Multinational and Globalization Overview

Multinational and Globalization

• The Industrial Revolution led to external circumstances that favored the growth of trade.
• The Industrial Revolution facilitated the unprecedented mobility of labor.
• Imperialism involved the forced movement of people as slaves.
• A rapid increase in cross-border flows of capital occurred.
• British exports of manufactured textiles significantly impacted handicraft industries in China and India.
• Newly industrialized regions sought markets for their products and raw materials needed for expanding populations.
• The end of the Napoleonic Wars (1790-1815) led to a period of relative world peace.
• International trade was stimulated by a shift towards liberal economic policies.
• Tariffs fell to low levels by mid-century.
• International trade grew faster than world output during the late 19th century.
• There were few restrictions on capital movements during this time, and adoption of the Gold Standard was widespread.
• Britain was the largest capital exporter, and London became the global financial center.
• Sterling (British currency) was the world's hardest currency due to its convertibility to gold.
• The Gold Standard reduced foreign exchange risks.
• The Bank of England, Britain's central bank, oversaw the Gold Standard.
• During the 19th century, 60 million Europeans emigrated to the Americas.
• By 1900, 14% of the US population was foreign-born, increasing from 5 million in 1800.
• There were few restrictions on international travel and work.
• Steerage costs fell, making emigration more feasible.
• Income gaps between rich and poor countries decreased.
• Slavery continued in the United States until the 1860s and in Brazil until the 1880s.
• Cross-border movement of indentured labor from Asia occurred.
• Infrastructure projects in the Caribbean, Africa, and elsewhere utilized indentured labor.
• Between the 1830s and World War I, approximately 4 million people, including Indians, Malays, Chinese, were transported globally.
• The United States occupied Cuba and the Philippines following a war with Spain (their former colonial rulers).
• Japan opened its borders to foreigners after the arrival of an American naval force in 1853.
• Japan rapidly modernized and occupied Korea and Taiwan by 1914.
• The British Empire expanded across Asia and Africa during the 19th century.
• France, Belgium, Portugal, and Germany also occupied parts of Africa.
• The Dutch East Indies (Indonesia) was a colonial possession of the Netherlands.

Growth of Multinationals

• Businesses and entrepreneurs built the first global economy.
• There was a new scale and durability to business structures created during the 19th century.
• 1820s - Businesses began to make international investments.
• These investments were sustained without the benefit of monopoly rights.
• During the 1830s, British merchants and bankers formed specialized "overseas" banks.
• This facilitated banking activities into colonies (e.g., Australian, Canadian, and the West Indies).
• Entrepreneurial firms began to establish factories across borders.

Foreign Direct Investment (FDI)

• In 1914, Western Europe (as a region) and Britain were the dominant sources of global FDI.
• FDI was distributed globally, with Latin America and Asia being significant host economies.
• Half of the world's FDI was invested in natural resources.
• A third of FDI went to services like financing, insuring, transportation, and commodity/foodstuff sectors.
• Multinational Manufacturing was mainly concentrated in the industrial economies of Western Europe and North America.

Diversification of Organizational Forms

• Entrepreneurs recognized opportunities in the rapidly globalizing world economy.
• Firms like Siemens and Singer began by adding value to products in their home markets, and later expanded internationally.
• Internal managerial and technological competencies helped sustain these investments.
• Firms employed diverse organizational forms in foreign markets.
• Many ventures were established solely to operate in foreign countries. These were termed "free-standing companies."

Free-Standing Companies

• Thousands of British and other European firms were created exclusively for international operations, with no prior domestic business.
• They were legally incorporated in their home countries.
• Typically small, with a head office, a board of directors, and a few clerical staff.
• Primarily focused on natural resources, services, or processing.
• Many British firms were actively engaged in operations within the United States.
• More than 3/4 (75%) of the 200 Dutch companies in 1914 operated in Indonesia (then known as the Dutch East Indies).

Policy Environment

• The absence of significant international wars reduced the risk of cross-border business.
• The spread of international property law ensured virtual worldwide protection of property rights.
• 17th century bilateral commercial treaties sought protection for alien property and reduced trade risks.
• The established rights of 19th-century foreigners' property could not be taken without full compensation.
• Uncompensated seizures were considered robbery.
• The principles of these laws were supported by European governments and enforced globally.

Drivers of Multinational Growth

• The spread of modern economic growth accelerated the search for raw materials, foodstuffs, and markets for manufactured products.
• The Industrial Revolution in Britain led to capital-intensive industries like chemicals, machinery, and packaged food products.
• Chemicals and electrical production consumed substantial amounts of raw materials (copper, aluminum, zinc).
• The automobile industry developed in the early 20th century, requiring materials like tin for solder and alloys for bearings.
• Petroleum emerged as a substitute for coal, used in trains, steamships, and early automobiles.
• The rapidly growing US market and resources attracted European countries needing markets and resources

Liberal Economic policies

• Government involvement in economic activity declined.
• Most governments treated overseas firms similarly to domestic firms.
• Mid-century saw a partial shift away from this liberalism.
• The McKinley Act of 1890 increased US tariffs on foreign goods.
• The average tariff on protected commodities was 50%. Foreign firms responded by opening their own factories domestically.

Improvements in Transport and Communication

• Increased railroad speed and reliability (1830s).
• Improvements in sailing ship technology resulted in lower freight costs.
• Steamships further expanded trade.
• Construction of the Suez Canal (1869) shortened the route between Europe and Asia.
• The opening of the Panama Canal (1915) further reduced sea journey times and costs.
• The telegraph revolutionized communications (1852-initially between London and Paris).
• Trans-Atlantic cable connections were established (1866-1872).
• This facilitated communications across Europe and with Australia.

Appearance of New Types of Firms

• 18th-century firms were predominantly small, family-owned enterprises.
• Owners were typically held personally liable for all business debts.
• The largest enterprises of the 18th century were chartered trading companies.
• 19th-century legal reforms allowed for new corporate structures.
• Limited liability allowed for larger capital raising.
• Limited liability became fully available in Britain in 1861.

Emergence of the Modern Industrial Enterprise

• Industrial enterprises played a critical role in creating technologically advanced, fast-growing manufacturing sectors.
• Advances in technology and markets were crucial in this modernization process.
• Innovations in transportation and communication (railroads, telegraphs, steamships, cables) made possible the mass production and marketing of goods.

Globalization Challenged and Reversed (1914-1950)

• The start of World War I marked the beginning of the end of the first global economy.
• By 1914, only Britain, the Netherlands, and Denmark remained free-trading countries.
• A backlash against immigration occurred, with the US starting controls around the 1880s.
• In 1901, Australia implemented a policy that nearly halted immigration from Asia and the Pacific islands.
• World War I ushered in significant economic instability.
• Following WWI, countries experienced economic crisis (eg recession).
• The Great Depression ensued in 1929.
• A major worldwide economic shock occurred.
• US real GDP dropped significantly.
• Unemployment rose in developed countries.
• Commodity prices plummeted, severely impacting developing countries.

Backlash against the Global Economy

• National concerns regarding company ownership increased during WWI.
• Governments seized assets of enemy companies.
• The Russian Revolution in 1917 led to the seizure of foreign property.
• Xenophobic policies and political nationalism gained popularity in the 1920s and 1930s.
• Governments in developing countries questioned foreign dominance over their natural resources.
• The Mexican nationalization of oil companies in 1938 was a key example of this trend.

Trade Protectionism Spread

• After WWI, trade protectionism increased substantially, notably in the US.
• US tariffs reached record highs by the early 1920s (Fordney-McCumber tariff).
• Australia, India, and Latin American countries adopted tariffs, quotas, and other trade barriers.
• These measures aimed to protect domestic industries and encourage import substitution.
• The Great Depression (1930s) created a worldwide collapse of the international trading system.
• The Smoot-Hawley Tariff Act in the US further exacerbated the depression.
• Many nations adopted protectionist measures.

Backlash against Migration

• During World War I, passport usage became compulsory in many countries, including the US.
• Restrictions on entering and leaving countries accompanied the increased use of passports.
• Other restrictions and visas were also implemented.
• In the 1920s and 1930s, many countries restricted immigration, further impacting global interconnectedness.