I NTERNATIONAL I NVESTMENT & F INANCIAL F LOWS

I NVESTMENT & F INANCIAL F LOWS 1. How money is invested 2. Multinational corporations 3. Where the Money Flows 4. Evolution of MNCs Historical Advantages of GN GS Resistance GS Embraces Changes in Production

H OW M ONEY IS I NVESTED Foreign Portfolio Investment (FPI) Foreign Direct Investment (FDI) Mostly by individuals; may be used by MNCs Used by MNCs—returns higher yield than FPI Mostly stocks and bondsSubsidiary branches and/or joint ventures To earn interest through dividends To earn profits No asset controlControls assets of company As shareholder, may vote on directors and possibly resolutions Determines policies, locations, products, product volume, personnel, etc. Short-term commitmentLong-term commitment

MNC S

A BOUT MNC S Ownership of plants, resource extraction, processing operations, and/or services Package of capital, technology, managerial skills, marketing skills Measured in Gross Corporate Product (GCP) Total value of all goods & services revenues for one year

C HARACTERISTICS OF MNC S Lots of $  Lots of power Transnationality= mobility Leverage over governments Look for favorable conditions Influence jobs  growth potential Promote globalization Transmitters of western culture & values Promote capitalism & materialism Influential actors in global system Offer domestic/ global competition

W HERE MNC S A RE Global North GN has majority of MNCsmajority Product of post-WWII US hegemony Top 500  80% GN Ra nk Country# of top 500 MNCs 1US133 2China69 3Japan38 4France35 5Germany34

W HERE MNC S A RE Global South MNCs 69 are China (and Taiwan)= 14% 28 owned other EE countries = 6% Only 3 MNCs not GN or EE are petroleum companies= <1% Colombia, Saudi Arabia, Venezuela

I F MNC S W ERE C OUNTRIES Rival states in power Wal-Mart in top spot for 2 nd year in 2011 GCP of $421.8 B Would be 24 th largest economy in world Note: not highest profitnot highest profit MNCs ranked with countries

W HERE THE M ONEY F LOWS

Trends in FDI: Capital flowsCapital flows More FDI goes into which country? The US with $201.7 B Capital flows to EEs est. at $1.041 T in 2011 iif.com/download.php?id=kTF+Yd4yss8= FDI in ChinaChina 30% of all FDI to EEs goes to China What impacts investment decisions?impacts

E VOLUTION OF MNC S

H ISTORICAL A DVANTAGES OF GN Dutch East India Company Recognized as early form of an MNC Influenced formation of others East India Company (British) French East India Company US encouraged FDI after WWII Needed to spark growth in allied countries Initial resistance by GS If you’re a GS leader, why would you resist?

GS R ESISTANCE TO MNC S Initial resistance by GS Newly independent from colonization Little leverage to institute regulations Unable to collectively act to institute rules of FDI Feared exploitation without compensation Lacked skilled workers for higher-level employment Repatriation of earnings Attempted unilateral development

GS E MBRACES MNC S GS see MNCs as Development Tool First embraced in 1960s in Asia & Central America Focus on light industry Set up maquilas / maquiladora as export processing zones (EPZs) in Central America Late 1970s in Africa and China, started to see as development opportunity In China, Special Economic Zones (SEZs) Efforts to entice MNCs with Over 3,000 in over 120 GS countriesGS countries

GS E MBRACES MNC S China’s SEZs 4 in 1980; now have 6now have 6 Model for other countries Russia Vietnam Philippines India (started with 8) Authoritarian regimes Control Political stability

GS E MBRACES MNC S EPZs offer More educated population More stable political environment Special investment incentives and trade concessions Exemption from domestic laws Infrastructure roads, power supplies, transport facilities, low cost or rent buildings Waiver of the restrictions on foreign ownership percentages---allow 100% for foreign company

MNC S & P RODUCTION

New International Division of Labor Started with US electronics firms Now includes processing raw materials, semi- finished, components, finished products 3 Types Production Chains #1 Product Specialization One product for regional market NAFTA: ingredients in English, French, Spanish; measurements standard and metric EU: ingredients in many languages

MNC S & P RODUCTION 3 Types Production Chains: #2 Host-Market Production Production for one national market Effective for big market countries—US, China, Brazil, India Can better cater to market country’s consumer preferences Transportation Size/ weight/ volume If producing in market country, avoids tariffs and NTBs Japanese auto factories in US Kraft chocolate bars in Brazil

MNC S & P RODUCTION 3 Types Production Chains #3 Transnational Vertical Integration Gap between producer and where goods are sold Production network Parts and final product from different places Output of one plant goes to one or more to complete

MNC S & P RODUCTION 3 Types Production Chains #3 Transnational Vertical Integration 2 types Assembly line: Each production unit performs separate step GM- Chassis in Canada, engine in US, interior in Mexico Separate production: Independent units, one assembly point IPod-parts from various countries assembled in China Assembled in’ label The next fashion craze

MNC S & P RODUCTION Production dispersed Other aspects in parent company or country/regional head subsidiary office R&D, marketing, human resources, finance Work outside of parent company Outsourcing Using 3 rd party to complete portion of work Offshoring /international outsourcing Hiring a foreign company or using foreign subsidiary for portion of work

MNC S & P RODUCTION New International Division of Labor Issues Exploits foreign labor MNCs generally follow set standards Most pay above local minimum going wage rate Intra-firm trading Cheats subsidiary countries of profits Trade within own set of subsidiaries to avoid taxes Can lower value of product to pay lower taxes b/c not actually trading Export “unfinished” product so profit is credited to parent company at home Inflates trade statistics

R ECAP 1. How money is invested 2. Multinational corporations 3. Where the Money Flows 4. Evolution of MNCs

E XERCISE What draws MNCs into a developing country? What are the pros of having an MNC in your country? What are the cons of having an MNC in your country ncq.html