Chapter 7 Multinational Corporations and Foreign Direct Investments

7.1 Foreign Direct Investments

7.1.1 FDI Definition

A foreign direct investment (FDI) is defined as a cross-border investment by a resident entity in one economy with the objective of obtaining a lasting interest in an enterprise resident in another economy (OECD).

FDIs Over the Years

  • 1960s: The determinants of market seeking FDIs by US firms in advanced industrial countries (Vernon and colleagues at Harvard Business School)

  • 1970s: Switch from FDIs to why firms go abroad through FDIs (Buckley, Casson, McManus, Hennart, Rugman, Swedenborg, et al.)

  • 1980s and 1990s: Spatial aspects of FDIs and value added activities; important impact of the emergence of intellectual capital as the key wealth creating asset in most industrial economies

7.1.2 FDIs Worldwide

7.1.2.1 FDI, net inflows (BoP, current US$)

7.1.2.2 FDI, net outflows, (BoP, current US$)

7.1.3 FDIs and Regions

7.1.3.1 FDI, net inflows, (BoP, current US$)

7.1.3.2 FDI, net outflows, (BoP, current US$)

7.1.4 FDIs and Emerging Markets

7.1.4.1 FDI, net inflows, (BoP, current US$)

7.1.4.2 FDI, net outflows, (BoP, current US$)

7.1.5 FDIs and Labor Productivity

Labor productivity and FDI are closely linked: labor productivity will attract FDI and FDI will help increase labor productivity.

7.1.6 FDIs and Canada

7.1.6.1 FDI, net inflows, (BoP, current US$)

7.1.6.2 FDI, net outflows, (BoP, current US$)

7.1.7 Global Inward FDI and Inward FDI Performance Index

As a percentage of global investments, Canada ranks below the United States.

Compared to the size of its economy, Canada is well positioned relative to the United States.

7.2 Multinational Corportions

7.2.1 MNEs’ Global Activities

7.2.1.1 MNEs’ Global Activities Before the 2008 Crisis

Period: 1990 2003 2007 2008
Number of MNEs A mere 3000 MNEs 63,000 MNEs operated away from home country and market through 821,000 subsidiaries 79,000 TNCs (Transnational companies) engaged in international production, with about 790,000 affiliates abroad
Employees in MNEs 90 million people (of whom some 20 million in the developing countries)
Output in MNEs US$16 trillion in global sales, twice the value of global exports and 25 % of the world’s gross product Value added by TNCs: $6 trillion and total sales at $31.2 trillion, compared to world exports of $17 trillion.
FDI The total FDI stock reached over $15 trillion in 2007 FDI outflows to Developed (57%), developing (37%). The gap between developed and developing countries is $ 342 billions
Origins US, Japanese, Western European companies are the major investors in Europe, Asia, and North America Foreign affiliates accounted for an estimated 11 per cent of world GDP in 2007 compared to 7 per cent in 1990

Source: UNCTAD, 2010

7.2.1.2 MNEs’ Global Activities After the 2008 Crisis

  • FDI by TNCs from developing countries reached $454 billion – another record high
  • Together with transition economies, they accounted for 39 per cent of global FDI outflows, compared with only 12 per cent at the beginning of the 2000s
  • Increasingly, developing-country TNCs are acquiring foreign affiliates of developed-country TNCs in the developing world
  • TNCs from Six developing and transition economies ranked among the 20 largest investors in the world in 2013

7.2.1.3 Some definitions

  • Developed countries: The member countries of the OECD (other than Chile, Mexico, the Republic of Korea and Turkey), plus the new European Union member countries which are not OECD members (Bulgaria, Cyprus, Latvia, Lithuania, Malta and Romania), plus Andorra, Bermuda, Liechtenstein, Monaco and San Marino.

  • Transition economies: South-East Europe and the Commonwealth of Independent States.

  • Developing economies: In general all economies not specified above. For statistical purposes, the data for China do not include those for Hong Kong Special Administrative Region (Hong Kong SAR), Macao Special Administrative Region (Macao SAR) and Taiwan Province of China.

  • Low-income economies: GNI per capita of $1,045 or less in 2013

  • Middle-income economies: GNI per capita of more than $1,045 but less than $12,746

  • High-income economies: GNI per capita of $12,746 or more

7.2.2 The Age of Regional MNEs

7.2.2.1 Fortune Global 500 2020

Rank Companies Revenues ($M)
1 Walmart $523,964
2 Sinopec Group $407,009
3 State Grid $383,906
4 China National Petroleum $379,130
5 Royal Dutch Shell $352,106
6 Saudi Aramco $329,784
7 Volkswagen $282,760
8 BP $282,616
9 Amazon $280,522
10 Toyota Motor $275,288

7.2.2.2 A Theoretical Framework: Rugman (2003)

“The Reality of Globalization: The Rise of the Regional Multinational,” Templeton Executive Briefing, 2003.

  • Divides world into three areas: North America, Europe and Asia-Pacific
  • Identifies four types of Fortune 500 companies:
Categories: Home region oriented Host region oriented Bi-regional Global
Criterion: more than 50% of total sales in home region more than 50% of total sales in a host region more than 20% of total sales in two regions, but less than 50% in any one region more than 20% of total sales in all three regions

7.2.2.3 Home-Region Oriented MNEs (Rugman, 2003)

Home-Region Oriented MNEs (2000)

7.2.2.4 Biregional MNEs (Rugman, 2003)

Bi-Regional MNEs (2000)

7.2.2.5 Global MNEs (Rugman, 2003)

Global MNEs (2000)

7.2.2.6 Canadian MNEs (Rugman, 2003)

Canadian MNEs (2000)

7.2.3 MNEs Not As Global as We Might Think

Type of MNE % of the 380 MNEs with sufficient data Intra-regional sales as a percent of total sales
Global 2.4 38.3
Bi-Regional 6.6 42.0
Host-region oriented 2.9 30.9
Home-region oriented 84.2 80.3

7.2.4 MNE’s Market Capitalization

Rank Country Company Market Capitalization
1 United States APPLE $982,863,589,091
2 United States MICROSOFT $770,040,274,514
3 United States FACEBOOK $378,868,730,582
4 China TENCENT $369,451,484,425
5 United States ALPHABET $329,162,251,524
6 United States JOHNSON & JOHNSON $323,027,731,469
7 United States EXXON MOBIL $303,435,602,453
8 South Korea SAMSUNG ELECTRONICS $249,206,263,654
9 Switzerland NESTLE $226,299,707,039
10 United States PFIZER $217,587,798,603

7.2.5 MNEs and Global Governance

The Super Entity

  • Took a database listing 37 million companies and investors worldwide and analyzed all 43,060 MNCs and the ownerships linking them
  • Found that a dominant core of 147 firms radiating out from the middle with each of these 147 own interlocking stakes of one another and together they control 40% of the wealth in the network
  • A total of 737 control 80% of it all
  • Top 15 includes: Barclays; Capital Group Companies; FMR Corporation; AXA; State Street corporation; JP Morgan Chase & Co; Legal & General Group; Vanguard Group UBS; Merril Lynch; Wellington Management; Deutsche Bank; Franklin resourcesl Credit Suisse; Walton Enterprises

Source: http://www.forbes.com/sites/bruceupbin/2011/10/22/the-147-companies-that-control-everything/

7.2.6 Multinational Corporations in the World

Source: World Investment Report 2008

7.2.7 Exports versus Sales from Subsidiaries

Value of Canada’s goods and services exports and foreign affiliates sales, 2004-2013

7.2.8 Some Advantages but not a Guarantee of Success

There are challenges and costs associated with the management of a MNC.

Changes in the institutional environment and the technological environment can affect the benefits of operating in multiple countries

7.2.8.2 Not Beneficial in All Industries

Local versus international firms. Benefits vary from one industry to another.

7.3 FDIs and MNC’s

7.3.1 OLI Framework of Multinational Activity

  • Ownership Advantages
    • The use of the firm’s own assets and skills (e.g., trademark, production technique, skills and “know-how”, etc.)
  • Location Advantages
    • Advantageous and attractive location (e.g., raw materials, low wages, special taxes, tariffs, etc.)
    • Demand conditions
  • Internalization Advantages
    • Operations of the firm organized internally (i.e., advantages of producing in-house rather than outsource production through a partnership arrangement such as licensing)

7.3.2 FDIs in Context: Regulatory Restrictiveness

Measuring FDI restrictiveness

The FDI Index gauges the restrictiveness of a country’s FDI rules by looking at the four main types of restrictions on FDI:

  • Foreign equity limitations
  • Screening or approval mechanisms
  • Restrictions on the employment of foreigners as key personnel
  • Operational restrictions, e.g. restrictions on branching and on capital repatriation or on land ownership

Total FDI Index, All types of restrictions, Index total (2020)

7.3.3 Two Types of Conflicts

  1. Those rooted in economics (e.g., some countries can’t afford to implement and enforce the sorts of environmental standards that Westerners take for granted)
  2. Those rooted in basic cultural differences

For type 1:

  • Would the “folks back home” accept the the host-country’s lower standards if they themselves faced a similar economic situation?

For type 2:

  • Is it necessary to engage in this practice in order to do business in the country?
    • If not, don’t do it.
    • If yes, proceed to next question.
  • Does engaging in this practice violate fundamental human rights?
    • If not, it may be permissible to follow local standards.
    • If yes, don’t do it. Ethically, you ought to cease operations and get out.

Source: Thomas Donaldson, “Multinational Decision Making: Reconciling International Values,” Journal of Business Ethics, Volume 4, Issue 4, pp. 357-366.”

7.3.4 Offshoring, Nearshoring, Onshoring or Reshoring

7.3.4.1 Share of total U.S. imports from China

Imports in U.S. Turning to Higher Value-Added

7.3.4.2 Jobs lost to import-offshoring in comp. & elect. (’000s)

Source: Census Bureau, BEA, BLS

7.4 MNC’s Challenges

7.4.1 Current Challenges

  • Taxation and FDIs
  • A world of platforms
  • New types of firms

7.4.2 Tax Evasion: The Case of Ireland

The “Double Irish” tax loophole:

Allows companies to channel profits to made in their major markets through the country and into tax havens; possible because registered companies do not have to be resident; involves multinationals setting up two Irish subsidiaries.

Loophole to be changed by 2021

Intellectual property tax regime:

Profits linked to the exploitation of patents will attract lower tax rates To be adopted to compensate for the change

7.4.3 Jones et Temouri (2016)

7.5 Data Challenge

7.5.1 Financial Risk

You work at the caisse de dépôt and here is an investment portfolio. Do you need to invest in China?