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

perspective:

Economy

o 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); This MNCs are 80000 in 2015.

Politics

o International politics is also more independent today; important policy issues like

climate change, the financial crisis and terrorism can not 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 this aspects have reduced the political attitude

of single states.

Culture

o 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 benefits more from Globalization, some other 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 titan

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 operates 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 counts 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

o Exports ones.

New actors are entering the global scenario (BRIC).

o Developing countries in 2014 accounted more than a half of all the

o FDIs.

Summarizing, what kind of FDIs do we have?

Greenfield Projects  Subsidiary (ex. New Plant)

 M&A  Merger and Acquisitions



The first ones generates 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).

Let’s return to Globalization:

Macro divers 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

1) (If this hypothesis collapse, PC becomes Monopoly)

Price-taker from the market

2) (A company can become price-maker thanks to licenses or patents)

No possibility to exploit economies of scale

3)

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