Multinational Corporations and Globalization
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Questions and Answers

Which factor does NOT define multinational corporations in relation to their economic performance?

  • Size of profits from foreign direct investments
  • Sales volume registered by domestic subsidiaries (correct)
  • Absolute or relative share owned in foreign production
  • Number of employees recruited from foreign workers

What does the economic criterion for defining multinational corporations NOT include?

  • Share of foreign assets
  • Size of profits from foreign investments
  • Volume of sales reported abroad
  • Total production obtained domestically (correct)

What accurately describes the role of management in a multinational corporation according to the behavioral criterion?

  • Ability to standardize operations across all countries
  • Capacity to implement localized strategies effectively
  • Focus on minimizing costs rather than maximizing market reach
  • Skill in adopting international strategies for optimal opportunities (correct)

Which type of foreign production focuses on acquiring specific high-quality resources?

<p>Natural resource seekers (C)</p> Signup and view all the answers

Which of the following is NOT a factor prompting natural resource seekers to invest abroad?

<p>Expanding into new market territories (C)</p> Signup and view all the answers

Access to the capital markets is considered a type of property for which of the following reasons?

<p>It strengthens relationships with financial institutions (A)</p> Signup and view all the answers

Which of the following is NOT considered a location-specific factor influencing foreign direct investment?

<p>Internalising moral hazards (D)</p> Signup and view all the answers

What is one key capability a multinational corporation must have under the behavioral criterion?

<p>To adapt strategies for regional or international use (D)</p> Signup and view all the answers

What defines market seekers in their foreign investment strategies?

<p>Supplying goods or services to adjacent markets abroad (A)</p> Signup and view all the answers

What is a potential benefit of internalising advantages in foreign direct investment?

<p>To avoid costs of moral hazard (B)</p> Signup and view all the answers

How do economies of agglomeration benefit multinational enterprises?

<p>By pooling resources and generating spillover benefits (B)</p> Signup and view all the answers

What is an example of a market failure that multinational enterprises might seek to circumvent?

<p>Search and negotiating costs (A)</p> Signup and view all the answers

Which of the following represents a disincentive for investment in foreign markets?

<p>Low infrastructure quality (B)</p> Signup and view all the answers

Which factor does NOT typically influence the quality of inputs in foreign direct investment?

<p>International communication costs (A)</p> Signup and view all the answers

What is the primary reason for a seller to protect the quality of their products in FDI?

<p>To avoid adverse selection (C)</p> Signup and view all the answers

Which of the following is a characteristic of artificial barriers to trade?

<p>Include import controls (D)</p> Signup and view all the answers

What are ownership advantages in the context of foreign direct investment (FDI)?

<p>Rights to specific technologies and factor supplies (B)</p> Signup and view all the answers

Which of the following best describes locational advantages?

<p>Proximity to markets and availability of cheap labor (C)</p> Signup and view all the answers

What do international advantages primarily evaluate in FDI?

<p>Whether expansion should occur within or outside the firm (C)</p> Signup and view all the answers

What is considered under ownership-specific advantages?

<p>Product innovations and marketing systems (C)</p> Signup and view all the answers

Which factors are included in internalization advantages?

<p>Costs of negotiation and opportunism (A)</p> Signup and view all the answers

How can favorable governmental policies impact locational advantages?

<p>By providing investment grants and tax incentives (A)</p> Signup and view all the answers

Which of the following is least likely to be classified as an ownership advantage?

<p>Proximity to raw materials (A)</p> Signup and view all the answers

Which aspect does NOT represent a locational advantage?

<p>High costs of local transportation (C)</p> Signup and view all the answers

What is a characteristic of multinational corporations regarding their operations?

<p>They tend to be centrally controlled by parent companies. (D)</p> Signup and view all the answers

According to the World Bank, how many countries must a corporation operate in to be defined as a multinational corporation?

<p>At least 5 countries. (A)</p> Signup and view all the answers

What role do multinational corporations play in global trade?

<p>They are a major force in the rapid globalization of world trade. (D)</p> Signup and view all the answers

Which of the following statements best describes the sales volume of many multinational corporations?

<p>Their annual sales volume often exceeds the GDP of the developing countries they operate in. (A)</p> Signup and view all the answers

What is one of the patterns observed in multinational corporations concerning product sales?

<p>About one-third of international exchange involves intra-MNC sales of intermediate products. (D)</p> Signup and view all the answers

What is the primary motivation behind efficiency-seeking foreign direct investment (FDI)?

<p>To rationalize resource-based or market-seeking investments (B)</p> Signup and view all the answers

How do efficiency seekers benefit from foreign direct investments?

<p>By reducing operational risks through centralized management (C)</p> Signup and view all the answers

What type of MNEs engage in FDI to promote their long-term strategic objectives?

<p>Strategic asset or capability seekers (D)</p> Signup and view all the answers

What is the main aim of the eclectic model regarding foreign direct investments?

<p>To offer an objective understanding of capital flow abroad (C)</p> Signup and view all the answers

What does eclecticism in the context of FDI refer to?

<p>The combination of multiple viewpoints to explain economic phenomena (A)</p> Signup and view all the answers

Flashcards

Multinational Corporation (MNC)

A company that operates and makes decisions in multiple countries, exceeding a minimum number of 5 countries, according to the World Bank.

Foreign Direct Investment (FDI)

A company that invests directly in a foreign country to control and manage its operations.

Globalization

The process of interconnectedness and interdependence between countries, driven by trade, investments, and technology.

Intra-MNC Sales

Sales of products or services between different parts of a multinational corporation within different countries.

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Economic Role of MNCs

The significant impact that multinational corporations have on the global economy, making them a driving force in its growth and transformation.

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Efficiency-Seeking FDI

Foreign direct investment (FDI) motivated by streamlining existing resource-based or market-seeking investments to gain economies of scale, scope, and risk diversification.

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Strategic Asset or Capability Seekers

Companies that invest abroad (FDI) to acquire assets of foreign companies, aiming to improve long-term strategic objectives and bolster global competitiveness.

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Eclectic Model of FDI

The eclectic model of FDI seeks to offer a comprehensive view of the international flow of capital, particularly when it involves foreign direct investment.

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Eclecticism

A theoretical approach that combines various points of view and concepts to explain a complex phenomenon, like foreign direct investment.

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OLI Paradigm

The OLI paradigm (Ownership, Location, Internalization) is a framework that analyzes the motivations and conditions behind foreign direct investment. It focuses on three key factors: ownership advantages, location advantages, and internalization advantages, which together explain why firms choose to invest abroad.

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Natural Resource Seeker

A company that invests abroad specifically to acquire raw materials or resources that are difficult to obtain or more cost-effective than those available in its home country.

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Market Seeker

A company that invests abroad to target a new market in another country or region. This market could be in the same country or in neighboring countries.

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Labor Seeker

A company that invests abroad to gain access to cheaper labor costs, especially in cases where the labor required is unskilled or semi-skilled.

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Knowledge Seeker

A company that invests abroad to gain access to specialized knowledge, technology, or management expertise that is crucial for its operations.

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International Strategic Management

The ability of a multinational corporation's management team to develop and implement strategies that operate across various international markets.

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Global Opportunity Identification

The ability of a multinational corporation to recognize and capitalize on profitable opportunities that arise in the global marketplace.

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Share of Production Abroad

The proportion of a multinational corporation's total production that originates from overseas subsidiaries.

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Sales Volume Abroad

The total revenue generated by a multinational corporation's subsidiaries operating in foreign countries.

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Ownership Advantages

Factors unique to a company that allow it to expand internationally, such as superior technology, industry knowledge, or financial resources.

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Locational Advantages

Factors that make a particular location attractive for a company to invest in, such as low labor costs, access to resources, or government incentives.

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Internalization Advantages

Advantages that arise from a company choosing to directly manage its foreign operations rather than licensing or outsourcing.

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Property Rights and Intangible Asset Advantages

These advantages relate to a company's unique assets, such as patents, trademarks, or proprietary knowledge.

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Advantages of Common Governance

These advantages derive from a company's ability to combine different assets, such as technology, production, and marketing, to create a competitive edge.

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Institutional Assets

These advantages stem from the formal and informal rules and institutions that govern a company's operations and relationships with stakeholders.

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Costs of Negotiating, Opportunism, Uncertainty, Taxes and Tariffs

These advantages refer to the costs associated with negotiating contracts, managing risks, and enforcing agreements in international operations.

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Eclectic Theory of FDI

This theory explains why companies choose to invest directly in foreign countries, arguing that companies need a combination of ownership, locational, and internalization advantages to be successful.

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Internalisation Advantages (I)

The benefits a company gains from operating within its own organizational structure, rather than through market transactions. Examples include avoiding market inefficiencies, protecting proprietary knowledge, controlling supply chains, and coordinating interdependent activities.

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Location-Specific Factors (L)

Factors related to specific locations that can benefit a foreign direct investor. These include access to natural resources, skilled labor, favorable infrastructure, government incentives, and market size.

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The Eclectic Theory of FDI

The eclectic theory of FDI explains why companies choose to invest directly in foreign countries. These factors include internalisation advantages, location-specific advantages, and ownership advantages.

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Ownership Advantages (O)

The benefits a company gains from its unique assets, resources, or capabilities, including its brand, technology, management expertise, or access to specific markets. These advantages give a company a competitive edge when operating abroad.

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Internalisation

A business strategy that aims to reduce or eliminate market imperfections by bringing activities within a firm's own control. This can be done through mergers, acquisitions, or establishing wholly owned subsidiaries.

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Economies of Agglomeration

The reduction in costs or increase in efficiency gained by concentrating related activities in a single location. Examples include sharing resources, knowledge transfer, and economies of scale.

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Positive Spillovers

The benefits that spill over from one company to another, such as knowledge sharing, technology transfer, and workforce development. These can positively affect the overall economic performance of a region.

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Political Risk

The risk of a foreign investor losing control of its investment or being subject to unfair treatment by the host government. This includes factors like regulatory uncertainty, expropriation risks, and the inability to fully enforce contracts.

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Study Notes

Multinational Corporation Activity and Globalization

  • Multinational corporations are a significant driver of global economic interconnectedness.
  • The lecture focuses on how multinational corporation activity influences economic globalization.

Lecture Structure

  • The complexity of multinational corporation frameworks in the current global context is examined.
  • The expansion of corporations within global economic mechanisms is explored.
  • The economic importance of multinational corporations in the global economy is evaluated quantitatively.

Definition of a Multinational Corporation

  • A multinational corporation (MNC) is a company that engages in foreign direct investment (FDI) and organizes the production of goods and services in more than one country (Dunning, 1993).
  • MNCs are large, with operations and activities centrally managed by parent companies.
  • They are significant players in the global trade system.
  • Intra-MNC trade (sales of intermediate products between subsidiaries) accounts for a substantial portion of international exchange.
  • MNCs frequently operate globally as global factories.
  • Many MNCs have annual sales exceeding the GDPs of developing nations.

Criteria Used in Defining Multinational Corporations (1)

  • Structural criterion: Based on the number of countries an MNC operates in (at least five, according to the World Bank) and the control it exercises over its foreign entities.
  • Property criterion: Assesses the percentage of assets held abroad and the presence of subsidiaries across different countries.
  • Also examines the presence of patents, innovation factors in production in subsidiaries, access to capital markets and the presence of strong relationships with financial institutions, and aspects of employee training and marketing strategies tied to the multinational corporations.

Criteria Used in Defining Multinational Corporations (2)

  • Performance criterion: Assesses economic parameters like the share of production in total production from foreign operations, sales volume, number of employees, profits generated by foreign operations, foreign asset share in total assets, and the level of internationalization.
  • Behavioral criterion: Evaluates management's ability to implement efficient strategies on a regional or global scale, encompassing opportunities within the global market.

Main Types of Foreign Production

  • Natural resource seekers: Companies invest abroad to obtain valuable natural resources at a lower cost than domestically. This can include searching for materials, labour supplies and other resources.
  • Market seekers: Firms invest abroad to enter new markets and potentially use local resources in production.
  • Efficiency seekers: MNCs seek economies of scale and avoid geographic risks through efficient organization of dispersed activities.
  • Strategic asset seekers: Companies invest abroad to acquire valuable assets (technology, brands, etc.) from foreign entities to build their capabilities and promote their global competitiveness.

The Eclectic Theory of FDI

  • Eclectic model: Aims to provide an objective perspective on the international movement of capital as foreign direct investment (FDI). This blends different theoretical viewpoints and diverse concepts to explain FDI by capturing the complexities of motivations.
  • Eclecticism: Combining various perspectives to explain a complex economic phenomenon.

The Eclectic Theory of FDI (factors determining firm prosperity)

  • Ownership advantages: Specific capabilities and resources (technology, skills, patents) allow a particular firm to expand into new markets.
  • Locational advantages: Advantages found in particular locations like cheap labor, abundant resources, proximity to markets and governmental support influence strategic expansion decisions..
  • Internalization advantages: Reasons to prefer internalizing activities (e.g., through FDI) over market mechanisms to avoid problems or exploit advantages.

The Eclectic Theory of FDI (Ownership Specific Advantages)

  • Firms with unique property rights, intangible assets, production management, organizational, and marketing systems, innovative capabilities, knowledge, and accumulated experience have competitive advantages in the market.
  • Common governance advantages combine these advantages with complementary assets and take advantage of differences in factors and governmental rules across locations.

The Eclectic Theory of FDI (Location Specific Advantages)

  • Spatial distribution of natural and created resources, resource endowments, markets, input prices, productivity levels, the cost of transport and communication, governmental incentives, and differences in regulations, cultures and infrastructure all affect a company's choices regarding where to locate operations.

The Eclectic Theory of FDI (Internalization Advantages)

  • Search and negotiating costs are avoided through internalization.
  • The reputation of the firm and the firm's internal management of projects and investments are protected from external conflicts such as broken contracts.
  • Issues like buyer uncertainty in evaluating products or inputs (such as technology), economies of scale in interdependent activities, and issues concerning the absence of markets all influence how MNCs decide to operate.

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Description

This quiz explores the role of multinational corporations (MNCs) in driving economic globalization. It examines the frameworks of MNCs in the global context, their expansion, and quantitative evaluations of their economic importance. Understand the complexities and patterns of MNC activities in today's interconnected world.

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