Teoria Emme

Globalization

The world is becoming more and more interconnected (there is a strong relationship between international trade, communication and politics). Nowadays economic, environmental, social and political issues are no longer limited to the single country because the world is interdependent (a reasonable governance can only be realized within a broader group of stakeholders all around the world).

Communication technologies and mass media are global standards (information, products, opinions can be distributed worldwide in real time at affordable prices); in fact, as a result of technological advances, from the 1930s:

• Price of a phone call from NY to London (99%)
• Cost of transportation of products and people (65%)
• Air freight costs (88%)

Another reason of Globalization is undoubtedly the concept of Open Markets, liberalization of international trade (removal of trade barriers such as: “import tariffs, import quotas and import bans).

Globalization has made possible and profitable for major companies to produce and sell worldwide; Globalization can be analysed from 3 main perspectives:

Economy

Mayor catalyst and most affected area; international exports have increased in the last 60 years, FDIs from governments and companies have increased too (in 2015 FDI’s = 1 trillion $). Many companies are searching for new markets and opportunities for production (country with low wages or soft environmental regulations); These MNCs are 80000 in 2015.

Politics

International politics is also more independent today; important policy issues like climate change, the financial crisis and terrorism cannot be solved by a single state. A broader group of countries like the EU, the G20 or the UN takes the decisions with the pressure of international groups that do not belong to a particular state, the so-called NGOs (non-governmental organization) such as GreenPeace, Amnesty International and so on. All these aspects have reduced the political attitude of single states.

Culture

Western culture is becoming dominant, destroying cultural diversity (fast foods, music and the English language itself is promoting this effect). Globalization has also shown some backlashes such as the phenomenon of people returning to their local and regional customs.

Some countries benefit more from Globalization, some others less!

Taiwan, Korea, India, China, Brazil are gaining considerable advantage from their integration into the world economy (for instance, they can use FDIs to build up infrastructure and sell products internationally exploiting the low wages in their country).

Low wages  Cheap products  Global success  Low poverty

Sub-Saharan African countries, on the other hand, are not prepared for a titanic international competition (in fact, industrialized companies sell their cheaper products in these regions destroying the local markets and production facilities). Moreover, they do not attract FDIs and foreign investors.

Globalization is both an opportunity and a threat for industrialized countries: they can acquire new markets for their industrial goods but they are also facing the competition of new emerging countries that for example can produce at a lower cost.

Multinational corporations (Main actors)

“...One of the most significant forms of non-state actor in global politics today...They exert a large economic and political influence around the world...”

MNCs = International companies = MNEs = Transnational corporations

“For profit enterprises that conduct business and have long-lasting interests in more than one country”

Simple company

They always operate within their home country.

NB: A company that simply exports is not a MNC.

MNCs

When company Y is similar in size with company X we have a merger, otherwise we have an acquisition. In 2015, 80.000 MNCs control over 800.000 subsidiaries worldwide (MNCs count as 1/3 of the world exports).

DEBATE: MNCs provide investments to other countries, create jobs, stimulate the creation of infrastructure, bring technology and create access to world markets. HOWEVER, they have a negative impact on the economy because they decapitalise other countries (they take profit, money and resources from these countries and bring them to the HQ country) and they cause income inequality (MNCs pay very well) in other countries of the world. They also argue that MNCs exploit poor workers, communities and countries causing damaging dependence. Finally, they argue that MNCs stifle domestic innovation and economic activities (MNCs can exploit very well economies of scale and dominate the market place).

Chapter 1: Globalization of markets and competition

Definitions

Transnational corporations (TNCs) are incorporated or unincorporated enterprises comprising parent enterprises and their foreign affiliates. A parent enterprise (X) is defined as an enterprise that controls assets of other entities in countries other than its home country, usually by owning a certain equity capital stake. An equity capital stake of 10 per cent or more of the ordinary shares or voting power for an incorporated enterprise, or its equivalent for an unincorporated enterprise, is normally considered as a threshold for the control of assets. A foreign affiliate is an incorporated or unincorporated enterprise in which an investor, who is resident in another economy, owns a stake that permits a lasting interest in the management of that enterprise (an equity stake of 10 per cent for an incorporated enterprise or its equivalent for an unincorporated enterprise).

If less than 10%, we call it “Portfolio Investment”. Anyway, if I own the 10% of a company but two owners have respectively 60% and 30%, I do not have control on it.

There is a way to measure how much a company is multinational: the Transnationality Index (TNI), calculated as the average of the following three ratios: foreign assets to total assets, foreign sales to total sales and foreign employment to total employment. Europe has the highest number of MNCs in the World and UK has the highest number of MNCs in Europe.

A Foreign Direct Investment (FDI) refers to an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. Only capital (financial flow, company’s money) that is provided by the direct investor either directly or through other enterprises related to the investor should be classified as FDI. The forms of investment by the direct investor which are classified as FDI are equity capital, the reinvestment of earnings and the provision of long-term and short-term intra-company loans (between parent and affiliate enterprises). A direct investment enterprise is an incorporated or unincorporated enterprise in which a single foreign investor either owns 10 per cent or more of the ordinary shares or voting power of an enterprise or owns less than 10 per cent of the ordinary shares or voting power of an enterprise, yet still maintains an effective voice in management. An effective voice in management only implies that direct investors are able to influence the management of an enterprise and does not imply that they have absolute control. The most important characteristic of FDI, which distinguishes it from foreign portfolio investment, is that it is undertaken with the intention of exercising control over an enterprise (<10%).

NB: It is not related to the purchase of an object (for example a plant) but to the sum of money outflowed from the parent company.

NB2: Other than having an equity stake in an enterprise, there are many other ways in which foreign investors may acquire an effective voice. Those include subcontracting, management contracts, turnkey arrangements, franchising, leasing, licensing and production-sharing. For example, the OECD treats financial leases between direct investors and their branches, subsidiaries or associates as if they were conventional loans; such relationships will therefore be included in its revised definition of FDI.

Trends

• Over years, the growth rate of FDI has been higher than the GDP and exports ones.
• New actors are entering the global scenario (BRIC).
• Developing countries in 2014 accounted more than a half of all the FDIs.

Summarizing, what kind of FDIs do we have?

• Greenfield Projects  Subsidiary (ex. New Plant)
• M&A  Merger and Acquisitions

The first ones generate new jobs (MNCs need more employees) while M&As usually are not characterized by new employees, but by cuts. GPs are preferred (mostly by P/S providers) because refer to industries where the investments are bigger (in terms of geography, exploitation of know-how and facilities), while the others are usually closed in the same country of the home one (rarely already existing businesses are likely to absorb easily those characteristics).

Macro drivers of Globalization

Political

• Peace in the triad
• Opening of markets (GATT, EEC, WTO...)
• Liberalization of foreign direct investments
• Liberalization of financial flows

Technological

• Increased efficiency of transportation and logistics: air; cargos; containers
• Increased efficiency of telecommunication and information technology
• Increased critical mass of investments in R&D and production

Social

• Some convergence of middle class consumer behavior
• Wider access to information, movies, TV series, internet

Globalization vs localization

Flexibility

Proximity

Quick Response

Why do firms invest abroad?

• 7276 firms investing abroad from 14 countries back in the ‘60s
• Today: about 105.000 firms investing abroad from all over the world

Why?

• Development of transportation and ICT
• Development in business practices
• Increasing favourable political and institutional environment after WWII
• Privatization programs
• Rise of large emerging economies

But why do firms undertake FDIs and become MNCs?

Theories on MNCs

Traditional theories

1) Portfolio approach

A = Company

1 2

A

1,2,3 = Countries

3

Capital flow across countries are governed by differential rates of return. I invest in the country that guarantees the highest rate of return. This is a situation typical for portfolio investments and not for FDI).

Neoclassical approach

CAR TEXTIL

Cars

1 2

Textile

K > L L > K

Two countries (1 and 2) and two goods (car and textile). One is abundant of capital (K), one of Labour (L). Each country will specialize in the production of the good that requires the abundancy of a specific factor whom the country itself is full of (CAR  1 and TEXTILE  2).

Obviously, between the two countries there will be imports and exports. The hypothesis is that factors cannot be moved from one country to another. THIS IS NOT REALISTIC.

Mundell erased this hypothesis. Country 1 can for example move capital in country 2 and produce there. Why would it for example do that?

Low taxes or fees  “Tariff-jump argument”

We saw some limits of the theories. Let us see the failures of them:

• They do not explain why some firms invest and others not, why firms invest in some countries and other firms in other countries or why some firms prefer FDI instead of other forms on internationalization such as outsourcing (it can be done in the home country and is considered an internationalization of an activity), alliances, offshoring (delocalization in an external country) or JV.
• We have the some macroeconomic conditions but different behaviours.

Modern theories

2) Oligopolistic approach

MNCs exploit market imperfections to take advantage of monopolistic and oligopolistic power. The possibility to exploit market power (imperfections are caused by the erase of the hypothesis of perfect competition) is the engine of FDIs.

Hypothesis:

• Produce homogenous power (If this hypothesis collapses, PC becomes Monopoly)
• Price-taker from the market (A company can become price-maker thanks to licenses or patents)
• No possibility to exploit economies of scale

In the other approaches, we focused on the macroeconomic scenario, now the focus is on the firm (microeconomics). Why should a firm become a MNC when it has market power?

Competitive advantage theory

Market imperfections and the search for market power are key determinants of FDI.

Market imperfections provide firms with competitive advantages (e.g. technology, brands and managerial capabilities). FDIs enable the firm to exploit these advantages on international scale, thus gaining extra-profit: internationalization as a specific type of growth. In addition, FDI (through M&A) can also eliminate a competitor, thus further increasing the market power.

So, why would I patent abroad and not only in my home country? To increase the mark