDI o Two ways to expand Horizontal integration the establishment of plants to make the same or similar goods in multiple locations pg 168 Vertical integrations The production s of outputs in some plants that serve as inputs for other plants in the firm The Production of components or intermediate goods that are then shipped to another plant to further processing pg 169 If a firm earns a substantial share of its revenue from o Intangible assets then horizontal integration o Specific assets then vertical integration Locational advantages tell us that cross boarder activity will be profitable whereas market imperfections tell us that the firm can take advantage of these opportunities only by internalizing the transactions within a single corporate structure MNCs and Host Countries Transfer savings from one country to another Introduce new technology and managerial experience Provide access to market networks Cost of MNCs o Borrow in the host s capital market rather than bringing investment with them o Charge licensing fees and royalties for technology o Internal transactions take place at prices set by the MNC o Drives host country firms out of business o Managerial positions closed to host country citizens o MNCs objectives don t match Gov objectives o Introduce inappropriate technology Regulating MNCs 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 Countries that have industrial policies Developing Countries What have they done to regulate FDI o Expropriation nationalization o Most often in extractive industries and public utilities Regulations Performance requirements Export processing zone o Locational advantage Cheap labor certain incentive o Set up in developing countries by the gov t to promote industrial commercial exports Sectorial restrictions national defense sensitive industries Developed Countries The Obsolescing Bargain Used to understand host state MNC relations o Obsolescing bargain Bargaining power SHIFTS to the host country the MNC cannot easily remove its fixed investment from the country so the investment becomes a hostage Pg 189 The initial investment agreement will strongly favor the MNC over the host state Why After the investment is made the bargaining leverage shifts toward the host state Why Sunk cost idea B c the host state 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 A Regime for FDI Locational incentives are a package host countries offer to to MNCs that either increase the return of an investment OR reduce the cost of an investment 1970s 1980s G 77 advocates that the UN develop a code of conduct to regulate MNC activity OECD advocates for rules that control host country activity What do you have to do to join the OECD rich country club Organization for economic cooperation development Outcome Nothing Poor country club UNCTAD GATT TRIMs Trade related investment measures limited Having to buy more of the source material at the local markets Regulating the host countries mainly Host countries would want to be able to prevent the companies from sending Bilateral investment treaties BITs Most successful b c it is bilateral