1. Multinational Corporations in the Global Economy Lecture 8 Introduction and Basic Facts Irina Malganova (KFU) - Spring 2014 Economy of MNC: Lecture 1

2. Plan for Today What is MNCs about? Basic facts about MNCs Advantages vs Disadvantages of MNCs Case Study A few questions you will learn to answer Irina Malganova (KFU) - Spring 2014 Economy of MNC: Lecture 1

3. Main book for our course Paul Krugman, Maurice Obstfeld, and Marc Melitz: International Economics: Theory and Policy 9 th edition Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1 http://krugman.blogs.nytimes.com/

4. A Few Other Books on Reserve Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

5. Key Terms MNC (Multinational Corporation) Foreign Direct Investment (FDI) Horizontal FDI Vertical FDI The Transnationality Index (TNI) Employment opportunities Multinational Parent Multinational Affiliates Greenfield FDI Brownfield FDI Home Country Host Country Foreign Assets Domestic Industry Irina Malganova (KFU) - Spring 2014 Economy of MNC: Lecture 1

6. Multinational Firms Before 1945, multinational corporations (MNEs) played a small role in world trade Today 30% of US exports and 48% of US imports are sales from one division of an MNE to another Fragmentation of production or offshoring has been a major factor in the growth of trade and FDI Irina Malganova (KFU) - Spring 2014 Economy of MNC: Lecture 1

7. Offshoring occurs when a firm moves part of the production process to a foreign country Via a subsidiary (e.g. Intel) or subcontracting (e.g. Nike) Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

8. An Example: Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1 Assembled in China (and now also Brazil) by Taiwan-based Foxconn and Pegatron

9. Fragmentation of production: the example of the Boeing 787 Dreamliner Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

10. When is a corporation multinational? In U.S. statistics, a U.S. company is considered foreign-controlled, and therefore a subsidiary of a foreign-based multinational, if 10 % or more of its stock is held by a foreign company Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

11. Why would a firm choose to operate an affiliate in a foreign location? Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

12. The production activities (1) The affiliate replicates the production process (that the parent firm undertakes in its domestic facilities) elsewhere in the world (2) the production chain is broken up, and parts of the production processes are transferred to the affiliate location Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

13. For example, Intel (the world’s largest computer chip manufacturer) Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

14. The example of Toyota Profit ¥962.1 billion (FY 2013) Total assets US$ 377.281 billion (2013) Total equity ¥12.773 trillion (FY2013) Total equity Employees 333,498 Parent Toyota Group ParentToyota Group Divisions Lexus Scion DivisionsLexusScion Subsidiaries 522 (Toyota Group) Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

15. Toyota Corolla 2014 Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

16. According to ILO report «for some, the multinational companies are an invaluable dynamic force and instrument for wider distribution of capital, technology and employment » Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

17. According to ILO report «for others they are monsters which our present institutions, national or international, cannot adequately control, a law to themselves with no reasonable concept, the public interest or social policy can accept » Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

18. Advantages of MNC's for the host country MNC's help the host country in the following ways 1. The investment level, employment level, and income level of the host country increases due to the operation of MNC's. 2. The industries of host country get latest technology from foreign countries through MNC's. 3. The host country's business also gets management expertise from MNC's. Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

19. Advantages of MNC's for the host country MNC's help the host country in the following ways 4. The domestic traders and market intermediaries of the host country gets increased business from the operation of MNC's. 5. MNC's break protectionalism, curb local monopolies, create competition among domestic companies and thus enhance their competitiveness. 6. Domestic industries can make use of R and D outcomes of MNC's. Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

20. Advantages of MNC's for the host country MNC's help the host country in the following ways 7. The host country can reduce imports and increase exports due to goods produced by MNC's in the host country. This helps to improve balance of payment. 8. Level of industrial and economic development increases due to the growth of MNC's in the host country. Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

21. Advantages of MNC's for the home country 1. MNC's create opportunities for marketing the products produced in the home country throughout the world. 2. They create employment opportunities to the people of home country both at home and abroad. 3. It gives a boost to the industrial activities of home country. Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

22. Advantages of MNC's for the home country 4. MNC's help to maintain favourable balance of payment of the home country in the long run. 5. Home country can also get the benefit of foreign culture brought by MNC's. Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

23. Disadvantages of MNC's for the host country 1. MNC's may transfer technology which has become outdated in the home country. 2. As MNC's do not operate within the national autonomy, they may pose a threat to the economic and political sovereignty of host countries. 3. MNC's may kill the domestic industry by monpolising the host country's market. Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

24. Disadvantages of MNC's for the host country 4. In order to make profit, MNC's may use natural resources of the home country indiscriminately and cause depletion of the resources. 5. A large sums of money flows to foreign countries in terms of payments towards profits, dividends and royalty. Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

25. Disadvantages of MNC's for the home country 1. MNC's transfer the capital from the home country to various host countries causing unfavourable balance of payment. 2. MNC's may not create employment opportunities to the people of home country if it adopts geocentric approach. 3. As investments in foreign countries is more profitable, MNC's may neglect the home countries industrial and economic development. Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

26. Applicability to particular business MNC's is suitable in the following cases. 1. Where the Government wants to avail of foreign technology and foreign capital e.g. Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

27. Applicability to particular business 2. Where it is desirable in the national interest to increase employment opportunities in the country Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

28. Applicability to particular business 3. Where foreign management expertise is needed e.g. Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

29. Applicability to particular business 4. Where it is desirable to diversify activities into untapped and priority areas like core and infrastructure industries, e.g. ITC is more acceptable to Indians L&T Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

30. Applicability to particular business 5. Pharmaceutical industries e.g. Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

31. Index of Reputation Institute-2013 1BMW78.39 2The Walt Disney Company77.76 3Rolex77.23 4Google77.15 5Daimler76.58 6Sony76.30 7Microsoft76.23 8Canon76.02 9Nestle75.21 10LEGO Group75.02 Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

33. Forbes.com The Global 2000 USA ( 524 companies) и Japan ( 258 companies)

34. Forbes.com The Global 2000 28 Russian Companies «Газпром» (15 th place), «Лукойл» (68), «Роснефть» (71) и «Сбербанк» (90).

35. Territorial structure of MNCs 733 companies from the countries of the Asia-Pacific region 605 — Europe, Middle East and Africa 524 — USA 145 — South and Central America.

36. Global 2000: Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1 The World’s Top Companies

37. 1. ExxonMobil* Country: USA Industry: Oil and Gas Revenue: $ 433.5 billion Income: $ 41.1 billion Assets: $ 333.1 billion Market Cap: $ 407.4 billion

38. 2. JPMorgan Chase* Country: USA Banking system Revenue: $ 110.8 billion Income: $ 19 billion Assets: $ 2.265 trillion. Market Cap: $ 170.1 billion

39. 3. General Electric* Country: USA Conglomerate Revenue: $ 147.3 billion Income: $ 14.2 billion Assets: $ 717.2 billion Market Cap: $ 213.7 billion

40. 4. Royal Dutch Shell* Country: Netherlands Industry: Oil and Gas Revenue: $ 470.2 billion Income: $ 30.9 billion Assets: $ 340.5 billion Market Cap: $ 227.6 billion

41. 5. ICBC (Industrial & Commercial Bank of China) Country: China Bank Revenue: $ 82.6 billion Income: $ 25.1 billion Assets: $ 2.039 trillion. Market Cap: $ 237.4 billion

42. 6. HSBC* Country: United Kingdom Bank Revenue: $ 102 billion Income: $ 16.2 billion Assets: $ 2.550 trillion.? Market Cap: $ 164.3 billion

43. 7. PetroChina* Country: China Industry: Oil and Gas Revenue: $ 310.1 billion Income: $ 20.6 billion Assets: $ 304.7 billion Market Cap: $ 294.7 billion

44. 8. Berkshire Hathaway* (Warren Buffett) Country: United States Industry: Investment Revenue: $ 143.7 billion Income: $ 10.3 billion Assets: $ 392.6 billion Market Cap: $ 202.2 billion $ 4.5 billion

45. 9. Wells Fargo* Country: United States Bank Revenue: $ 87.6 billion Income: $ 15.9 billion Assets: $ 1.313 trillion. Market Cap: $ 178.7 billion

46. 10. Petrobras - Petroleo Brasil* Country: Brazil Industry: Oil and Gas Revenue: $ 145.9 billion Income: $ 20.1 billion Assets: $ 319.4 billion Market Cap: $ 180 billion

47. 11. BP* Country: United Kingdom Industry: Oil and Gas Revenue: $ 375.5 billion Income: $ 25.7 billion Assets: $ 292.5 billion Market Cap: $ 147.4 billion

48. 12. Chevron* Country: United States Industry: Oil and Gas Revenue: $ 236.3 billion Income: $ 26.9 billion Assets: $ 209.5 billion Market Cap: $ 218 billion

49. 13. CCB (China Construction Bank)* Country: China Bank Revenue: $ 68.7 billion Income: $ 20.5 billion Assets: $ 1.637 trillion. Market Cap: $ 201.9 billion

50. 14. Citigroup Country: United States Bank Revenue: $ 102.6 billion Income: $ 11.1 billion Assets: $ 1.873 trillion Market Cap: $ 107.5 billion

51. 15. «Газпром»* Country: Russia Industry: Oil and Gas Revenue: $ 117.6 billion Income: $ 31.7 billion Assets: $ 302.6 billion Market Cap: $ 159.8 billion

52. Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

53. The Transnationality Index (TNI) It is calculated as the arithmetic mean of the following three ratios 1. the ratio of foreign assets to total assets 2. the ratio of foreign sales to total sales 3. the ratio of foreign employment to total employment 1. the ratio of foreign assets to total assets 2. the ratio of foreign sales to total sales 3. the ratio of foreign employment to total employment

54. Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1 Example TNI ( Hutchison Whampoa limited ) = = [ 75447/ 92762 + 21053/26924 + 198707/240000] / 3 * 100 = 80.77424 = 80.8

55. Summary Some multinationals replicate their production processes in foreign facilities located near large customer bases. This is categorized as horizontal foreign direct investment (FDI). An alternative is to export to a market instead of operating a foreign affiliate in that market. The trade-off between exports and FDI involves a lower per-unit cost for FDI (no trade cost) but an additional fixed cost associated with the foreign facility. Only firms that operate at a big enough scale will choose the FDI option over exports. Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

56. Summary Some multinationals break up their production chain and perform some parts of that chain in their foreign facilities. This is categorized as vertical foreign direct investment (FDI). One alternative is to outsource those parts of the production chain to an independent foreign firm. Both of those modes of operation are categorized as offshoring. Relative to the option of no offshoring, offshoring involves lower production costs but an additional fixed cost. Only firms that operate at a big enough scale will choose to offshore. Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1

57. How to Reach Me Office: K.Marks str. 43 off.410 Email: IGMalganova@kpfu.ru Please include “MNC” in subject line Office Hours: Mondays 1-2PM Tel. +7(843)238-08-31 Irina Malganova (KFU) - Spring 2014 Economy of MNC. Lecture 1