Appunti International Business & Management

International Business and Management

Part 1: Introduction - data and trends

Definition of MNC: MNC is a company that carry out (any) value added activities in more than one

country.

An enterprise

comprising entities in 2 or more countries, regardless of the legal form and fields of activity of

• those entities,

which operates under a system of decision-making permitting coherent policies and a common

• strategy through one or more decision-making centers

in which the entities are so linked, by ownership or otherwise, that one or more of them may be

• able to exercise a significant influence over the activities of the others, and, in particular, to share

knowledge, resources and responsibilities with others.

Subsidiary: the term subsidiary is used for any organizational unit of a MNC in foreign country. It’s

defined as any operational unit controlled by the MNC and situated outside the home country.

Or a subsidiary is any value-adding unit outside the home country, a sales unit, an R&D centre or a

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manufacturing plant.

Modified Model of the Value Chain

Modified Model of the Value Chain Organisation

Control and Information Management

Management

Processes Human Resource Management

Finance/Taxation

Supply Chain Processes

Sourcing Logistics Operations

Core

Processes Demand Processes

Research & Development Marketing

Support Processes

Source: Adapted by

Zentes/Swoboda/

Morschett 2004. Antonio Majocchi - International Business and Management, Academic Year 2016-2017

So the HQ has different subsidiaries around the world which perform many different activities

(production is only a part, not the most important). Control issue: something is decided at a central

level and something at the decentralized units. The ownership relationship could be at 100% but

also at 50% (subsidiary = joint venture) or the subsidiary can be an important supplier (market

relationship), but that is legal problem.

The Porter value chain reports all the activities which generate value added in the company

(decomposition of the value added). Every time a company performs one of the value chain

activities in another country we can talk about a MNC.

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Ex. R&D:

market value given by the market if I sell the asset now

• book value: value from balance sheet

•

There can be a lot of difference between book value and market value

Some numbers from FDI Markets

In 2010 MNCs generated an added value of about $16000 Billion of US$ equal to roughly a

• quarter of the world GDP.

Foreign subsidiaries of MNCs generate roughly 1/10th of the world GDP and 1/3 of overall export

• sales.

Foreign affiliates of MNEs employed about 75 million people.

•

If you just look at sales it’s a huge mistake, because then the AV say something different.

The added value is not a measure of the profitability but it measures (good approximation

of) the amount/ dimension of activities I’m performing in my company:

+ revenues

– cost of goods and services (COGS) [variable costs]

= added value

– labor costs

= EBITDA [good measure of liquidity – how much cash flow I have generated] – D&A [fixed

costs]

= EBIT [good measure of profitability]

– interest costs [can be also a “+”]

= PTP

– tax

= profit losses

Foreign Direct Investments - FDI

Purchase of physical assets (greenfield) or significant amount of ownership (M&A) of a

company in another country to gain some degree of management control

- to acquire lasting interest in enterprises operating outside of the economy of the investor

- potential control over foreign affiliate as part of the definition: The UN defines control in this case

as owning 10% or more of the ordinary shares or voting power

- By contrast, portfolio investment does not involve obtaining a degree of control (no influence on

the strategy) in a company but financial gain [Financial investments vs industrial investments].

When we have to measure the importance of MNC around the world we use this measure even

though it’s not a perfect measure of internalization of firms but it’s a proxy.

When a company locates for example R&D in another country means it has ownership/control of

assets in another country. The market value assets is FDI and it is different from the book value

(=accounting value). We can rely on the book value which is a good approximation but is not

perfect 2

SUB 1 [trading company buying in Russia and trading in US] Sales= 100,000

Cogs = 99,00

Added value = 1000

SUB 2 [production unit buying raw materials, producing in US and selling there] Sales =

50,000

Cogs = 10,000

Added value = 40,000

If we consider the level of sales subsidiary 1 appears better than subsidiary 2 but actually

it’s not right: we have to look at the value added because we are not looking for financial

performance/ profitability but for the level of activities.

You don’t buy an existing company but you set up the unit by yourself

You’re buying something which already exist, eg Chinese has bought Pirelli, Microsoft has

bought Nokia. Sometimes you’re not interest in all the assets or only on intangible assets

eg Luxottica which bought the brand Rayban.

Plant (5 years plan) 2010 —> 1000

2011—> 800

2012 —> 600

If a new machinery comes into the market and I try to sell the mine its market value is zero while

the book value is equal to 600.

How FDIs are measured?

There are three sources of FDI we can measure:

How FDIs are measured?

1. Equity

2. Reinvested earnings: reinvest profits which does not come back to the HQ in form of dividends

3. Intra-company loans

Antonio Majocchi - International Business and Management, Academic Year 2016-2017

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1. Equity

It’s the case of a company that acquires an other company

Merge and Acquisition

FIAT CHRYSLER

60% Greenfield

BMW CHRYSLER

100%

2 possibilities, same instrument (Equity)

Money generated in US (profit) by Chrysler doesn’t return to Italy but re reinvested in US.

An other possibility is that FIAT loans the amount of money necessary to Chrysler, this is an Intra-

company loan.

Two different approaches for FDI: stock and flow

Stock = amount of the investment (balance sheet)

Flow = marginal increase/decrease of stock value(income statement)

. FDI inflows and FDI outflows: in theory the numbers should be the same but actually they

are a bit different. The reason is that FDI is a measure according with the accounting

principles which are not the same in all the countries ( so the investment is accounted

differently in the two jurisdictions), another problem is taxation.

In 1990 the level of inflows/outflows was really low because internationalization didn’t have

a big dimension. FDI is a typical really volatile item so depends on the trend of the overall

economic crisis.

economy: in the very last years there is a decrease because of

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The reason is that FDI is a measure according with the accounting principles which are not the same in a

countries ( so the investment is accounted differently in the two jurisdictions), another problem is taxation.

In 1990 the level of inflows/outflows was really low because internationalization didn’t have a big dimen

FDI is a typical really volatile item so depends on the trend of the overall economy: in the very last years

is a decrease because of economic crisis. The level of

has increased

than 10 t

around the wo

Cross-Bo

M&As

increased: ½ o

flow in 1990

1/3 in 2005-20

Sales of fo

affiliates:

increased

moved in the

direction (mo

less) of the v

added (w

level is obvio

lower).

Total assets

foreign affil

amount of total assets taken from the balance sheet of different companies owned by a foreign owners.

Exports of foreign affiliates: is a part of the amount of sales so indicate the level of sales which don’t fini

The level of stock has increased more than 10 times around the world.

the domestic country (of the subsidiary) but in other countries. You can compute the ratio between the ex

and the total turnover of the foreign affiliates. These numbers give us a measurement of the export strateg

the company.

Memurandum: every time you’re measuring some numbers you have to compare them with other variabl

Cross-Boarder M&As also increased: 1⁄2 of the flow in 1990 and 1/3 in 2005-2007. Sales of

have an idea of the real growth, the relative growth could be lower comparing with these other variables.

foreign affiliates: have increased and moved in the same direction (more or less) of the

GDP: sum of the added value generated in all the countries of the world.

value added (whose level is obviously lower). 4

Total assets of foreign affiliates: amount of total assets taken from the balance sheet of different

companies owned by a foreign owners.

Exports of foreign affiliates: is a part of the amount of sales so indicate the level of sales which

don’t finish in the domestic country (of the subsidiary) but in other countries. You can

compute the ratio between the export and the total turnover of the foreign affiliates. These

numbers give us a measurement of the export strategy of the company.

Memurandum: every time you’re measuring some numbers you have to compare them with

other variables to have an idea of the real growth, the relative growth could be lower

comparing with these other variables.

GDP: sum of the added value generated in all the countries of the world.

Gross fixed capital formation: the amount of investments in the world in plants, machineries,

intangibles etc. Gross because depreciation is not deducted. We can compare all the investments

around the world with foreign investments.

Exports: a measure of internationalization of the economy.

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Royalties and license: FDI and export (its boom has been before) are the main way of entering a

foreign market but there also franchising, royalties and licensing contracts (someone else uses

your brand and how much has to pay for that is the fee). The number is underestimated because of

accounting problems, royalties are difficult to measure: royalties are often reported in company’s

balance sheet as sales and they are the typical tools used by MNC to avoid payment of taxes.

Example:

Stock FDI (2010):1000

Stock FDI (2011): 1100

Flow FDI : 100 FLOW STOCK

2000 100 100

2001 200 300

2002 200 500

… … …

2015 200 10000

Here there is a mistake because for stock we have also to consider the depreciation.

EX: Stock = Stock + Flow - Depreciation

2001 2000

BEPS - Base Erosion Profit Shifting

The significant share of MNEs’ total FDI income booked in low-tax, often offshore, jurisdictions

reflects the emergence of holding companies as major aggregators of MNEs foreign profits.

Large and small firms have been using offshore financial centers and jurisdictions to evade or

avoid taxes.

Investments which are targeted for tax erosion policy: the idea is moving profit from a country to

another just to avoid taxation (tactical investments). A significant share of international corporation

FDI is booked in low tax area and there’s a general trend in the world to generate holding company

as a major aggregate of MNC foreign profit. Large and small firms had been used as offshore

financial centre to evade or avoid taxes. 5 years ago a research on ownership of small and

medium Italian companies showed that the majority of them have the financial headquarter located

in Luxemburg or in Netherlands.

If we look at the profit generated by Italian companies it is really low and then there a lot of profit

allocated in the holding companies located in the countries mentioned before and the most of the

time they are not physical existent but only office (problem of high difference in taxation’s rates

among European countries). 6

Income booked in foreign affiliates

Efforts to stem offshore financial flows have been under way at both the national and international.

There is still a long way to go and International cooperation is a key factor.

Within a multinational corporation where the profit are recorded?

The first two location are respectively Netherlands and US. The most interesting colon of the figure

is the third one: the ratio of the amount of profit generated by multinational corporations in that

countries to the GDP. These are the places where companies allocate profit but not their activities.

International Business and Management – AA 2016/2017

Luxemburg, Bermuda, Caymanàmore profit than GDPàexamples of offshore financial centres.

It is not surprising that services

represent the highest ratio

It is not surprising that services represent the

International Business and Management – AA 2016/2017 considering the global inward FDI

highest ratio considering the global inward FDI

stock by sector. What surprising is

stock by sector. What surprising is the amount

the amount of the primary sector:

in Eu today the share is equal to

of the primary sector: in Eu today the share is

4% while in US 2%. A large

equal to 4% while in US 2%. A large amount of

amount of FDI has the aim to rich

FDI has the aim to rich control on natural

control on natural resources eg in

Africa. a large amount of services

resources eg in Africa. a large amount of

investments are generated by

services investments are generated by

manufacturing companies: eg Cars

manufacturing companies: eg Cars producer

producer which sets up a chain of

cars sellers in South America is

which sets up a chain of cars sellers in South

generating investments in retail so

America is generating investments in retail so

in service sector; the last

in service sector; the last acquisition of

acquisition of Luxottica was in

Brazil of a retail chain so once

CASE: APPLE IN IRELAND Luxottica was in Brazil of a retail chain so once

again a manufacturing company

http://europa.eu/rapid/press-release_IP-16-2923_en.htm again a manufacturing company which create

which create investments in the

http://www.apple.com/ie/customer-letter/

http://www.finance.gov.ie/news-centre/press-releases/minister-noonan-disagrees-profoundly-commission- service sector.

investments in the service sector.

apple Preferential agreement between Ireland and

Apple regarding taxation. Apple makes money

all around the Europe (stores in the picture)

but all the sales are accounted in Ireland (the

same for Amazon in US) —> Apple Sales

International. But all the profit are transferred

from this entity outside Ireland to a virtual head

office and only a portion of the profit is subject

to taxation in Ireland —> so the almost part of

Apple revenues is not taxed. 0.005% effective

According to the world’s investment report 2015 the list above represents the first 20 largest companies by FA

tax rate in 2014.

(foreign assets). There is a distortion because we are using foreign assets as measure of foreign activities. We

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typically find more assets in a steel company than a service one. BP (British Petroleum) is quite discussed in

US in the last years because of an ecological disaster in the South of US. ArcelorMittal large steel Indian

Which is the reason behind the challenge of the European Commission? The different treatment

company has its headquarter in Luxemburg for the previously speech avoid taxes. (Majocchi prefers added

comparing with the other companies —> no fair competition.

value which is the real measure of economic activities).

Who is right? Discussion. Apple didn’t know that was the role. EU Commission has no

Table 1.4

competences about where profit attacks so if the other countries will claim it, Apple will pay the tax

Until 5-10 years ago the game of FDI seemed to be played just by private-owned companies; in the last few

like everybody else and competition will be fair. The amount of credits to Ireland will be decrease if

years there is a rise in State-owned companies.

Apple will pay the same taxes of other countries —> opportunity for other countries.

EU Commission had challenged other companies: Starbucks, Fiat, Amazon.

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Remind —> Multinational Corporations have some tools to avoid taxes that other companies don’t

have. 7

Difference between FDI and Financial Investments: FDI are industrial investment (ex. FIAT

buying Chrysler) while with financial investments you buy just a small portion to generate a

financial profit without having the aim to control.

In FDI you don’t control financial movements, you control equity outflows, reinvested earnings and

other capital.

The share in world FDI outflows is decreasing over time. For example Japan is a great resource of

investments but is not a receiver of investments because it is a very closed country. If we look at

the states of Europe we can see that many of the countries are in the top 10 of investing countries

behind USA, Japan and China; but if we look at the Europe as a unique unit, it’s in the first place.

( X - M ) + CM = BP —> Balance of payments

X = export

M = import

CM = capital movement (FDI and FIN)

If (X-M) is positive I have a negative balance in capital movement.

HQ

IRELAND UK

Ownership of the

brand. Starbucks

TAX: 1% PROFIT: 100

TAX: 30%

Moving profit from UK to Ireland allows to pay just 1€ of tax instead of 30€.

Part 2: Market selection and market entry

It regards the choice in which countries I wanna go and how I enter these countries.

Foreign Market Entry Models

Export / Import

• Franchising

• Minority holdings

• Joint Ventures: new ventures jointly owned by 2 or more partners

• Wholly-owned subsidiaries: operations which are one hundred percent owned abroad

• 8

Simplify version of reality we have export/import and FDI as the two way of entering a foreign

market. There are other opportunities as well as franchising, joint ventures, agreements —> NEM=

non equity modes.

Theory of international corporations gives the tools to understand which are the best solution