Chapter 7 Multinational Corporations and Foreign Direct Investments

7.1 FDIs and MNCs

7.1.1 Global 500 2020 – Top 10

7.1.2 The Age of Regional MNCs

Divides the world into three areas:

  • North America
  • Europe
  • Asia-Pacific

Identifies four types of Fortune 500 companies:

  • Home region Oriented: more than 50% of total sales in home region
  • Host region oriented: more than 50% of total sales in host region
  • Bi-Regional: more than 20% of total sales in two regions, but less than 50% in any one region
  • Global: more than 20% of total sales in each of all three regions

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

7.1.3 Home-Region Oriented MNEs (2000)

7.1.4 Bi-Regional MNEs (2000)

7.1.5 Global MNEs (2000)

7.1.6 Canadian MNEs (2000)

7.1.7 MNEs Not As Global as We Might Think

7.1.8 Market Capitalization – Top 10

7.1.9 MNCs 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/

7.1.10 Multinational Corporations in the World

7.1.11 Exports versus Sales from Subsidiaries

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

7.1.12 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

7.1.14 Not Beneficial in All Industries

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

7.1.15 A Different View to MNCs

Source: World Investment Report 2008

7.2 FDIs Worldwide

7.2.1 Foreign Direct Investment (FDI)

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).

7.2.2 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

7.2.3 FDIs Worldwide

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

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

7.2.4 FDIs and Regions

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

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

7.2.5 FDIs and Emerging Markets

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

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

7.2.6 Labor Productivity and FDIs

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

7.2.7 FDIs and Canada

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.

7.3 Firms and FDIs

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

7.3.3 FDIs in Context: Regulatory Restrictiveness

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

7.3.4 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.”

7.4 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?