1. Presentation prepared for the Conference on "Emerging-Market Transnational Corporations and Sustainable Development in China and Abroad", Hubei University, Wuhan, China October 2015 Seev Hirsch Emeritus Professor Faculty of Business Tel Aviv University Israel

2. Nation State & Domestic Enterprise 1 The state Domestic business

3. Nation State & Multinational Enterprise 2 Multinational enterprise Home country Foreign country 1 Foreign country 2

4. Both Nation States (NS) and Multinational Enterprises (MNE) are man-made institutions MNEs have one home country and several host countries Intensive interactions between MNE and each country Hierarchy -Formal -Informal Interaction creates common and conflicting interests -between MNE & home country, MNE and host countries & between home and host countries Characteristics: 3

5. Common interests 4

6. MNE maximizing value accruing to their shareholders NS maximizing value accruing to their citizens Conflict over division of benefits and costs Taxes Financial policies Environmental policies Trade and investments policies Location !!!!! Conflicting interests 5

7. Gains from common interests outweigh costs of conflicting interests Evidence: High growth rates of economies engaging in outward FDI (Asian Tigers, China) Growing share of FDI including FDI from Emerging Economies in global Economy Emerging Economies FDI in 2014: US$ 468bn. Relative share: 13% in 2007, 35% in 2014 HOWEVER: MNE activity contributes to increase in inequality between & within countries !! Overall Effects 6

8. Income & Wealth Distribution US 7

9. Income Distribution – by region 8

10. Conflicts over location of value activities: New business Expansion Closure Specific activities Management functions All decisions presented by the MNE as legitimate business decisions Conclusion: In market economies the Home Country cannot effectively interfere in MNE decisions on location of value activities. Interference in location decisions implies negation of market economy status Location Related Conflicts 9

11. Power Relations over time 10 Vernon’s Sovereignty at Bay but also Obsolescing bargaining power model Johanson & Vahlne: MNEs gain experience, market knowledge, legitimacy Ohmae - states are increasingly overshadowed by MNEs Martin Wolf – MNEs require rules set by states Kobrin: “States will not disappear and will certainly continue to play a major, if not the major role in the international order” OVERALL: Home country’s ability to control their successful MNEs diminishes over time as MNEs grow & become integrated into more countries

12. Conflict over corporate location 11 Corporate location = Corporate Nationality ????? - NOT !!!!!!!! where: corporate head office is located corporate taxes are payable shares are registered most stockholders reside major production plants are located major markets are located

13. “Today, technological advances may permit different parts of the value chain to operate in different places, companies may hold portfolios of brands with different national heritages, and leaders, shareholders, and customers may be dispersed. Still, the nationality of a firm is rarely ambiguous. It usually has a major influence on corporate strategy, and it seems to be growing in political importance”. “…..in most civil law systems in Continental Europe and other countries influenced by those systems, nationality is determined by the company’s seat – the location of its central administration” (Jones, HBR, October 2006) Corporate Nationality 12

14. Corporate Nationality change = Corporate Exit Corporate Nationality changes when the top decision making body is moved to a different country. Motivation – Rare cases: Conflict over public policies, including taxes More Common: Cross Border Acquisitions & Mergers Examples: Lenovo - IBM’s personal computer business taken over by China based MNE Nokia - Finland based mobile telephone business - taken over by Microsoft ABB - Swedish based engineering giant - ASEA merged with Swiss- based engineering giant Brown Bovary. Land Rover - UK based taken over first, by German based – BMW, then by US Based - Ford, then by India based –Tata To illustrate implications of corporate nationality change we employ case study of Adama – Israel based MNE Corporate Nationality Change 13

15. Founded in 1965 by Kibbutz Hatzerim Supplying micro-irrigation services in Europe, South Africa and Latin America. Technology- drip irrigation system, based on patented and constantly updated by local R&D. Branch plants established in two other kibbutzim Yiftach,and Magal. By 2014 Netafim is a major MNE: Global sales US$700m, 4300 employees, sales in 100 countries 12 production plants: 3 in Israel, 5 in Latin America, 1 each in US, Australia, South Africa The Ukraine In 2006 Markstone Capital group from US and Tenne Capital from Israel acquire 24%of Netafim’s shares. In 2012 Permira, a Europran Invstment company acquires 63% from investors and owners. Kibbutz Hatzerim keeps 33% of the equity Motivation: Financial needs of privatized Kibbutz members. Israel’ other water management companies: Plastro Gvat (John Deere Water systems), Naan Dan Jain, Tahal, Mekorot, etc. Israel Cases Studies1: Netafim 14

16. Adama – Originally “Makhteshim – Agan”, two companies, merged in 1977, in globally important crop protection chemicals industry. Producing and distributing globally in over 100 countries, insecticides, herbicides and fungicides. Owned originally by Israel's Federation of labor until sold in 2006 to IDB, a subsidiary of Israel Discount Investments, the country’s leading conglomerate. IDB floated 53% of the company’s shares on the Tel Aviv Stock exchange in 2007. 60% of IDB’s shares were sold in 2011 for US$ 2.4 to China National Agrochemical Corporation (CNAC), subsidiary of China National Chemical Corporation (ChemChina) a state owned enterprise. In addition IDB, which was in financial difficulties, got a US$ 960 million loan, secured by the company’s remaining shares.China National Chemical Corporation Subsequently, the company’s name was changed to Adama. Israel case study: Adama 15

17. Following the transfer of ownership the company’s sales and profits made good progress: Sales increased from $m2,691 in 2011 to $m3,221 in 2014, and net profits in the same period increased from $m131 to $m157 The Israeli management team was kept on. The CEO, who left to head TEVA, Israel’s leading MNE, was replaced by Chen Lichtenstein, an experienced veteran of the company. New board of 9 directors, consists of 5 Chinese, chaired by Yiang Xingqiang, and 4 Israeli members. Move to integrate China based chemical subsidiaries of CNAC into the new structure by transferring a senior executive to China. Plans to expand capitalization, initially in New York, where issue was unsuccessful. Change in capital structure to facilitate issue of shares on Shanghai and possibly Hong Kong stock exchanges Why did IDB sell Adama? Why did ChemChina buy Adama? Adama (cont.) 16

18. % Revenues US$ mCountryCompany 21.09 11,979Switzerland Syngenta AG 19.91 11,304US DuPont 19.46 11,050Germany Bayer Crop Science 12.84 7,290US Dow Agro Sciences 12.75 7,238Germany BASF SA 8.62 4,897US Monsanto 5.33 3,029Israel/China Adama Agricultural Solutions 100.0056,787Total Global Sales of Crop Protection Chemicals by Leading Companies, 2014 17

19. Adama’s example suggests need to redefine corporate nationality: Earlier definition: Location of Corporate Central Administration. New definition: Location of those who control appointment of the corporate central administrators Change of corporate nationality takes place: when control over appointing central administration is moved to another country Following acquisition by ChemChina China has become home country of Adama, even though top management’s location is unchanged Change can have profound economic and political effects on the country’s international standing When corporate nationality changes, the old Home Country changes status to that of a Host Country. Corporate Nationality Change Reconsidered 18

20. Unlike relocation of value activities corporate exit may signal call for public interference, even though it is conducted between willing seller and buyer. Reasoning: Transaction may have negative effects on public interests: unemployment Loss of control over valuable technologies, firm specific assets, natural resources negative security, environmental, foreign relations impact International standing Intervention takes place even in market economies. Examples: Australia, Canada, US, Interventions are often portrayed as control of incoming FDI Difficulty of accepting public intervention due to: negative effect on potential investors, Intervention counters the logic of market economy. Corporate Exit, Public Interest & Public Policy 19

21. In market economies corporate nationality is determined in a non- symmetric way - Business enterprise can become a multinational Choose its home country Change it home country Nation States can: - Induce local business corporations to become MNEs - Induce foreign MNEs to choose new home country -Establish SOEs with governmental mandate -Block corporate entry and/or exit by fiat Concluding Remarks 20

22. Point of departure: Relationship between Home Countries and Their MNEs are characterized by conflicting and complementary interests. Advantages of MNE’s presence far outweighs their absence. Conflicting interests over location of value activities, when MNEs opt for foreign while Home Country prefers domestic location. In market economies MNEs’ location preferences usually prevail. Issue: Should MNEs’ autonomous choice include corporate exit? Corporate Exit - Change of corporate nationality, cross-border transfer of those who appoint Corporate Central Administration. Corporate Exit can have negative economic environmental and political effects which, in my view, justify in principle public intervention. A Final Word 21

23. 謝謝 THANK YOU תודה רבה 22