Chapter 1- Multinationals and Global Capitalism

Chapter 1: Concepts

• The University of Cyberjaya is a Malaysian university.
• The course/chapter focuses on multinationals and global capitalism.

Topic/Chapter Learning Outcomes

• Explain the role of multinational corporations in creating global capitalism.
• Discuss three major debates surrounding globalization.
• Explain the concept of multinational corporations.
• Explain the impact of national culture using Hofstede's dimensions.
• Describe four multinational corporations in a comparative analysis.

Globalization Definitions

• Harvey (1989): Globalization is the "compression of time and space".
• Guill'en (2001): Globalization is a process leading to greater independence and mutual awareness among economic, political, and social units.
• Bordo, Taylor, and Williamson (2001): Globalization is characterized by the integration of commodity, labor, and capital markets between countries.
• Kogut (1997): Globalization is the process of increasing integration in world civilization.

The Origins and Extent of Globalization

• Different perspectives exist on the starting point of globalization, ranging from the decades after WWII to the 19th century, or even to the first circumnavigation of the Earth in the 16th century.
• Some scholars argue that globalization began in the ancient world.

Causes of Globalization

• Globalization is driven by advancements in communication and transportation technologies.
• Governments and corporations also play a significant role.
• Globalization is viewed by some as an inevitable process.
• Globalization is not a linear process but rather a complex process with periods of integration and disruption.

Consequences of Globalization

• Globalization, despite some claims of convergence, is associated with greater inequality between countries than in past 100 years.
• Globalization is seen as eroding the sovereignty of nation-states.
• The debate continues on whether mass consumerism is homogenizing global cultures.

Defining Multinationals

• The term "multinational firm" was coined in 1958 by Maurice Byé.
• David E. Lilienthal used the term "multinational corporations" in 1960.
• A multinational corporation is defined as a company with operations and/or income-generating assets in more than one country.

Types of Foreign Investment

•  Foreign Direct Investment (FDI): Involves management control over assets in foreign countries. This may involve acquiring an existing firm or developing a new operation.
• Portfolio Investment: Involves the acquisition of foreign securities by individuals or institutions without direct control over the management of the foreign entity.

Types of FDI

• Equity Arrangement: A company is wholly owned or controlled by another company (parent company or holding company).
• Joint Venture: Involves a partnership, with shared ownership and control.
• Non-equity Arrangement
• Licensing: Independent firms transfer certain technology, rights, or resources.
• Franchising: A company grants the right to another to conduct business in a specific way for a period of time.
• Cartels: Independent firms agree to maintain or limit prices.
• Strategic Alliances: Firms form an agreement to share facilities or cooperate.

Liability of Foreignness

• Crossing borders introduces strategic and organizational complexities (e.g., policies, culture, language, laws).
• This results in a "liability of foreignness" for foreign firms.
• The magnitude of this "liability" depends on the distance between the home country and host country economies. Distance increases costs and risks.
• Four dimensions of distance – Political, economic, geographical and cultural distance.

Impact of National Culture on Business

• National culture comprises a set of values, expectations, and behaviors that are learned, shared, and transmitted.
• National cultures do not always manifest identically within a geographic boundary, but they overlap with regional and corporate cultures.
• Key factors include individual factors (personality, economic, social background), economic conditions, technological advancements, and political factors.
• Cultural shifts occur less rapidly than economic or technological ones and are entrenched in societal practices.
• Hofstede's study identifies five cultural dimensions that differ across countries.

Hofstede's Five Dimensions

• Power Distance: Tolerance for inequality
• Uncertainty Avoidance: Acceptance of uncertainty
• Individualism vs. Collectivism: Importance of individual vs. group interests.
• Masculinity vs. Femininity: Traditional gender roles and values
• Long-Term vs. Short-Term Orientation: Emphasis on the future versus the present.

Impact of National Culture on Business (continuation)

• Individualism is largely observed in English-speaking countries. Collectivism prevails in developing countries.
• Uncertainty avoidance is higher in German-speaking countries and Japan compared to English-speaking countries.
• Long-term orientation is prevalent in East Asian countries.
• Cultural factors significantly influence firm organization.

Multinational in Theory & The Firm

• Ownership and Location Advantages:
  • These advantages influence the choice for multinational expansion.
• Comparative advantages:
  • Comparative advantage focuses on the ability for an economy to create a particular good or service at a lower opportunity cost than its trading partners.
• The Heckscher-Ohlin Theory:
  • Developed a theory for a country's comparative trade advantage. This theory assumed atomistic competition.
• Multinational Ownership:
  • Mainstream economic theorists viewed multinational corporations as arbitrageurs of capital, moving funds from low-return to high-return regions.
  • A breakthrough in understanding multinational ownership came with a PhD thesis in MIT by Stephen Hymer (1960). In his work, he showed FDI involved the transfer of resources (not merely finance) in order to overcome the "liability of foreignness."
• Competitive Advantages: Size, financing, management practices, and access to raw materials.
• Ownership Advantages:
  • Access to superior technology and knowledge.
  • Access to protected technology, via patents.
  • Standardized technological approaches.
  • Branding, and product differentiation.
  • Superior management and organizational techniques.
  • Access to finance.
• Location Advantages: Geographic/physical advantages, tariffs and nontariff barriers to trade, government policies (subsidies, restrictions), spatial distribution of resources, exploitation of natural resources.

Multinational in Theory - Internalization and Boundaries of the Firm

• Coase (1937) theorized that firms and markets represent alternative methods of organizing production, where firms overcome transaction costs by internalizing market transactions.
• Internalization occurs, when firms internalize transactions when the marginal cost is lower than using the market.
• Market failures may prompt firms to consider internalizing various transactions.
• Factors that influence internalization (Asset-specificity, Bounded rationality, and Opportunism).

Internationalization - Electric Paradigm of International Production

• The eclectic paradigm argues that firms choose international production based on the combination of ownership and location advantages.
• Firms consider whether their ownership advantages can be added to a potential foreign market.
• Firms also must consider whether a locational advantage can increase their profitability.

The Eclectic Paradigm of International Production (continuation)

• Ownership-advantages can include product innovations, organizational and marketing systems, and various financial and knowledge resources.
• Location advantages can include the spatial distribution of resources and markets, access to resources, or barriers to trade.
• Incentive advantages include avoiding transaction costs, moral hazards, and broken contracts; ensuring firm reputations, and fostering stability.

Multinational Theory - Knowledge Based Theories of the Firm

• Knowledge-based theories emphasize that companies are collections of knowledge/tacit capabilities that develop from experience; leading to differences in firm organization.
• Firms with superior knowledge and organizational skills are at a greater advantage to compete in international markets.

Multinational Theory - Entrepreneurship

• Entrepreneurship is viewed differently by different theoretical schools of thought.
• Classical economics, in this view, the entrepreneur's main role is to bear risk. More recent theories include Kirzner (1973, 1979) and Schumpeter (1943) who have different perspectives on entrepreneurship.
• Casson (1985) conceptualizes an entrepreneur who makes sound/difficult judgment about coordination of scarce resources. The emphasis is also on the utilization of diverse sources and their exploitation rather than ownership.
• More recent theories suggest different, complementary approaches to understanding entrepreneurship.
• Geographic/locational factors also influence entrepreneurial activity.