Lecture 6 - Eclectic Paradigm PDF

The amplitude of the multinational corporation activity as vector of the globalization of the economy Global economy mechanisms – Lecture 6 Structure of the lecture The complexity of the multinational corporation framework in the current context The expansion of the corporations...

The amplitude of the multinational corporation activity as vector of the globalization of the economy Global economy mechanisms – Lecture 6 Structure of the lecture The complexity of the multinational corporation framework in the current context The expansion of the corporations in the context of global mechanisms Quantifying the economic role of multinational corporations in the global economy Definition Dunning, J. (1993): ”an enterprise that engages in FDI (foreign direct investments) and organizes the production of goods and services in more than one country” Multinational corporations: size, patterns and trends ❑ Large size; ❑ Their worldwide operations and activities tend to be centrally controlled by parent companies; ❑ They are major force in the rapid globalization of world trade; ❑ Almost one-third of international exchange involves intra-MNC sales of intermediate products or equipment from one nation's subsidiary to another; ❑ The have become in effect global factories searching for opportunities anywhere in the world; ❑ Many MNC have annual sales volume in excess of the GDP of the developing countries in which they operate. Criteria used in defining multinational corporations (1) A) Structural criterion - Is based on two main pillars: 1. the number of countries where a multinational corporation operates – according to World Bank a multinational corporation is a company that oversees and control entities from at least 5 different countries; 2. property - is not limited by the simple holding of a larger or a smaller percentage of the existing assets abroad a) property upon the production factors, despite their origin or destination b) property on patents and innovation factors used in the production of some goods within their own subsidiaries or within the foreign partners subsidiaries; c) access to the capital markets – tight relations with the financial institutions – banks; d) property on the management and the technical organizations forms ( from the training of the employees to the marketing strategies) Criteria used in defining multinational corporations (2) B) Performance criterion ❑ A multinational corporations can be defined based on several economic parameters: The absolute or relative share own in the total production obtained abroad; The sales volume registered by the subsidiaries located abroad; The number of employees recruited from the domestic workers; The size of profits as a result of foreign direct investments; The share of foreign assets in the total held assets; In order for a company to be multinational, it should incorporate a high degree of internationalization; C) Behavioural criterion ❑ The ability/capacity of the management to adopt and implement strategies at regional/international scale; § The ability of these strategies to identify the best available opportunities that exist on the global market at that time  THE MAIN TYPES OF FOREIGN PRODUCTION 1. natural resource seekers; These enterprises are prompted to invest abroad to acquire particular and specific resources of a higher quality at a lower real cost than could be obtained in their home country (if, indeed, they are obtainable at all). seeking physical resources of one kind or another; seeking plentiful supplies of cheap and well-motivated unskilled or semi-skilled labour; the need of firms to acquire technological capability, management or marketing expertise and organisational skills. 2. market seekers; These are enterprises that invest in a particular country or region to supply goods or services to markets in these or in adjacent countries. 3. efficiency seekers; The motivation of efficiency-seeking FDI is to rationalise the structure of established resource-based or market- seeking investment in such a way that the investing company can gain from the common governance of geographically dispersed activities. Such benefits are essentially those of the economies of scale and scope and of risk diversification. 4. strategic asset or capability seekers. The fourth group of MNEs comprise those which engage in FDI, usually by acquiring the assets of foreign corporations, to promote their long-term strategic objectives – especially that of sustaining or advancing their global competitiveness. Source: John H. Dunning and Sarianna M. Lundan 2008, Multinational Enterprises and the Global, Edward Elgar Publishing Limited Economy, Second Edition, pp. 68-73  ❑ The eclectic model main aim consists in providing an objective perspective on the The eclectic movement of capital abroad as foreign direct investments. theory of FDI ❑ Eclecticism - combining several points of view and heterogeneous concepts to explain a complex economic phenomenon. The eclectic theory of FDI John H. Dunning distinguished three groups of advantages that determine the prosperity of a firm, industry or country to be a net recipient or exporter of FDI : Ownership advantages: factors that enable a particular firm to expand at all (rights to particular technologies or supplies of factors); Locational advantages: overcoming custom barriers that restrict imports; the possibility of using cheap labour force; the existence of an abundant amount of resources; proximity to the opening markets; good transportation and communication networks; favourable governmental policies or a cooperative cultural environment - question of comparative advantage; International advantages: whether expansion is best accomplished within the firm, or by selling the rights to the means of expansion to other firms  The eclectic theory of FDI Ownership advantages technology, industrial organization and size, access, finance; Locational advantages the relative transportation costs of raw materials and finished goods; the locations of materials and markets; the cultural similarities between an MNC‘s home and potential countries; government tax concessions, tariff rates, investment grants Internalisation advantages costs of negotiating, opportunism, uncertainty, taxes and tariffs.  The eclectic theory of FDI Ownership-specific Advantages (O) of an Enterprise of one Nationality (or Affiliates of Same) over Those of Another a) Property rights and/or intangible asset advantages (Oa) The resource (asset) structure of the firm. Product innovations, production management, organisational and marketing systems, innovatory capacity, noncodifiable knowledge; accumulated experience in marketing, finance, etc. b) Advantages of common governance, that is, of organising Oa with complementary assets (Ot). Ability to take advantage of geographic differences in factors endowments, governmental rules. c) Institutional assets (Oi). The formal and informal institutions that govern the value- added processes within the firm, and between the firm and its stakeholders. Source: Source: John H. Dunning and Sarianna M. Lundan 2008, Multinational Enterprises and the Global, Edward Elgar Publishing Limited Economy, Second Edition, pp. 101-102  The eclectic theory of FDI Location-specific Factors (L) (These May Favour the Host countries) Spatial distribution of natural and created resource endowments and markets. Input prices, quality and productivity (e.g., labour, energy, materials, components, semifinished goods). International transport and communication costs. u Investment incentives and disincentives (including performance requirements, etc.). Artificial barriers (e.g., import controls) to trade in goods and services. Infrastructure provisions (educational, transport and communication). Cross-country ideological, language, cultural, business, political differences. Economies of agglomeration and spillovers. Economic system and strategies of government; the institutional framework for resource allocation. Legal and regulatory system (e.g., protection of propriety rights, credible enforcement). Source: Source: John H. Dunning and Sarianna M. Lundan 2008, Multinational Enterprises and the Global, Edward Elgar Publishing Limited Economy, Second Edition, pp. 101-102  The eclectic theory of FDI Internalisation Advantages (I) (i.e., to Circumvent or Exploit Market Failure) u To avoid search and negotiating costs. To avoid costs of moral hazard and adverse selection, and to protect the reputation of the internalising firm. To avoid cost of broken contracts and ensuing litigation. Buyer uncertainty about nature and value of inputs (e.g., of technology being sold). When market does not permit price discrimination. Need of seller to protect quality of intermediate or final products. To capture economies of interdependent activities (influenced by Ot). To compensate for the absence of future markets. To avoid or exploit government intervention (quotas, tariffs, price controls, tax differences, etc.). To control supplies and conditions of sale of inputs (including technology). To control market outlets (including those which might be used by competitors). To be able to engage in practices, such as cross-subsidisation, predatory pricing, leads and lags, and transfer pricing as a competitive (or anticompetitive) strategy. Source: Source: John H. Dunning and Sarianna M. Lundan 2008, Multinational Enterprises and the Global, Edward Elgar Publishing Limited Economy, Second Edition, pp. 101-102 Questions/Suggestions Thank you, see you next session..