Economic Globalization and Human Rights PDF

ECONOMIC OF GLOBALIZATION AND HUMAN RIGHTS MODULE 1 WHAT IS ECONOMIC GLOBALIZATION? One actor is the core object of the analysis: multinational enterprises. Ngozi Okonjo-Iweala is the Director General of the World Trade Organisation (WTO). De...

ECONOMIC OF GLOBALIZATION AND HUMAN RIGHTS MODULE 1 WHAT IS ECONOMIC GLOBALIZATION? One actor is the core object of the analysis: multinational enterprises. Ngozi Okonjo-Iweala is the Director General of the World Trade Organisation (WTO). Defining economic globalization XIX century concept, but the beginning of modern globalization goes back to the wheat. The beginning of globalization is undateable , but it is related to wheat and its economic value. There are many points of view on the topic, but talking about the price of this fundamental food is one of the basis. Before that period the standard situation was one of having national boundaries and the price was settled in the meeting of demand and supply. This means that every country can have different pricing for every type of goods and the prices were very sensitive to the national conditions. Possibly negative shocks could affect the price of the food, in this case there’s usually a shortage of supply because of weather conditions and so on (the supplied quantity decreases). If demand remains stable and supply decreases, the price increases because of shortage of supply or excess of demand. The prices increase not due to companies intentions, but due to different external dynamics. A country like England was using wheat, but we won’t think of it as the ideal country. England was the US of today, it was one of the most important because of its military, economic and social conditions. The price volatility is particularly dramatic and raises an issue: if a country cannot trade, the boundaries of the country are close to the merchandising, the price goes up and influences consumers. We cannot talk about a globalized world if the prices were fixed on a national level and if there are boundaries. At the beginning of the XIX century, in case of a negative shock, a country can compensate by importing from other countries like it happened to GB with the importations from USA (the price can be much more stable and the price volatility decreases). The price of wheat starts to be set in the international market because of trade flows between countries. The kick-off 1820s: when the price of wheat inside Britain started to be set by international supply and demand. Before the 1820s: food/commodity prices moved according to changes in domestic supply and demand conditions (e.g., a crop failure or bumper crop). Once the volume of international trade was large enough a crop failure would lead to a lot of imports into a country rather than prices rising. The consequences of this process: when countries had the chance to import, the working field was affected. The possibility to buy and sell goods globally had revolutionary effects on domestic economies, especially on jobs. Large imports of cheaper food from the US led many UK workers to shift from agriculture (import-competition sector) to manufacturing (textile export sector). David Ricardo’s comparative advantage. 1776, Smith raised criticism against core laws adopted in GB to protect the landlords using tariffs on imported corn, favoring national production, this to keep prices high and protect national production. Even though England had no comparative advantage in producing corn. The idea of absolute advantage started from the critique of this kind of law. A country like England doesn’t have any course if the corn production is protected by law and from international competition, working in the sector can be profitable. Smith was favorable to this. The corn laws were adopted for many years perpetuating the inefficiency between countries. Things started to change when globalization took place because the price was lower (beneficial for society, but introduces a change in the national economy structure). This change in the structure of the economy brought some sectors to become less attractive such as agriculture. People started to move to cities because there were factories thanks to the Industrial Revolution. Richard Baldwin’ view Baldwin R. (2016) wrote The great convergence, Harvard University Press. For me globalization developed along four phases. - Humanizing the globe - Localizing the global economy - Globalizing local economies - Globalizing factories The first phase, humanizing the globe: 200,000 – 10,000 BC. Migrations were forced because of climate change: people to move away from Africa because consumption follows production. Production and consumption (of food) spatially bundled but not in fixed locales. Little trade makes it easier to move people to food than food to people. Long period of increasing and burgeoning population discovering new, and distant, production sites. It was easier to move people to food than food to people. There was no globalization, but the seeds were planted. The second phase, localizing the global economy: 10,000 BC – 1820 AC. The agricultural revolution anticipated the Industrial Revolution.Agricultural revolution food was brought to people rather than vice versa. Trade is still limited and difficult. First bundling of production and consumption in specific locations. Rise of cities and ancient civilizations in Iraq, Iran, Turkey, Egypt, China, India, Pakistan, Greece, and Italy. Trade emerges among these production/consumption clusters, but modern globalization has not started yet. Prices inside nations are still determined by local supply and demand condition. trade was emerging, bringing food to people who were increasing, but prices were settle within the countries. Focus on the agricultural revolution. Enclosure in Britain in XVII-XVIII century fencing of land that used to be open. Britain was one of the main advanced countries in the world. The process of enclosure of land: before people were used to sharing land, but after the enclosure property was distributed among people and family members who had the rights on lands, moreover the countryside started to be closed. This also brought an end to access for many rural families to common lands. The limits made people have less land rights. The ‘cash cow’of the day became raising sheeps because it was much cheaper than rising a cow and labor-saving than raising food. This institutional change was prodromic to the third phase. The third phase is about globalizing local economies: 1820 – 1990 First and second Industrial revolutions: steam engine and electricity radically changed mankind’s relationship with the environment (urbanization, mass production, high production and control of energy...). The two revolutions were anticipated by the scientific revolution. The scientific method was testing the hypothesis and data in order to share the knowledge to peers and to make it more understandable for society. This made it possible for scientists to meet mechanical engineering and collaborate with the entrepreneurs and staff equipment. Radically better transport conditions make it cheaper to move goods and consume goods made faraway production concentrates (agglomeration) while international trade explodes. Countries can concentrate their resources on what they can do their best and trade for the rest. Nations «do what they do best and trade for the rest». England's production of food wasn’t very good, so it traded it, but it exported manufactured goods. At the time of the Industrial Revolution they were produced in a very highly efficient way and they were used as a base to import food, spices and machinery that gland could not produce very efficiently. Globalization went hand in hand with industrialisation and so, by consequence, to urbanization. These phenomena were intertwined and they mutually explained each other. This is the period where income levels in opportunities between the industrialized north and the developing south. Productivity surges in the advance to the North. Industrialization agglomeration, innovation circle brought to a big North-South divide. Knowledge imbalance leads to an unprecedented divergence in incomes, the so-called Great Divergence. The fourth phase is about globalizing factories: 1990 – present ICT revolution in the 1980s-90s made it easier to move goods, services, capital assets, technology, ideas and to coordinate complex processes across great distances. It’s a period of great convergence and there are rising opportunities to catch up with the south. At that time, the north started to de-industrializing in favor of service economies, relocating industries to the global south. Micro Clustering of production and North-South Offshoring. The North deindustrialized while some countries in the South industrialized Big jump of world GDP Great Convergence in the level of income between north and south. Great economies such as Russia, India, China, Brazil. The road of globalization is a matter of decreasing costs. Three costs that are relevant: 1. Trade costs 2. communication cost (cost of sending information across territories) 3. personal contacts (share knowledge, meeting and exchanging ideas) Globalization started when these costs started to decrease. The first costs to decrease were the trade cost with the creation of the boat and the ship (GB could ship across GB to the US in a couple of weeks). Telegraphs brought a decrease in communication costs. The last one to decrease were personal costs. What is (economic) globalization? Economic "globalization" is a historical process, the result of human innovation and technological progress. It refers to the increasing integration of economies around the world, particularly through trade and financial flows. The term sometimes also refers to the movement of people (labor) and knowledge(technology)across international borders. There are also broader cultural, political and environmental dimensions of globalization Four pillars that characterize globalization: 1. Trade (exports & imports of goods and services) 2. Capital movements (foreign direct investments) 3. Movement of people (migration) 4. Spread of knowledge (technology transfer) Trade is crucial and is underlining all the other elements, but there are other features that are really relevant to globalization. International trade On the axes: time series (trend) and billion of dollars. Trade across time: trade dynamics in different macro areas. The general trend is the increase that the countries faced. The increased trade isn’t homogeneous: for some countries the increase is much smoother than for others that have a sharper increase. In front of an exponential increase, there is a period of decrease almost in each  country. Afterwards there is a recovery. Financial crisis, pandemic, economic crisis or events could bring a decrease in the trade. Developing countries as a whole have increased their share of world trade – from 19% in 1971 to 29% in 1999. But there is great variation among the major regions. For instance, the newly industrialized economies (NIEs) of Asia have done well, whileAfrica as a whole has fared poorly. UNCTAD, Handbook of Statistics 2023 - worldwide merchandise exports, 2007-22 A merchandise export: what countries sell to others, in particular manufacturing goods. United Nation Conference on Trade and Development (UNCTAD) is a very famous international actor that provides all the data on trade and on investments. If we take again the collapse of of exports in this case, because the crisis of 2007, we can see that there was then a rebound. Then there is still a sharp increase and a short decrease, and this is more related to the energy price that on 2015-2016 viewed China deciding to reduce imports from outside. The trend is definitely increasing by 11% in merchandise exports, which is a huge increase and there is also a growing trade deficit in developed economies. By 1.6 trillion of US dollars = it means that this is this countries are importing more than exporting. The distribution of merchandise trade: it is the annual growth rate, so 2021 to 2022, looking at the balance of exports and imports, here you see the numbers the might be of this growth, here you can see differences within developed economies and developing economies. There is an immediate striking difference between these two blocks of country: so developed economies are the north and developing economies are the south. 1. Developed economies: the imports grew more. 2. Developing countries: the exports grew more First, this explains the trade balance. But also, if we unpack developing economies (Africa, Americas and Asian and Oceania), we clearly see differences in driving this performance. For Africa in America, the growth weight of export is dominated by the growth rate of import. In all, dynamic terms means that these areas are importing more than what they are exporting in value, in terms of US dollars. Whereas the opposite is characterizing Asian economies which are exporting more. If we measure the difference between the amount of exports and the amount of imports we can distinguish between developing and developed economies. The second graph, 2018-2022: we can see two informations: 1. The two blocks of countries are very different. Developed countries are facing a trade deficit because they are importing more than exporting. While developing countries are exporting more than importing. 2. There is an increasing dynamic: the trade deficit is increasing overtime for developing countries and its trade balance is increasing in the last 5 years. Trade structure by product Green: food items Red: agricultural raw material Light blue: fuels Light red: manufacturing goods Blue: metals We can unpack by single countries the performance of exports in 2022: trade makes us talk about manufacturing firstly. Germany has the largest manufacturing industry in the world after China. Africa: there is no manufacturing at all, for instance. It's much more fuel and raw materials, and it's the same for Australia and LA. Manufacturing is concentrated in the USA, UE and Asia (China and India). However, manufacturing is not the only one, the most recent trend and probably the trend that will emerge more rapidly in the following years is this one is service trade. This is the growth rate of work service exports in trillions of US dollars. First of all, there is an increasing trend and this trend is increasing very rapidly after the pandemic. And the projections are for an increase in service trade even more. If you look at these numbers on the left and you compare these numbers with those of manufacturing trade, the two are not comparable. These are much lower numbers. So still 90% of trade is manufacturing trade, and 10% is service trade. They say the international services account for 7% of world GDP. But developing economies are still lagging behind as they share the lowest market share, but they are rapidly increasing, so now they are serving 30% of the global market. So 70% of the global market is served by advanced economies, US first. Worldwide service exports, 2007-22 The export of services in developing economies is overcoming the imports. Whereas the other way around is where developed economies are. The difference with respect to manufactory is that now all the regions are performing well in this respect (Africa, Asia and Americans). If we look at the top five service exporters in 2022, you see that if we look at the developed economies here where you can compare 2021 to 2022, you see that the United States and the United Kingdom are dominating, with Germany, Ireland and France. But if you look also at the developing economies, you see clearly that the amount of service export is not comparable with that of the United States or even the United Kingdom, perhaps, but still they are approaching very fast (China and India are approaching the USA really fast). In terms of services, you can trade: There are different specialization patterns: developed countries are much more concentrated in ICT, intellectual property and business services; whereas developing economies are more concentrated in transport and travel. Capital movement The amount of trade has increased sharply in some parts of the world, but it is not only a matter of exchange of merchandising and services but also of flows of capital assets/movement. Capital movement is a matter that characterizes an advanced economic system, it's not only a matter of moving money from one border to the other. It is reflected in financial flows (movement of currencies). It is a macro fact that, at least the economic system, witnessed a sharp increase in private capital flows to developing countries after the 1990s. An increase after a period of “dry” in the 1980s protectionist reaction to the 70s inflation, Vietnam war, oil shocks, Bretton Woods. The 80s were characterized by the reaction of the 70s and it was characterized by the first hard policies to liberalize capital force that made transactions across borders easier, cheaper, and without barriers. Significant fall in net official flows of “aid” or development assistance since the 1980s. Change in the composition of capital flows: upsurge of foreign direct investments, while portfolio and bank investments increased as well but are more volatile. From the 70s to 1999: net official flows. Official flows means that there are flows of money and funds that are provided by governmentments (public aid). These public aids increased throughout the 70s and beginning of the 80s, but then they started decreasing and collapsing going close to zero. The positive net of official flows means that the developing economy is attracting more international goods from other countries than the goods that are sent to the other countries. The dash line reflects the capital flows that increase as much as the public one in the 80s and then they restart. the picture in the 90s: there's a decrease in the amount of other funds received by developing categories, but there is a need to increase the price. When we look at the driver components, we distinguish among three main investments, the direct investment, portfolio investment and other types of investments. Portfolio investments are important but nonexistent until the 90s. The story of the late 80s and 90s is where our story begins. The story begins considering the devolving countries started receiving less and less of public aid and more and more as private investments. This private investments were mainly of two types: 1. Portfolio investments = private investment made for speculative reasons (bond acquisition/private societies). They are highly volatile since they follow the market fundamentals (interest rate, risk profile of a country). These are shorter investments, 1/5/10 years length usually. 2. Direct investment = they keep rising with a less higher volatility, they are much more stable in rising: they keep rising and their profile is much less volatile. Relevant and sharp increases which sometimes rise more rapidly than the growth of trade. It’s becoming more and more relevant especially starting from the 90s, attracting private investments and among them this direct investment is becoming the major part. The developing economies are starting from the 90s and attracting private investments and among the private investment is direct investment is becoming very, very relevant. Movement of people We are not talking about the moving of people in this course. We have to consider that the most migration occurs between developing countries until the 1990s. Afterwards, there is increasing South-North migration flows (not just about refugees). For statistics: IMO World Migration Report 2024 (see Reading Materials on Moodle). Number that is increasing over time, this can be underestimated since lots of people were not tracked. When we talk about migration we tend to think about refugees or poor people escaping for poor living conditions. However we should not forget that human capital migration is another type of migration of talented and graduated young people. Human capital migration, an interesting phenomenon since it involves young people and it’s not only a matter of south-north flows. The talent ranking in terms of attractiveness. Spread of knowledge Information exchange is an integral, often overlooked, aspect of globalization. This is the most recently analyzed feature. For instance, direct foreign investment brings not only an expansion of the physical capital stock but also technical innovation and transfer of knowledge. This technology transfer can take different forms or might happen through different channels and mechanisms: 1. direct investments, that are not referring just to money, but also to capital assets flows that are not necessarily tangible (an intangible capital asset is technology). 2. Also scientific collaboration, that increased over time, is relevant to this topic. There was an increase in overtime between universities, between research labs and centers, between companies both formal and informal, thanks to the ICT revolution that helped transfer information easier and cheaper. 3. Offshoring of research and development: are the most knowledgeable stages of the value chain of the production process of companies. R&D means prototyping, design, projecting, engineering, all this highly knowledge intensive and strategic affiliates of the company. Increasing technology transfer since the 1990s scientific cooperation, co-patenting, R&D offshoring, distance learning. Usually, at least until the 70s-80s, R&D was traditionally accomplished in-house where enterprises were located because it was risky to move some kind of activities and it was relevant to keep it inside the company. It is linked to knowledge about production methods, management techniques, export markets and economic policies is available at very low cost, and it represents a highly valuable resource for the developing countries. There is a calculation of the level of geographical concentration of R&D expenditures. If the indicator approaches zero, many different companies are approaching R&D, while if it approaches the 1 it means that R&D is concentrated in one company. This level was approximately reached from one country: the USA. If many different companies do R&D, it’s more democratically distributed. It’s very close to one in 1999 (just US) but then there was a decline and concentration in few areas. The graphic shows that the decrease stopped in 2012. R&D is spreading across different countries and they are not necessarily advanced economies, but they are emerging or developing economies (China, Israel, India) that attract R&D activities. Examples: US automotive industry. Delphi Automotive is a multinational that by the end of the 90s decided to create a technical center from Indiana to Ciudad Juarez, Mexico. It was also a matter of high investments by the region in increasing the human capital of the population and the possible potential labor force, just for contracting this kind of activity. These activities are not normal activities, but highly knowledgeable intensive activities. It was quite successful, because they were providing: Engineering and development Product and process design Project management Training Invented more than 200 patents since 1998. DRIVING FORCES OF GLOBALIZATION There are many different factors that contribute to the push of globalization. 1. Liberalization of capital movements and deregulation of financial services in particular (from mid 1990s) that occurred in many countries as a reaction to the dramatic events of the 70s. The 80s were characterized by right wing political emergence such as Margaret Thatcher and Reagan are two of the most known, but also Argentina and Brazil. The financial deregulation means decrease the barriers of capital movements (lower controls, less stringent requirements, no working restrates) and attracting investments. 2. Further opening of markets to trade and investments ➔ decreasing trade barriers and tariffs. 3. Key role of ICT due to the ICT revolution 4. Emergence and relevant role of international institutions and organizations: WTO, IMF, WB, European Union, OECD 5. Entry of China in WTO (2001). It was a shock and this is the period when there was a massive inflow of Chinese products, China was neglected during 70s-80s, entered the market with heavy weight with all the consequences annexed. Key event: Clinton and Jiang Zemin (president of the Republic of China), during the time of the establishment of UE. There was the idea that the world could not become bipolar, there was an idea to push China to become a truly market economy in favor of trassistioning China to the capitalist system and one way to do it was to let China enter into WTO. Actually, what is happening now is the trade-war between the US and China, started by the Trump administration and continued by the Biden administration. The import tariffs were lower than the one adopted by China toward American goods but then it was converted at a very low rate sign that those countries were willing to trade within themselves (mutual exchange of products and services). If you look at them at the dynamics of the trade barriers between the two countries, you clearly see a picture with two colors: a white collar shows the decrease of the mutual tariffs (the import tariffs adopted by the US were lower than the ones adopted by China, towards American roots, but they converted really low rate). At the same time, you should look at the dark side, which shows the non-price barriers, that are made of anti-dumping tariffs and countervailing tariffs (retaliation tariffs), which are two types of barriers. Starting from 2001-2002, the two countries are strongly fighting against each other. So if on one hand, they are decreasing the standard tariffs, on the other hand, they were starting fighting the same indirect tariffs that brought them to apply standards to their production, meaning that they started applying antidumping tariffs with the idea that the Chinese products were entering the US markets through a dumping strategy = is selling a product and an extremely low price (price lower than its marketing account production). Fixing a price for a product which is below the marginal cost, implies that the company is making negative profits, and is producing with a loss. It is in a short term strategy to penetrate the market and to predate it, so as to keep off all the competitors. 9-11 attack was the start of the attack of globalization. Starting from 2001 the tariffs barriers applied from the US are larger than the ones applied by China. Measuring economic globalization When talking about trade flows across countries and regions we have to talk about capital flows across countries and regions. Also foreign direct investments, global value chains, migration flows and technology transfer (e.g., patent flows) are important to measure globalization. Definitions: Direct investment: category of international investment that reflects the objective of a resident entity in one economy (direct investor) of establishing a lasting interest in an enterprise (direct investment enterprise) resident in another economy. The object of the investment is placed in another country while the investor is placed in a different country. The lasting interest is the feature that differentiate direct investment from portfolio’s one.  Lasting interest implies the existence of a long-term relationship and a significant degree of influence by the direct investor on the management of the direct investment enterprise. Direct investment involves both the initial transaction between two entities and all subsequent capital transactions between them and among affiliated enterprises. There is a financial flow, but investing in another entity means having sure that the relationship would be a long term one and the actor wants to have significant influence in the management of the company. This can be translated by INF and OCD that direct investment enterprises are incorporated or unincorporated public or private enterprises in which a foreign investor owns 10% or more of the ordinary shares or voting power. An effective voice of management, as evidenced by at least 10% ownership, implies that a direct investor is able to influence, or participate in, the management of an enterprise; absolute control by a foreign investor is not required. Direct investment firms may be: ○ Subsidiaries: direct investments enterprise happens foreign investor controls (directly or indirectly) more than 50% of the shareholders’ voting power, or he/she has the right to appoint or remove a majority of the members of this enterprise’s administrative, management or supervisory body. ○ Associates: where the direct investor and its subsidiaries control between 10% and 50% of the voting shares ○ Branches: uncorporated enterprise that is a permanent establishment or office of a FDI; is an uncorporated partnership or a joint venture between a FDI and third parties; land, structures and immovable equipment and objects directly owned by a foreign resident; mobile equipment operating within an economy for at least one year (es. ships, aircrafts, gas/oil drilling rigs) The purpose is to understand how to account the structure of a direct investment, but also to fully understand the consolidated system and how the system works within the responsibility of a multinational enterprises. N is a direct investor displaced in several countries. N owns 60% of company A and A owns 55% of company B, hitch owns 12%of company C. According to definition A is a subsidiary of N because it owns more than 50%.  B is a subsidiary of A and of N, but B is indirectly controlled by N, so if we calculate the amount of shares controlled directly by N over B, only 33% attributable to N (calculation: 55% times 60%). B is subsidiary according to the fully consolidated system because the company that indirectly based the filter A is a subsidiary(major part of A is owned by N) and this allows B to become a subsidiary of N (it is an indirect control). C is an associate of B and it is considered an associate (indirectly) of N as well even if the control is only 4% (calculation: 60% times 55% times 12%) Company N owns 10% of ordinary share of company D. So D is an associate of N. Company E is owned by 60% of company D, so E is a subsidiary of D. The indirect control of N respect to E makes E an associate of N because there is no mediation by an ownership. Radically different: company F owned by 30% by N and company G owned by 25% by F. So F is an associate of N and G associate of F. The relationship between G and N: G is NOT an associate of N because there is no subsidiary relationship; so G is not formally owned by N. H is owned by 60% so it is a subsidiary of N. J is owned by 30% and it is an associate of H, so J it is also an associate of N because there is a subsidiary relationship K is owned by 70% and it has a branch L owned by 70% by K. So K is a subsidiary of N and automatically L, that is a branch of K, is also a branch of N P associate of N; Q associate of P, but Q is not an associate of of N Multinational enterprise A multinational enterprise is a company that holds a significant equity share of the company operating in another company. Basically, multinationals are a network of companies, where there is a central note that is traditionally located in one country and the other production units or service units are located in another. The centralized management system is when the headquarter is based in one country and coordinates other subsidiaries or associates or affiliates in other countries. The management strategies are decided by the headquarter in the own country and are adopted and transferred to the other units. Transnational corporations are different from multinational corporations because the translational corporations usually have different headquarters located in different countries. Walmart is leading in terms of revenue in 2023, but it is not the first and for profits, for example. Profits are revenues, minus process. In terms of the number of employees Walmart is the largest gang. Ten years ago, there were only the United States dominating Japan and Germany; now you can see how China is climbing the stairs and also Saudi Arabia. So the countries that were dominating 10 years ago, are no longer in the same proposition.  TYPES OF FDI FDI entry has two types whether you look at the control or sectors. FDI is an investment and the actor wants a long lasting investment. We measure FDI depending on whether we look at the type of control or sector we want to have: 1. Greenfield investments: investor is involving the creation of an entirely new plant or activity. New from scratch. The direct investor is creating an activity that was not there before in the recipient economy. 2. Brownfield FDI has two types of forms: the first type is the expansion of the enterprise -> It is something new, but related to something that was already there. The second is the Mergers and Acquisitions (M&A) that is cross-border FDI that involves changing the ownership of an existing enterprise. There is merger when the foreign investor merges with the firm acquired in the host country. The investor is acquiring at least 10% of the company. The full acquisition comes when it is 100%. It is also called Brownfield. The subject remains as it is - is the full acquisition if there's a total change in leadership) or merge (tw are merging together and it implies the creation of a new entity / company that is managed and controlled by the direct investors, related to the creation of a third entity - an activity that is already existing). The creation of a new entity is ménaged by the direct investor enterprise. There is also a distinction between: 1. Horizontal: FDI involving the duplication of part of a firm’s activities in a foreign country. Reproduction of an existing value chain in another country. The sector remains the same from the statistical point of view as the direct investment enterprise. It is a replication. The business model of the value chain. There is an idea of penetrating new markets and escaping costs, being closeNon equity modes of international production 2. Vertical: FDI involving the transfer or the relocation abroad of one or more of a firm’s stages of production to access low-cost inputs or intra-firm trade. The main idea is to get access to cheap labor and access to resources. The sector of direct investment is different from the sector of the direct investor enterprise. FDI is very complicated and so companies can choose other methods. Non equity modes of international production Usually when a company begins this activity, 99% of the time they don't born international. They started with small companies and limited localized market. After many year of investments they started growing in importance of international outsourcing or offshoring. This means that not all companies are committed to internationalization strategies. Usually, roughly 50% of the companies are those that are any kind of internationalization activity which means that 50% of these companies remain domestic. Within them, the way through which a company internationalizes are different, the easiest is indirect export. The company is releasing the service to another company. E.g. You own a pastry, and you produce so much that you want to sell your products to foreign countries. The exportation cost is high so it’s better to ask an export company to do it for you. The direct export = company produces at homes and exports the goods produced. The main profits come from abroad because the customers are located outside the country. The return is high because you rely on clients abroad and domestically. Export is costly!!! Of course, the return can be high since you also rely on foreign clients, e.g. in Veneto there are small enterprises that sell 90% of their products abroad so their business is just export. FDI is more complicated because you produce and sell entirely abroad. If you want more production abroad it is not only companies embarking in FDI. In fact not all the companies can embark all the costs of moving production abroad. FDI is even more complicated since you don’t produce at home and sell abroad but you do all the process abroad. The costs are huge and subject to many risks - monitoring risk - political risk - climate risk If you want to move the production abroad, bearing a cost for FDI is not for all companies. Companies that embark these risks are the largest multinationals that have technical/human/financial resources and lobby power. What are the other ways to do it? The other ways to internationalize production are identified by the type of control (internal and external) and the location of the supplier (national or international): 1. Domestic supply = national location and the production is insourced. Everything remains at home (majority of the cases). All the production stages are internally processed. It means that the company is producing its product within the country, there’s no production reallocation. 2. domestic outsourcing = performance, outside the firm/plant, of a production activity that was previously done inside the same firm/plant. The production is national but the control is outsource. The company is using suppliers and these one are still located in the same country. These companies are high integrated and specializeds ares and concentrated, industrial district. Usually,  these companies do not produce anything from the beginning to the end. The main companies are assembler. These suppliers share the same country of origin. Production offshoring = production stages are moved in another country. There are two ways of doing it. 3. International insourcing = Control remains internal to the company and means that the supplier remains within the same owner structure. It’s mainly coincident with FDI. I am importing the components but still from a company on which I have control (since I’m at least 10% owner of it). This customer-ownership relation remains under the same umbrella. 4. International outsourcing = geographic separation of activities involved in producing a good (service) across two or more countries. I subcontract another company in another country to produce those products for me and this is going to be regulated through a contract. It’s not a part of my business, it’s an independent supplier located outside my country. It’s another way of subcontracting which is usually called “non-equity mode”. Other non-equity modes Contract manufacturing Services outsourcing Contract farming Management contracts These are different names of international outsources and the names depends on the sectors. Franchising is an internationalization mode when there is a high service component. There are two components: The sub-contractor is called franchisor while the independent entrepreneur is the franchisee who applies to try to commercial exploit the brand and hold the facilities that the franchisor can provide to the franchisee. ○ Franchisee = independent entrepreneur, similar to a supplier, but who generally works for a producer that provides a brand, or a trademark, or marketing activity, and/or other services (training, advertising, consultancy, credit...) ○ Franchiseur = internationalize production without being involved directly in the activity There is a cost, a fee (direct) or royalty (indirect) or both, that the franchisee pays to the franchisor. the franchisee pays to the franchisor, it can be a fee (direct) or royalty (indirect). The franchisor can still have the control over the mechanism and expand the production worldwide without embarking himself at 100%. Benefits for the producer: maintains control over the production process by monitoring the franchisee, so it can exploit superior knowledge of foreign markets of the franchisee and the franchisee takes the risk of the entire operation.  Benefits for the franchisee: exploits brand and reputation of the producer limited advertising effort, services included and higher possibility to penetrate foreign (emerging) markets (e.g. China) Licensing is similar to franchising. The domestic firm (licensor) allows a foreign partner (licensee) the right to exploit (commercialize) a license, a patent, a trademark, for which it gets a royalty. The main benefit for the exporter access to foreign markets without costs. Good entry strategy into (emerging) markets when: ○ the domestic licensor lacks know-how and time to engage in direct export ○ the foreign market is not too large no incentive to produce abroad ○ limited capability to meet the (un)expected levels of demand ○ foreign Government favours licensing to help domestic producers ○ Pay attention: once the contract expires, the licensor can become a potential competitor STYLEZ FACTS FDI grew dramatically in the last 15 years of the XX century, far outpacing the growth of trade and income, then stabilized between 2001 and 2005, decreased because of the financial crisis, and returned to grow only recently 1985-1999 annual growth rate of GDP = 2.5% 1985-1999 annual growth rate of exports = 5.6% 1985-1999 annual growth rate of real FDI inflows = 17.7% Since 2001: the trend reversed ○ Collaps of share prices (stock exchange) because of the internet bubble ○ 1999 and 2000 anomalous peaks due to a rise in intra-EU investments following the implementation of the single currency In general: FDI flows remain much smaller than trade flows. A very large share of world trade is conducted by MNEs’ subsidiares across the world The Geography of FDI Geography of FDI, yellow the developing countries: increase of greenfield projects and more significant in developed economies. After covid, developing countries are catching up, there’s an increase in South America but the leader is Asia. A recovery of greenfield FDI. Industries: drop in extractives SDG sectors (sustainable development gold of FDI) agrifood systems FDI trend Inflows, from 2006 to 2020 in billions: the trend is straight, different from the other ones sth happened with the financial crisis. There was a recovery, an increase, a constant decrease and a collapse. The very last prediction seems to show an increase. The geography is that developing overcomes the other, but now it's different: developing countries are not all behaving the same. The prediction of 2024: slightly increase and volatility FDI inflows Decrease (blu) for developing economies, North America is more attractive than Europe (the contrary in the past). Developing economies are decreasing but are more attractive Africa Latin America Asia Are decreasing, but Asia is a developing country: when we talk about developing countries we talk about China and india. Before, Europe was more attractive than America. Greenfield FDI inflows 43 attracted by developing countries, but a convergence between the two: developing economies a decrease. FDI inflows and outflows, by country Greenfield after covid is increasing, while the others are decreasing even in value. Greenfield with an increasing value today. Greenfield FDI by sector distinguish: primary, manufacturing and services during 2022 and 2023. There is a general increase in the deals concerning the first two sectors and a decrease in services. The average value of single projects is higher in 2023 in respect to 2022. The value of services is declining and in average value of the project, whereas there is a, increase in manufacturing. If we look at manufacturing in services in single industries there are increasing dynamics in the automotive sector (a lot of greenfield FDI). There is a decline in IT and communication. One of the group industries identified is GVC, intensive industries, that are particularly exported to the global value chain. There is an increase in the number of projects. Until the pandemic the picture was quite different, now there is a rebound and return to the sectors after a time of declining. Extractive industries: critical raw materials are concentrated in some part of the continent and are intensively used in high tech systems. They are geopolitically important.the extraction of the critical minerals are a sector of investment. If there is an increase of attractiveness in these materials, there is a decrease in the digital sector, that is losing power and attractiveness from an FDI perspective. In developing countries these sectors are very attractive and the growth rate is quite high. There is a huge growth rate. The average picture is that greenfields of FDI are becoming very important in Asia, which has become the most attractive region for these materials. M&A FDI by sector The number of deals is declining in services and growing in the primary and manufacturing. In value terms there is a sharp increase in the extracting field.  MNE CHARACTERISTICS (OECD) The main players of the globalization process are multinationals. OECD countries are more provided with data about this topic. We are talking about very peculiar agents: multinational companies. MNEs are generally large companies compared to domestic firms and competitors (in terms of employment, turnover and value added). The size of affiliate control and the control of domestic own companies: foreign subsidiaries of MNEs are on average larger than national firms in host economies. The companies that are domestically owned are strikingly different from MNEs. In every country of OECD, MNEs affiliates are much larger than the average domestic counterparts, whatever is the sector. The picture changes when we select the largest companies that are domestically owned because there is not much difference: in any case, MNEsare very large companies that are comparable in size only to the largest domestic companies. Being large has some implications because correlated to size there is the capability to get credit, also implication in terms of bargaining power, availability of resources, higher lobbying power from the political point of view, being able to exploit increasing return to scale (the larger the company becomes, the lower is the cost of production). They are more efficient compared to small ones: they are able to extract profit markets from the goods and the services that they sell. However the larger the company, the more complicated and complex is the managing of the structure and the activities (coordination and administration costs are very high). Differences in sector composition of foreign affiliates compared to national firms MNEs operate in scale and capital-intensive industries Role of R&D, technology and innovation: companies are more tech intensive than domestic ones because they have the resources to run this kind of activities and they are also more efficient in terms of outputs. That’s why they have a higher investments in ICT. MNEs are more productive and efficient of domestic companies One of the consequences is that MNEs pay higher wages than domestic companies. The total compensation per employee is larger on average. The reasons are several: 1. Higher wages reflect higher productivity and efficiency because they affect the production more. 2. They need to attract talents and attract human capital -> they pay for that and they have to maintain it so they pay higher wages. Higher wages reflect the higher skill composition of the MNE workforce. MNE offers higher salaries in order to attract talent. It is not just a matter of attracting people, but also they prevent the possibility of not having the people stolen from them. The risk of loosing the talent is very high especially after training the workers and paying for their knowledge to be improved (companies wait for MNE to train people and offer a salary that is quite higher so that they attract the human capital. Also self employment is very attractive).  3. Organizational changes and new business and management practices oriented to flexible payment systems 4. Reputation effect = the company taking care of the human capital is very important. The idea of paying extra wage to prevent the possibility of people leaving is part of the reputation. 5. Increase loyalty, reduce absenteeism, reduce the risk of poaching externalities Other MNE characteristics On average, MNE earns higher profits than domestic firms and MNE are more export-intensive than import-intensive in manufacturing (trade openness is larger). But they are relatively more import-intensive in services. MNEs are increasingly engaged in global production networks: 30% of the car's value goes to Korea For assembly, 17.5% to Japan for components nd advanced technology; 7.5% to Germany for design, 4% to Taiwan and Singapore for minor parts, 2.5% to the UK for advertising and marketing services and 1.5% to ireland and Barbados for data processing. Only 37.5% of the production value is generated in the US. Lobbying power, sometimes higher than that of nations International Center for Settlements and Investments Disputes (ICSID) is a branch of the World Bank, Washington. MNEs operate indifferent countries and they have disputes with other companies and local or national governments that are settled by this branch of the world bank that is composed of lawyer and arbitrates that try to find agreements. The graphic shows the amount of profit on total sales. Profits of the largest MNEs are even larger than before the pandemic.  GLOBAL VALUE CHAIN It is the mode in which the production is organized. Definitions: 1. GVCs refer to the internationalized sequence of activities involved in the design, production, marketing, distribution, and support of a product or service. These chains span across multiple countries, where different stages of the production process are carried out in locations that offer the best combination of cost, quality, and expertise. [ChatGPT] 2. A GVC refers to the full range of activities that economic actors engage in to bring a product to market. The GVC does not only involve production processes but also preproduction (such as design) and postproduction processes (such as marketing and distribution) [Wikipedia] 3. Companies used to make things primarily in one country. That has all changed. Today, a single finished product often results from manufacturing and assembly in multiple countries, with each step in the process adding value to the end product. Through GVCs, countries trade more than products; they trade know-how, and make things together. GVCs integrate the know-how of lead firms and suppliers of key components along stages of production and in multiple offshore locations. The international, inter-firm flow of know-how is the key distinguishing feature of GVCs. [World Bank] GVC are the most economic tool to understand globalization. They are networks of companies and suppliers, investments and financial flows, but also FDI. It was going through a growing fragmentation of the production processes, this means that companies in a certain point of time (80s-90s) started to externalize part of the value chain. This externalization did not occur between the same country of origin, but on an international scale involving other countries that weren’t neighbors. This means that on one hand the fragmentation of production depends on the modularisation of products that could be reduced in size and the production of which could be done outside the company. Much more components involved intermediate components that increased the transfer of the production to other countries. The market was used to outsource this kind of activity. Non-equity modes are also used. This brought the increase of trade and the trade was intra-industries and intra-firms: parts of the product are made in a country and exported to another country as inputs aim for the next production step. Geographical proximity is very important in GVC. Image about DE, US ad China. The partner countries: 1. USA: countries in LATAM 2. China: Asian countries 3. DE: European countries The GVC are actually very regionalised. The network structure is connected to geography. Geographically DE is the smallest also in terms of GDP, but is the most exposed to GVC in the world. Open strategic autonomy is a need to become autonomous on basic materials and EU is trying not to be dependent on other countries. GVC is not just related too complex products: Nutella and Barbie. 1. Nutella: Ferrero International SA, the Headquarter is in Luxemburg 10 production plants in the world: 5 in EU, 1 Russia, 1 in Turkey, 1 in Canada, 1 in Brazil, 1 in Australia Some ingredients locally supplied: es. packaging and milk Other globally delivered: Hazelnuts from Turkey Palm oil from Malaysia, Papua New Guinea, and Brazil Cocoa from Ivory Coast, Ghana, Nigeria, Ecuador Beet sugar from the EU, brown sugar from Brazil Vanilla from EU and USA 2. Barbie: Is the choice of relocating the production in China really convenient? The cost amounts to 9 dollars per doll. The first point is in labor: the cost charged to produce one single doll is 0,35 cents. Together with raw materials the cost is just 1 dollar. So the cost of production is really fragmentated in a successful way. The type of costs linked to services and transportations are the main source of cost. Per year, a billion Barbies are sold (a hundred per second) before the release of the movie. So the profit margins are very high if we consider the quantity in general and not only the single Barbie in itself. 3. Iphone: the product can be modularised. The value chain of the iPhone 4 i fragmentated in different countries (inputs in dollars). The companies within these countries are selling the materials in China where the physical output is sold to the USA. The price of the iPhone 4 when it exits on the market is 400 dollars higher, but the profit is still 270 dollars. The cost is due to the transportation, but also to the fact that the contribution of China to the value added to the iPhone 4 is really small (7 dollars) brings USA to develop all the stages of the productions and this is the country that really gets the value added of the chain. The case of semiconductors From 2000 to 2022 revenues rose from 200 bln of US$ to 600 bln of US$. 800 production steps, but the activity is regrouped in 3 main phases: design, manufacturing assembling & testing. Increasing costs so many companies are now specialized in single steps of the value chain. THE VALUE CHAIN The main steps of the value chain: The most crucial one is the design. A value chain is the full range of activities needed to create a product or service. For companies that produce goods, a value chain comprises the steps that involve bringing a product from conception to distribution, and everything in between — such as procuring raw materials, manufacturing functions, and marketing activities A value chain is a step-by-step business model for transforming a product or service from idea to reality. Value chains help increase a business's efficiency so the business can deliver the most value for the least possible cost. The end goal of a value chain is to create a competitive advantage for a company by increasing productivity while keeping costs reasonable. According to Michael Porter (HBS), the value chain is made of the following stages: The primary activities from the inbound logistics are designed in terms of raw materials. All these activities are generated in coordination to the other with the outcome of generating the profit margin of the economy. Primary activities are directly related to the creation of goods: Inbound logistics: receiving, warehousing, and managing inventory Operations: procedures for converting raw materials into a finished product Outbound logistics: activities to distribute a final product to a consumer Marketing and sales: strategies to increase visibility and target appropriate customers (advertising, promotion, and pricing) Service: programs to maintain products and enhance the consumer experience (e.g., customer service, maintenance, repair, refund, and exchange) Support activities improve the efficiency of primary activities Procurement: how the company obtains raw materials Technology: R&D, design, projecting, testing, prototype development Human Resource Management (HRM): hiring/retaining employees Infrastructure: company systems and composition of its management team (such as planning, accounting, finance, and quality control) How do we assess the value created? One way to do it is the through value-added, that is a way to measure a company’s performance and reputation VA = Output value - Intermediate costs. the Output value is the selling price * quantity of output sold, while intermediate costs are equal to production costs (labor, services, energy..). VA helps explain why companies can sell their goods or services for more than they cost to produce… Examples: 1. Gucci bag: value added bc of design, style, status, practicality, materials, sustainability 2. netflix: comfort in use, variety of services, personalization and customisation, speed 3. bio products: personal health, environmental impact and social impact The global value chain. GVC relegates the trade in intermediate goods/services (in 2015 counting for 57% of total trade). Data source: domestic and foreign value-added content of gross exports by exporting industry Database OECD-ICIO (Inter-Country Input-Output tables) Covering 76 countries and 45 industries from 1995 to 2020 UNCTAD-EORA: 189 countries, 1990-20 In national account, gross value added (GVA) is given by: GVA = Gross Output – Intermediate Consumption This is a general definition, but it is not possible to have this information for all the countries in the world. However, we can compute GVA for the exported goods and services gross value added of exports (GVA-EXP). This is the largest indicator. Thanks to the use of input-output tables, it is possible to distinguish the GVA between domestic (DVA) and foreign (FVA) value-added. The input-output table is a quantitative economic tool used to analyze the relationships between different sectors of an economy. It provides a detailed picture of how the output of one industry serves as an input for another industry, illustrating the interdependencies within an economic system. Key Components of an Input-Output Table: 1. Rows (Outputs): Represent the output of each industry or sector. Indicate how the goods and services produced by one industry are distributed among other industries and final consumers. 2. Columns (Inputs): Represent the inputs used by each industry to produce its output. Include intermediate goods (from other industries) and primary inputs like labor and capital 3. Final Demand:Captures the demand for goods and services outside of inter-industry use, such as household consumption, government spending, and exports. 4. Value Added: Represents non-intermediate inputs like wages, profits, and taxes, which contribute to the sector’s total output. So, domestic value added is the share of value added originating from domestic inputs, while foreign value added is the share of value added originations abroad. GVA = FVA + DVA Two types of participation in GVC 1. Backward GVC participation: countries can participate in the GVA by looking at the value added = measuring how much the value added of the goods produced by my country depend on inputs coming from other countries. ○ The importance of foreign suppliers in domestic production is captured by the Foreign value added (FVA), which includes inputs produced in other countries. The higher the weight of foreign suppliers, the higher is my backward participation. ○ Imported input production of goods and services, export of intermediate or final good ○ The FVA share of GVA-EXP indicates the dependence of domestic exports on imported content: FVA/GVAEX. It is a number between 0 and 1 or 0 and 100%. The higher the number, the higher the participation of an external country. 2. Forward GVC participation: a country can also participate in GVC providing inputs, exporting inputs. To measure it we can rely on a third indicator: DVX, which refers to the export of inputs to countries that produce final goods. ○ DVX: e.g. raw materials, oil ○ Part of domestic GVA is exported to other countries and is used as an input in their exports: DVX/GVA-EXP Total participation of a country into GVC: FVA + DVX List of countries by their total value chain participation: Vietnam was the most exposed country. It was mainly focused on backward participation. Almost all the Asian economies are above average. The trend of DVA and FVA : there is an increasing trend apart from 2008. We can see the foreign and domestic elements that are both increasing because the global GVAEX is increasing over time because countries are exporting more and more. But although the major part comes from the inside of the country, over time the share of FVA has increased a lot (backward participation). Distribution of 2015 of countries: there is a measure of forward participation and backward participation in developing economies. Countries above the line are the one participating in the GVC maily from a backward perspective (so as input absorbers), whereas below the line there are countries that are predomely in the GVC being exporters (manufacturing countries are generally the ones below the line because they are poor in raw materials). Recap Value-added refers to the total sales revenue of a company minus the cost of goods sold and excludes the value of inputs and raw materials purchased from suppliers. The participation of countries to GVC can be a backward relationship refers to the extent to which a country exports goods or services that are not fully produced domestically without relying on imported inputs, but it is the value of the imported inputs that is determining the inputs used to produce an export of the country to other countries. Forward participation measures the extent to which a country exports foreign goods or services to incorporate them into its own exports: forward is actually the export and contributes to the export of other countries. The sum of the two is the GVC. TRENDS IN GVC PARTICIPATION The trends by region are from 1993 to 2018 in the total GVC participation of the country in the GVC. There are two types of info: 1. Cross-section comparison between regions: we can see the exposition to GVC. South east Asia and especially China was less exposed compared to UE in general, that is the region of the world the most exposed to GVC. North America and  China are the least exposed to GVC, because they are very strong economies and very big states, much of their imports-exports happen internally because of their size. The most exposed to GVC is Belgium and Netherlands, since those are states that are extremely small, but very much infrastructuralism and very open to trade. Small countries with big infrastructures are extremely open to trade. So size matters. 2. trend and time dynamic of the index: the red line on 2008 (financial crisis). Before 2008 there was a general increase of participation to GVC, but then there is an initial drop generated by the crisis with a rebound that follows the drop. After 2012 and 2013 there was a stagnation, the index did not recover in any country. Is it a matter of backward and forward participation? In the backward participation there is a polarisation: there are countries backward participating in GVC such as EU, Korea and western EU. They are not rich in raw materials. After the crisis there is a stagnation, apart from Japan. This trend in GVC participation is not dependent on the type of participation: in both backward and forward participation the trend follows the one of the graph above (the only exception is China, whose trend is rising. Korea and China are forward participating, even if North America and the eastern EU are more relevant. However there is a global upward trend and a decline after 2008, the only exception is china. There is no positive performance after 2008. The dynamics of domestic production: China and the US are emerging as main economies, there’s a slight decrease till 2008, then there’s a peak after 2008, and later a smaller increase in domestic production. Economists in 2018 produced the picture about the slowbalisation meaning that is globalisation slowering? The first thing that happened is that the level of uncertainty on the global scale increased. If you get the main newspaper of the countries there is an increasing use of words connected to uncertainty and the trend has been increasing after 2008. It is a general uncertainty, but also specific: energy uncertainty, trade uncertainty, economic and political uncertainty. Uncertainty is relevant because talking about GVC brings to focus on investments that become much riskier and uncertain if there is a high level of uncertainty. Also the policies of central banks are restricting in order to decrease the level of participation and to raise the rates of interest: the higher the interest rates, the less appealing it is to invest in the country. Other concurrent events, e.g. the trade war of 2018 and the rise of automation, which contributes to decrease the participation of countries, the length of GVC or the density of the investment: there is no need to look for cheap labor abroad since automated technology replaces it. Some companies are still investing, and some still far away, but less frequently than before. The higher the interest rates are, the less appealing it is appealing to invest in a country. Fourth, there is the issue of reshoring. Evolution of regional to global foreign value added: You take a country, and you take the FVA, which is the contribution of foreign countries to the value added of my exports. If I produce a bag and I export it, I earn money. To produce a bag, I use Italian textiles, but I need the zip from China. The FVA is the percentage of contribution of China to the value added of my export. Suppose that I need rubber from Germany and the metal from China, thus part of my FVA is regional (the one from Germany, since Germany is in the EU like Italy) but also foreign/global (China). What this index measures is the ratio between the regional FVA and the global FVA. The index is capturing the amount of input coming from Italy and the amount of imports coming from different regions of the world. In this way we measure how regional the value chain is, meaning understanding how much of the foreign value added originated and came from other countries. The same index calculated for the three main regions of the world: EU, Asia and North and Latin America. There’s one region that’s most exposed to GVC, which is Europe (2%), with respect to Asia and North America = European countries rely more on each other, than Asian countries on other Asia countries and American countries on other American countries.  1. Asia: low and increasing, thus Asia is becoming more regional, the GVC of Asia is becoming more regionalized. 2. North America: low and stable. 3. Europe: declining and rising afterwards = from mid 90s to 2013 there’s a race beyond Europe, European countries are relying more on countries of other regions, mainly Asia (Russia for instance). After the crisis and the period 2008-2012 there is an increasing regionalisation of EU countries. From the mid-1980s to 2008 general increase in global production (‘hyper-globalization’ era = countries are more and more involved in GVC). From 2011 onward (after the 2008 global financial crisis + 2011 sovereign debt crisis) there was an increase in global uncertainty and less attraction to far-away destinations. This is particularly true for EU-28 countries increasing sourcing value added from within the region (nearshoring or reshoring = companies start to invest less abroad and if they do investments abroad they are doing them closer or they are closing plants abroad and reopening them in their own regions). But increasing export of value added globally (farsharing). Asia-Pacific countries tend to both source and export production regionally. Americas: lowest GVC regionalization (sourcing and export) The case of friendshoring “International economic policy intended to “achieve free but secure trade” by “favoring the friendshoring of supply chains to a large number of trusted countries.” [Janet Yellen, 13/04/2023]. The main target was China, moving the GVC from China to other “friend countries”. Implicit throughout Yellen’s speech was the need to move supply chains from China to US partners such as Taiwan, India, Vietnam, and Mexico. However, supply chains don’t change overnight, and anyone expecting friendshoring to result in a quick and decisive uncoupling of the US economy from China will find little in this past year’s data pointing toward that result. Progress on reducing China’s share of US goods imports has been modest and, in some cases, China’s share of US imports has actually increased, e.g. in the IT sector US is still very much dependent on China still. A closer look at the data, however, reveals the consequences of Yellen’s approach are beginning to play out, even as challenges—in particular regarding green energy and critical minerals—remain for the administ. Evolution trying to identify the bilateral FDI flows between countries that are considered friends, and countries that aren’t considered friends. See UN resolutions, 68 (during first Russian invasion of Ukraine) and 262 (on Ukraine freedom) à the author considers friends the countries that voted in favor of the resolutions, and not friends the countries that voted against or abstained. Bilateral FDI flows are higher among countries that were supposed not to be friends before the resolutions, but after the things changed completely: friendshoring is emerging, and this is a way of measuring which countries are friends and not (policy and political attitude). The evolution from 2012 to 2016 of agreements between countries that are friends or not: to distinguish which are friends and which are not, we generally look at the countries' vote. If they voted in favour they are considered to be friends. The bilateral agreements were higher between countries that were supposed not to be friends and after the vote of the resolution we can see that the solid blue line is always above the other meaning that after the vote you start investing mainly with other friendly countries in respect to the one that are opposing your resolution. It is not only a matter of the Ukraine resolution, but this process was tested also in the Syria resolution. Governance of value added chain Governance modes of global value chains, the point is there are 3 blocks of theories to explain or predict where activity should be located (within ownership boundaries or outside). The process by which technology is combined with material and labor inputs, and then processed inputs are assembled, marketed, and distributed. Key issue: which activities and technologies are kept in- house and which should be outsourced to external suppliers? Where should the activities be located? They identified five cases of GVC governance and the discrimination depends on three elements that comes from three main theories: there are two polar ways: 1. doing everything in-house 2. pay the supplier on the market, outside or inside the country Hybrid forms that have GVC: 1. complexity of transaction of the item à one thing is to relocate the production of a simple piece of cotton, another is to relocate the production of engines (training, risk of cheating, of quality, etc) 2. whether knowledge can be standardized and modularized 3. whether the competences are available outside the firm By observing what companies usually do, there seems to be a sort of blend solution that the companies find to ménage the input and output relationship. Since 1990s increasing fragmentation of production across geographic space. How are fragmented activities coordinated? The two polar cases depend on two options: make vs buy = to accomplish very thing in-house within the same company or to use the market through transactions. How can we discriminate between choosing one or the other option? There are some elements that are used to manage transactions and these depends on three hybrid elements between the market, hierarchy and vertically integrated company. There is a theory that identifies the way in which a company can choose one or the other option. There are some elements that make the GVC emerge: 1. complexity of transactions and the complexity of knowledges, information transfer 2. the possibility to codify the information and the knowledge. The codification makes the transfer easier, this means that instructions, rules and norms can be written down and made easily interpretable by the parties through codes. Another way of codifying is through standards, that also make the transaction easier. Not everything can be codified: How can we codify the instructions to ride a bike? There are informations that are tacit and orally transmitted or that you can learn through experience. 3. the availability of capability by suppliers = whether capable suppliers are available. These three elements can have eight different combinations. The five types of GVC that emerge clearly from the combinations are: 1) Market The market is where there are high capabilities by suppliers and transactions are early regulated by the market = no intermediate forms of transaction. The market is the main mechanism that regulates the relationship between buyers and suppliers. The availability of suppliers is high, the service is easy to provide (switching costs are low), low level of complexity of transaction, high codifiability of knowledge. Low switching cost to a new partner. Suppliers do have high capabilities to accommodate the buyer’s requirements about products, with limited or no inputs from the buyer. Limited asset specificity: market governance, limited coordination. Buyers respond to specifications and prices set by suppliers. 2) Modular value chain It involves modules, meaning that products become complex and are made of different modules -> high codifiability. However, the knowledge can be easily standardized and modularized. In this complexity of modules (they are a lot) at least they’re standardized (so less complexity in the knowledge). Low need for the buyer to monitor the process because there is a high capability of the suppliers, high complexity and high standards ability of knowledge. Ex: an electronic brand (sony) contracting a thor party manufacturer like Foxconn 3) Relations value chain There are complex transactions, highly specific and highly customized, not easily codifiable, many times are tacit. There are many suppliers with the right capability but it is difficult to codify, that’s why there’s the need for trust between the two parties (strategic knowledge). The suppliers must receive, understand and provide the knowledge in order to produce. Suppliers have high capabilities high degree of trustworthiness. Mutual dependence is regulated by reputation, spatial proximity, social capital (ethnic ties, family linkages...), frequent face-to-face transactions. High switching costs explicit coordination 4) Captive value chain Low suppliers’ capability. There’s a lead firm that wants to transfer complex products with the possibility to codify knowledge not finding enough capability in suppliers. There’s the need to instruct, to monitor suppliers. Transactional dependence between the parties + dominance of the lead firm. High switching costs for the supplier, who is assigned few and simple tasks (e.g., assembly) 5) Hierarchy Company does everything itself, no codification possible. Products are possible, even if complex. High-capability suppliers cannot be found, internal coordination and production in-house  DETERMINATION OF FDI AND MNE LOCATION CHOICES The characteristic of MNE: very big, productive, pay giver wages, very normative, they spenda lot of resources in research and development, are embarked in Human Resources and bank strategies, produce higher value added product and they have high profits. What drives the decisions of multinational enterprises? MNE are multi-activity firms that engage in FDI and in a variety of other NEM activities. The twofold nature of MNE: 1. Like international trading companies = they trade with other subjects that belong to the same ownership structure or that can be suppliers located in a foreign country. So there are very complex transactions = take into account costs, intercultural management issues. In generalMNE undertake cross-border transactions outside their home countries, BUT they own/or control foreign production facilities. 2. Like multiplantdomesticfirms = MNE operate more production units and internalize transactions between them, BUT at least one of this units is located in a foreign country The theory of the determinants of MNE activity must seek to explain: these companies do not start their activities being internationalized or multinationalized. At the very beginning they are very small activities stated in a small plant and involving little people, but after a certain amount of time the develop the activity and start enlarging becoming innovative, efficient and reach enough experience to enter the market and become international. These company more gradually from being fully domestic to internationalised (serving international market trhough exports). After they have become fully profitable, they will try to become more complex through the full production abroad )opening nex plants abroad and acquiring existing plants = most complex way of being international. the ownership of activities (why) the location of activities (where) the organization of activities (how) Economic and behavioural explanations of the existence and growth of MNE. Historical perspective > how economic thoughts have dealt with this kind of issue. Main approaches: 1. Marxism more on imperialism than FDI 2. Neoclassical theory no idea of FDI 3. Stephen Hymer: the first analysing the determinants of FDI 4. Raymond Vernon and the product life-cycle 5. The eclectic OLI paradigm by John Dunning 6. New trade theories Marxism We are talking about the beginning of the XX century. Two problems: lack of data and tools to analyse them (book, newspapers, rumours, partial information). It considers the actors that were active in the market and considers the investments as a form of imperialism. Erico where companies and states especially in the EU (UK, FR, Belgium, Netherlands, Italy, Germany, Austria, Russia) were trying to get territories in other parts of the world. Try to counterbalance the underconsumption (John Hobson) = at a retain point, thanks to development achieved after the Industrial Revolution and the technological progress of this period, companies and countries became very efficient in producing (standardization, mass production, fordism, Taylorism, science applied to production). There was the problem of a surplus of products: they could not sell inside the country also because there was a very centralized power that brought just a small part of the population to afford the products. John A. Hobson investments as prime motivators of imperialism, needed to counter-balance under-consumption (or excess savings) at home, generated by bad income allocation However there are also scholars that think that it is due to capitalism that brought the country to export abroad. Vladimir Lenin > Imperialism as the natural consequence of capitalism which generated monopoly = there is. A natural tendency of capitalism is market concentration in finance and then in production. And this generates biases that brought colonisation abroad. So competition monopoly in banking monopoly in production, which is subject to finance lower profit opportunities at home colonization Others think that the need of the company to do the division of labour has to be accomplished internationally because of the higher need to get raw materials from where they were available (complexity of the production chain). Markets for products search for investment opportunities may lead to wars of annexation = aggressive behaviour to conquer new territories and incorporate them In the end, Rosa Luxemburg international loans (finance) as a way for capitalist societies to penetrate (and destroy) pre-capitalist societies (no peaceful transition). Neoclassical theory 20s, 30s and 40s. FDI is not yet recognisable: they are either non-existing or they are assimilated market investments as portfolio investments or investments stimulated by market fundamentals. They’re considered not particularly interesting or they were considered a risky investment. International trade theory (Hecksher-Ohlin). Bertil Ohlin: capital movements are either absent (fixed endowment to explain countries comparative advantages), or purely exogenous in the form of payment of gifts or war reparations. No clear distinction between FDI and other forms of investments. Ragnar Nurske: focus on portfolio investments no more exogenous but driven by interest rate differentials or technological change  Carl Iversen: still no distinction between portfolio investments and FDI cross-border investments driven by interest rates are more risky than domestic ones Until 1960s no clear recognition of FDI. The contribution of Stephen Hymer (1934-74) work in the US. He was the one that first considered the FDI. We are in the context after the two WW = reconstruction time. FDI does not seem to be so affected by risk, uncertainty, interest and exchange rate movements as portfolio investments. These investments are not simply a transfer of money > there’s the transfer of other resources like technology embodied in tangible and intangible assets, trademarks, patterns, secrets, skills, capabilities, management; moreover the investor must maintain control and affect the strategic decisions. These kinds of investments originate from the willingness of these companies to exploit an advantage that they have (ownership advantage) > an advantage, many times technological but not necessarily, that they already exploited in the country of origin and that now they want to exploit abroad. This allows to: eliminate competitors gain rents from the use of external assets like cheap labour, cheap materials, skills, natural resources no more powerful than nation-states, but rooted in the major financial centres of the world This represents a radical new theory. The core assumption of his theory was the ownership advantage that originates from market imperfection (failure). A perfect competitive market is the best form of a market we can have. In this kind of market we have Perfect rationality of agents, everyone satisfied (Pareto efficiency). This is not the case because there are very reasons for the market to fail. The equilibrium fails to be achieved for many reasons: price of public goods, the market form is never perfectly competitive (where this happens we have an ideal market). The imperfectly competitive market structure are: 1. Monopolies = one single producer that phase all the demand 2. oligopolies = few single companies that dominate the demand and interact strategically (incorporate what the others do) 3. monopolistic competition = hybrid form where the companies produce a highly differentiated product and they are niche monopoly, where they are monopolists but compete with one another Market imperfection implies market concentration = companies have market power, they can affect the price in a highly concentrated market. Why does market imperfection arise? The markets for final goods are imperfectly competitive. So market imperfections come from: - imperfect good markets: media and entertainment, air travels  - imperfect factor markets: market for inputs, for energy, capital assets, raw materials - internal or external scale economics. The economies of scale refers to the fact that economies getting larger spend less to produce goods. This is a technological advantage to larger companies over the smaller ones. Higher efficiency and profitability, the more the company becomes larger. - role of the state: states assign by law the monopoly too certain companies In a perfectly competitive market they wouldn't have the capacity to affect the price. In a highly concentrated market companies can set a price higher than the marginal cost earning a mark up over the cost. Determinants of FDI Reason for FDI: these market imperfections allow companies to have ownership advantages exploitable in house but they want also abroad. Another reason for FDI is removing market conflicts, removing competitors abroad, removing conflicts with potential rivals by acquiring control, gaining extra market power abroad (if you incorporate them in your ownership structure, you’re becoming larger and increasing your market share also in foreign countries) No search for low costs of production indeed. the market imperfection arise from two things. 1. First determinant: existence of specific advantages (due to market imperfections) that might be exploited abroad, especially if domestic markets are saturated 2. Second determinant: conflict removal in foreign markets with potential rivals acquiring control over foreign rivals leads to higher market power, increasing market imperfections The mainstream approach came up in the 1970s elaborated by a scholar of Hymer, John Dunning: the eclectic OLI paradigm. It is a positive theory (what is) rather than normative (what is should be) = he is interpreting the reality starting by the observation of facts. Main hypothesis: the level and structure of a firm’s foreign value-adding activities depends on three conditions being satisfied simultaneously. 1. (O): ownership advantage. There is a sort of unique advantage that the company owns that gives her a proprietary advantage in the market. Usually we talk about technology that is already exploited in the domestic market, but  it is not enough, so it is exploited abroad. The extent to which it possesses unique and sustainable ownership- specific advantages (tangible or intangible assets) w.r.t. firms of other nationalities, thanks to which it can achieve lower costs or higher product quality market power. This advantage is a push factor that originates from the country of origin that has the advantage. This is not sufficient. 2. (L): location advantage. To relocate activities, firms must combine O-advantages with incentives to locate its operations outside the home country (e.g. inputs, intermediates, services, culture, institutions specific of host regions). The location advantage is a pool factor that originates from the country of destination. There’s something abroad that attracts countries to operate outside the country: land permission, the availability of cheaper labor, cheaper raw materials, particular types of consumers. They are both necessary conditions but not enough to have FDI > another way to exploit location and advantage is through for example licensing, outsourcing, subcontracting abroad (non equity modes). 3. (I) international advantage. market-replacement activities that confer the direct control over assets and hierarchical advantages: internalization becomes more profitable than arm-length contracts see Transaction Costs Theory. Producing within your ownership structure is more convenient than using the market, than using suppliers outsourcing licensees. Ownership-advantages are usually related to property rights and/or intangible assets, innovation, patents, brand, reputation, experience, managerial skills, financial ability, common governance. Location advantageç natural resources, inputs that are low, availability of raw materials, investment incentives, export processing zones, input prices, quality and productivity, transport and communication costs. Internalization-advantages: they originate from comparing the gains companies can have managing transactions with independent suppliers vs having direct interactions with suppliers that are part of their group > theory of transaction cost Avoid search, monitor and negotiation costs Avoid moral hazard, adverse selection Avoid costs of litigation and broken contracts Avoid government intervention (quotas, tariffs) Control supplies and conditions of sales of inputs Better engagement in practices (predatory pricing, transfer pricing,...) Situation where you don’t trust or like or is not convenient to make an independent supplier to supply goods, so it is better to do it on your own. The cost of using the market is not comparable to the cost of internalization. You have to compare the cost and benefits of making with the cost and benefits of buying in the market. 1. Transaction costs (TC): search, monitoring, evaluation, contract enforcement 2. Internalization costs (IC): organization, coordination, administration = cost of making the product yourself  Vertical integration (i.e. larger firm boundaries) occurs when TC > IC Vertical disintegration (i.e. narrower firm boundaries) occurs when IC > TC it is better to use the market and disintegrate production to use the market; ex. the bicycle production. There are elements that make this choice important (between IC and TC), because the cost of using the market increases with: - asset specificity > the more specific the asset the higher the cost; if the assets are general, everyone can do it so the price is lower; - market and/or technological uncertainty > the more frequent the interaction the higher the trust - high expert contractual opportunism (moral hazard) the cost of using. The higher is the risk of opportunism, the higher is the incentive to integrate internal activities. Main motivations behind MNE activities From OLI paradigm to Dunning’s classification of MNE activities in four main strategies: 1. Natural resource seeking (vertical FDI): Access to natural resources (oil, raw materials, wood, water, minerals...) which are not available at home or which are cheaper than at home (e.g. extractive industry) 2. Market seeking (horizontal FDI) = penetrating new markets, not only investing abroad. Supply local or adjacent markets via proximity to demand. MNE motivated by the emergence or growth of new markets, or by the need to adapt products to local tastes, or existence of trade barriers favouring ‘tariff-jumping’ local production than exporting (e.g. IKEA) 3. Efficiency Seeking (vertical + horizontal FDI): is an FDI that is used to improve the efficiency of the comparing (reducing production abroad and using cheap labour). MNE investing to rationalize and restructure previous investments which are either resource- or market-led mainly MNE taking advantages of lower labor costs and/or higher labor endowment (e.g. Mexico maquiladoras) 4. Strategic asset seeking (vertical + horizontal FDI): Acquire knowledge-intensive assets of foreign firms, localized knowledge, competencies and capabilities, brands... (e.g. French and US MNE acquiring Italian fashion and luxury companies, or Chinese Lenovo acquiring IBM in 2005, or Indian Tata acquiring UK steel giant Corus in 2007) EXAMPLE: Rolex -> They own a foundry in order to deliver the gold on time with the highest quality possible (using the market could mean risks > the remedy is FDI > building you own foundry)  ECONOMIC EFFECTS OF FDI Main questions: in host countries Do FDI inflows generate a higher economic growth and development? Do FDI inflows generate net employment growth? Do FDI inflows affect the quality of labour? We are talking about developing and emerging economies that strongly need capital. Underlying mechanisms When we talk about a multinational corporation that invests in a country (investments are a flow of resource, accumulation of capital assets that are made for production purposes), implicitly means to accumulate capital assets that can be material, tangible or intangible. It is not only a matter of attracting financial assets (money) -> companies want to expand their activities in different locations, so they invest in these activities. Attracting investments from outside means for a host country to accumulate capital assets (tangible or intangible). This means a triggering mechanism for local and private investments: the crowding in effect = the arrival of this inward FDI or of multinationals is the way for local entrepreneurs to invest as well. Investments that would never be provided by these actors are actually put in practice once the investments projects are realized in a host region. So FDI is a vehicle for transferring technology to LDC, through «capital deepening» = is a process through which the arrival of an FDI makes further investments by private activities more profitable and cheaper, less risky (FDI reduces the cost of introducing new varieties of capital goods and increases the rate at which new capital goods are introduced). These are the positive direct effects of FDI on aggregate economic growth due to the transfer of: financial capital (investment): K accumulation (Keynes multiplying effect) technology and R&D capabilities management and marketing methods skills investments by local firms (crowding-in effect) This is a positive return in various terms. Positive return from attracting FDI, especially from the perspective of less developed countries. There are also negative direct effects that are mainly due to the particular nature of multinat