MGX5181
International Business
Strategy
Week Two
The Multinational Corporation MNC
International trade theories and
their impact on the
internationalising organisation
Week 2 objectives
• Assess the role of the MNC in international
strategy
• Brief review of the impact of international trade
theories on the internationalising organisation.
2
2
The World’s Multinational’s
• Many have sales larger than their host nations
GDP.
• According to one estimate, the 500 largest
industrial corporations account for 80% of the
world’s direct investment and ownership of
foreign affiliates.
• Corporate Headquarters for the 500 largest
industrial corporations are in 32 different nations.
• One third of world exports consist of goods
flowing between different parts of same
companies.
• Often created by mergers and acquisitions
Ownership
• Mostly owned by pension funds, banks or
insurance companies. Often run by
powerful people.
• Ownership becoming global as foreign
capital transfers to shares in local markets.
(e.g. foreign institutions own more of Aust
sharemarket than locals. Australian
institutions invest approx 20% of their
funds overseas).
Global 500 by Revenue
Global Ranking Company
08 10 12
Revenue USD$Mil
3
2
1
Royal Dutch Shell
484,489
2
3
2
Exxon Mobil
452,926
1
1
3
Wal-Mart Stores
446,950
4
4
4
BP
386,463
5
5
Sinopec (China Oil)
375,214
6
6
China National Petroleum
352,338
7
7
State Grid (China Power)
259,142
6
10
8
Chevron (Oil)
245,621
10
12
9
ConocoPhillips (Oil)
237,272
5
8
10
Toyota
235,364
8
11
11
Total (Oil)
231,580
12
Volkswagen
221,551
Australian Companies in Global 500 (2012)
Aust Rank Company
08 10 12
Global
Rank
10
12
Revenue
USD Mil
Head
Office
1
4
1 1 BHP Billiton
159 108 71,739
2 2 Wesfarmers (Coles) 183 171 54,147
Melb
Perth
3
3
3 Woolworths
184 175 53,559
Sydney
5
4
4 CBA (Bank)
249 227 44,306
Sydney
7
5
5 Westpac (Bank)
254 229 44,112
Sydney
2
6
6 National Aust Bank 266 254 40,521
Melb
6
7
7 ANZ (Bank)
338 291 36,731
Melb
8
8
8 Telstra
441 438 24,968
Melb
9 Caltex Australia
486 22,810
Sydney
Global 500 Most Profit
Global Ranking
2008 10
12
Company
5
2
1
Gazprom (Russia , Energy)
44,459
1
3
2
Exxon Mobil
41,060
4
3
ICBC – Industrial & Commercial 32,214
Bank of China
2
5
4
Royal Dutch Shell
30,918
7
9
5
Chevron
26,895
6
6
China Construction Bank
26,180
7
Apple
25,922
8
BP
25,700
9
BHP Billiton
23,648
10
Microsoft
23,150
11
Vale (Brazil, Mining)
22,885
12
Petronas
21915
10
8
11
Profit 2012
USD$Mil
National Composition of the Largest MNCs
Country
Of top 260
(1973)
Of top 500
(2008)
Of top 500
(2010)
Of Top 500
(2012)
USA
126 (48.5%)
153 (30.6%)
133
132
Japan
9 (3.5%)
64 (12.8%)
68
68
Britain
49 (18.8%)
34 (6.8%)
30
27
France
19 (7.3%)
39 (7.8%)
35
32
Germany
21 (8.1%)
37 (7.4%)
34
32
China
11 (2003)
29 (5.8%)
61
73
Canada
4 (1.5%)
14 (2.8%)
11
11
15
15
Switzerland
South Korea
15 (3%)
14
13
Netherlands
13 (2.6%)
13
13
Australia
8 (1.6%)
8
9
1
1
Malaysia
Features of MNC’s
• Annual Revenue


Typically sales in hundreds of millions of
dollars. Around 2000 MNC’s have annual sales
over US$1 billion.
Many MNC’s have higher annual revenue than
the GNP of various countries. About half the
world’s 100 largest economies are companies.
• Character

MNCs are predominantly oligopolistic (operate
in markets where there are few sellers)
Features of MNC’s
• Affiliates

Most MNCs have a sizeable number of
affiliates. Top 500 own over 50% of worlds
productive assets.
• Areas of operation

MNC’s are the product of developed countries.
Almost 3/4 of the operations are in developed
market economies.
Features of MNC’s
• Structure & Control


By and large control is via complete or majority
ownership. Usually there is a common global
strategy.
Parent can control foreign affiliates via
resources eg: capital, technology, trademarks,
patents and manpower, plus long and short term
budgets.
Are there any really Global
Companies?
• Research by Alan Rugman & Alain Verbeke
(2004):



Assessed world’s 500 largest companies. They found
they represent over 90% of all foreign direct investment
and about half of all world trade.
380 gave data on a regional basis. Found that 320 had
an average of 80.3% of sales in their home region.
Therefore concluded that most were really only
regionally based.
Found most only global at “back end” of value chain –
some connection in functional areas such as financial
capital, HR capital, R&D, knowledge or components to
serve home region clients.
Are there any really Global Cos?
• Rugman and Verbeck found there was really only nine
global companies in their study:
1. IBM
2. Sony
3. Royal Philips Electronics
4. Nokia
5. Intel
6. Canon
7. Coca-Cola
8. Flextronics Intl
9. LVMH (Moet Hennessy Louis Vuitton)
• Common themes



The application of scientific technical knowledge in the
marketplace (7)
Masters of using branding in consumer markets (2)
All offer products that appeal across cultural and national
boundaries ie products people wanted, sheer availability or
status allure
Multinational’s and Foreign
Direct Investment
• Multinationals achieve managerial control
over their assets abroad through foreign
direct investment (FDI).
• FDI is direct investment in business
operations in a foreign country, including
establishment of new operations as well as
purchases of more than 10% of existing
companies.
Foreign direct investment
• Basic types of affiliates:
 A controlled affiliate is an enterprise in
which the investor has control of more
than 50% of the voting power.
 A non-controlled affiliate is an enterprise
in which the investor has control of at
least 10% of the voting power and no
more than 50%.
• Source: OECD 2012
FDI by type
• M&As
• Non-resident purchase of existing equity (10% to 100%
of the voting power)
– Sub-category (above 50% of the voting power)
• Other types of FDI
• Issuance of new equity
– Greenfield (New) investment
– Extension of capital
• Financial Restructuring
• Source OECD 2012
FDI Inflows 2003-2012
OECD 2013
Multinational’s and Foreign
Direct Investment
• Motivation for FDI is diverse:

Marketing factors

Barriers to trade

Cost factors

Investment climate
Major Determinants of Direct F.D.I.
Marketing Factors:
• Size of market
•
•
•
•
•
Market growth
Desire to maintain share of market
Desire to advance exports of parent company
Need to maintain close customer contact
Dissatisfaction with existing market
arrangements
• Export base
• Desire to follow customers
• Desire to follow competition
Barriers to Trade:
• Government erected barriers to trade
• Preference of local customers for local products
General:
• Expected higher profits
• Other
Major
Cost Factors:
•
•
•
•
•
•
•
•
•
Determinants of Direct F.D.I.
Desire to be near source of supply
Availability of labour
Availability of raw materials
Availability of capital/technology
Lower labour costs
Lower other production costs
Lower transport costs
Financial (and other) inducements by government
More favourable cost levels
Investment Climate:
• General attitude toward foreign investment
•
•
•
•
•
•
Political stability
Limitation on ownership
Currency exchange regulations
Stability of foreign exchange
Tax structure
Familiarity with country
MNCs and the
Host Country
• Positive Impact:






Capital Formation
Technology Transfer
Regional & Sectoral Development
Internal Competition & Entrepreneurship
Favourable Effect on Balance of Payments
Increased Employment
MNCs and the Host Country
• Negative Impact









Industrial dominance
Exploitation of raw materials and cheap labour
Bribery and corruption
Interference in political matters
Technological dependence
Disturbance of economic plans
Cultural change
Interference by home government through
MNC
Degree of government control may be less than
intended
MNCs
The Home Country Perspective
• Improves Gross Domestic Product via
repatriation of profits, royalties & fees.
• Increases export opportunities.
• Political advantages.
• Job losses.
• Net effect on imports & exports.
• Creating competitors.
Allegations Against MNC’s
• In transferring technology to less developed
countries, prices are set too stringently.
• If a country attempts regulation, MNC’s merely
divest and move where regulations are less
stringent.
• The centralisation and control of key functions of
MNC’s in their home countries perpetuate a
neocolonial dependence of less-developed
countries.
Allegations Against MNC’s
• Sensitive country information is
disseminated internationally by MNC’s
global intelligence networks.
• MNC’s introduce superfluous products that
do not contribute to social needs and
perpetuate class distinctions.
• National labour interests are undermined
because of global activities of MNCs.
Allegations Against MNC’s
• MNC’s avoid paying taxes. Through
artificial transfer pricing, MNC’s undermine
attempts by Governments to manage their
economic affairs.
• The best jobs are given to citizens of the
nation in which the MNC’s have their
headquarters.
Allegations Against MNC’s
• Inappropriate technology is introduced by
MNC’s to less developed countries.
• National labour interests are underminded
because of the global activity of MNEs.
MNC
“Code of Conduct”
• In the 1990s the United Nations set up a Code of
Conduct on Transnational Corporations in respect
of their international dealings.
• Intended to create a stable business environment
conducive to foreign direct investment and other
company activities that stimulate economic
development.
• UN Centre on Transnational Corporations closed
down by USA pressure in 1998 as US MNCs
complained about scrutiny.
• Replaced in 1999 by UN “Global Compact” which
has no teeth as no penalties.
Global Compact
This is a voluntary initiative to promote good
corporate citizenship (according to UN)
 UN request to world business.
Has 10 Principles:
 Human Rights

• Principle 1: Support and respect the protection of
international human rights within their sphere of
influence
• Principle 2: Make sure their own corporations are
not complicit in human rights abuses

Labour
Global Compact
• Principle 3: Freedom of association and the effective
recognition of the right to collective bargaining;
• Principle 4: The elimination of all forms of forced and
compulsory labour.;
• Principle 5: The effective abolition of child labour; and
• Principle 6: The elimination of discrimination in respect
of employment and occupation.

Environment
• Principle 7: Support a precautionary approach to
environmental challenges;
• Principle 8: Undertake initiatives to promote greater
environmental responsibility; and
• Principle 9: Encourage the development and diffusion
of environmentally friendly technologies.
Global Compact

Anti-Corruption
• Principle 10: Businesses should work against all
forms of corruption, including extortion and bribery.
Economic Theories For
International Trade
Traditional Trade Theories
and
Modern Trade Theories
Traditional Trade Theories
• Review your knowledge on the following
economic theories for international trade:




Mercantilism
Absolute Advantage – Adam Smith
Comparative Advantage – David Ricardo
Factor Proportions Theory – Heckscher &
Ohlin
Modern Trade Theories
• Country Similarity Theory


In 1961 Steffan Linder suggested that most
trade in manufactured goods is between
countries of similar per capita income.
ie consumers have a similarity of preference
when at the same stage of economic
development.
Global Horizons Theory
•
•
•
•
As part of a firm’s growth, their
geographical horizons change.
Change is caused by:
INTERNAL

Executives, Technology, Product, Raw Material
Supply
• EXTERNAL

Customer, Government
Product Life Cycle (Vernon, 1966)
• Concept is related to product life cycle and concerns
the role of innovation in trade patterns.
• Phase 1: New Product., Domestic Market
• Phase 2: Export Mature Product., Other
Industrialised Countries
• Phase 3: Foreign Production

Export to Developing Countries
• Phase 4: Move Production to Developing
Countries
• Phase 5: Export of Product Back to Home
Country
New Trade Theory
• Emerged in 1970’s (see Helpman and Krugman)
• Proposed key driver for internationalisation
was to obtain economies of scale


Increase in range of goods available to
consumers
Decrease average cost of goods
• Certain products may be dominated by
countries whose firms were first movers in
their production
Ownership Advantage
Theory
S.Hymer, 1976
• Company must have a compensating
advantage that offsets innate advantages of
local firm
• Advantages are either firm specific or
ownership specific

E.g.: Technology, Product Differentiation,
Economies of Scale, Access to Capital Markets,
Entry Restrictions.
Internationalisation Approach
Buckley and Casson,1976
• Seeks to explain why foreign direct investment is a more
effective way of exploiting resources and markets than
indirect methods like exporting or licensing.
• Emphasis is on extending direct operations. Company
needs a competitive advantage or a unique asset to
expand. Incentive depends on the relationship of:

Industry specific factors
• E.g.: Product, Industry Structure

Regional Specific
• Geographical, Social

Nation Specific
• Political & Fiscal

Firm Specific
• Management Ability
Global Strategic Rivalry theory
• In the 1980s economists such as Paul Krugman
and Kelvin Lancaster developed a new way of
looking at the growth of MNCs. According to these
theories firms struggle for a sustainable competitive
advantage to exploit to dominate the global
marketplace.
Global Strategic Rivalry theory
cont.
• Focus is on strategic decisions adopted as firms
compete globally. Sustainable competitive
advantage is achieved by:
 owning intellectual property rights
 investing in research and development
 achieving economies of scale or scope
 exploiting the experience curve
Porter’s National Competitive
Advantage theory (Porter’s diamond)
• In 1990 Michael Porter stated that success in
international trade came from the interaction of four
country and firm specific factors:

factor conditions
• land, labour, capital, education, infrastructure etc.
• International rivals will differ in the mix and cost of available factors
and the rate of factor creation.

demand conditions
• Competitors from other nations face differing segment structures to
home demand, differing buyer needs and differing levels of buyer
sophistication.
• Large sophisticated domestic consumer base often stimulates
innovative products.
• Understanding competitors home demand conditions helps you
predict their foreign strategies and product development.
Porter’s National Competitive Advantage
theory (Porter’s diamond) Cont

Related and supporting industries
• Competitors based in other nations will differ in availability of
domestic suppliers, quality of interaction with suppliers, and presence
of related industries.
• being close to local suppliers leads to improved communication, costsavings, innovations transferable overseas.

Firm strategy, structure and rivalry
• the domestic environment shapes firms ability to compete
internationally. According to Porter you need vigorous competition,
and strong local investment in areas that provide sustainable
advantages e.g. R&D, quality control, brand imaging, employee
training).

Other diamond components
• Chance
• Government
Porter’s Country Diamond
Context for
firm strategy
and rivalry
Factors
(input)
conditions
• Factors inputs quality and cost:
- Natural resources
- Human resources
- capital
- Physical infrastructure
- Administrative infrastructure
- Information infrastructure
- Scientific and technological
infrastructure
44
• A local context that
encourages appropriate
forms of investments and
sustained upgrading
• Vigorous competition
Related and
supporting
industries
• A critical mass of
capable local suppliers
• Presence of clusters
Demand
conditions
• Sophisticated and
demanding customers
• Customers needs that
anticipate those elsewhere
• Unusual demand in
specialized segments that
can be served globally
Lasserre Fig 6.11, p.176
Porter’s National Competitive
Advantage theory (Porter’s diamond)
Cont
• Porter’s rules for innovation:

Sell to the most sophisticated and demanding
buyers and channels
• Stimulates fast improvement
• Sets valuable benchmarks
• Challenges ability to compete

Seek out the buyers with the most difficult needs
• Enhances ability to deal with pressure
• Encourages research and development
Porter’s National Competitive Advantage
theory (Porter’s diamond) Cont

Establish norms of exceeding the toughest
regulatory hurdles or product standards
• Encourages early upgrading

Source from the most advanced and
international home-based suppliers
• Deal with those with a competitive advantage and
insights that may assist you

Treat employees as permanent
• Requires focus to improve productivity via training and
rewards

Establish outstanding competitors as motivators
• Provide benchmarks to compare and exceed
Porter’s National Competitive Advantage
theory (Porter’s diamond) Cont
• Developing clusters


Use home nation clusters of buyers, suppliers and
related industries to gain competitive advantages.
Use home based suppliers and buyers as
international allies
• Regular senior management contact
• R&D interchanges
• Reciprocity in serving as test sites for new products and
services
• Cooperation in penetrating international markets
Internalisation Theory
• Relies heavily on the concept of transaction
costs.



Transaction costs are the costs of entering into
a transaction such as negotiating, monitoring
and enforcing a contract.
The firm must decide whether it is better to
own its own factory overseas or contract others
to undertake the work e.g. license, franchise,
supply agreement.
When transaction costs are high it is better to
internalise production i.e. direct foreign
investment
Eclectic Theory
• John Dunning (1988) combined location advantage,
ownership advantage and internalisation advantage
to form a unified theory of FDI.
• According to Dunning FDI will occur when 3
conditions are satisfied:

Location advantage
• Must be more profitable to operate in foreign market than
domestic

Ownership advantage
• Firm must have unique competitive advantage over local firms
e.g. technology, marketing or management capabilities)

Internalisation advantage
• Benefit of establishing own production facilities (control) must
outweigh using a local independent firm (licensing) to provide the
service