INTERNATIONAL
INVESTMENT
&
FINANCIAL FLOWS
INVESTMENT & FINANCIAL FLOWS
1.
2.
3.
4.
How money is invested
Multinational corporations
Where the money flows
Evolution of MNCs
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Historical advantages of GN
GS resistance
GS embraces
Changes in production
HOW MONEY IS INVESTED
Foreign Portfolio
Investment (FPI)
Foreign Direct Investment
(FDI)
Mostly by individuals;
may be used by MNCs
Mostly stocks and bonds
Used by MNCs—returns
higher yield than FPI
Subsidiary branches and/or
joint ventures
To earn profits
To earn interest through
dividends
No asset control
As shareholder, may vote
on directors and possibly
resolutions
Short-term commitment
Controls assets of company
Determines policies, locations,
products, product volume,
personnel, etc.
Long-term commitment
MNCS
ABOUT MNCS



Ownership
 Plants
 Resource extraction
 Processing operations
 Services
Assets
 Capital
 Technology
 Managerial skills
 Marketing skills
Measured in Gross Corporate Product (GCP)

¤
Total value of all goods & services revenues
for one year

http://www.economist.com/news/finance-and-economics/21594476-scarce
CHARACTERISTICS OF MNCS
How would you describe the influence of MNCs?
 Lots of $ Lots of power
 Transnationality= mobility
Leverage over governments
 Locate favorable conditions

Influence jobs growth potential
 Promote globalization

Influence culture, values
 Promote capitalism & materialism
 Influential actors in global system

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¤
Offer domestic/ global competition
WHO OWNS WHAT
Takeover activity hit $1 trillion. An M&A
boom is upon us, as announced takeovers this
year reached $1 trillion nearly two months
earlier than in 2013—the quickest rate in seven
yearsLots of $ Lots of power
 Link URL for Who Owns What site
 Stats for how many MNCs dominate which
sectors? Like the 7 controlling 2/3 of all global
media?
¤
WHERE MNCS ARE: GN
GN has majority of MNCs
 Product of post-WWII US hegemony
 Top 500 80% GN

Rank Country
# of top
500 MNCs
1
2
3
4 (tie)
US
China
Japan
France
132
73
68
32
4 (tie)
Germany
32
http://money.cnn.com/magazines/fortune/global500/2012/countries/Australia.html?iid=top3
WHERE MNCS ARE: GS
 73
are China (and Taiwan)= 32%
 28 owned other EE countries = 6%
 Only 3 MNCs not GN or EE are petroleum
companies= <1%

¤
Colombia, Saudi Arabia, Venezuela
MNCS RIVAL STATES IN WEALTH
MNC
Country Rank
Country
Shell
$484.5 B GCP
25
Belgium
$483.5 GDP
Walmart
26
Norway
Exxon-Mobil
27
Argentina
GE
52
New Zealand
Ford
59
Hungary
Apple
60
Morocco
IMF data 2013; Fortune 500 http://money.cnn.com/magazines/fortune/global500/2012/full_list/; http://www.businessinsider.com/25-corporations-bigger-tan-countries2011-6?op=1
WHERE THE
MONEY FLOWS
DESIRABLE FDI LOCATIONS
http://www.finfacts.ie/irishfinancenews/article_1026203.shtml
WHERE FDI GOES
 Global

FDI
2013: $1.3 T
 High point 2007 at $2.1 T
http://www.oecd.org/daf/inv/investment-policy/FDI-in-Figures-Feb-2014.pdf

 More
FDI goes into which country?
China at $253 B
 U.S. with $166 B (#2)

http://www.oecd.org/daf/inv/investment-policy/FDI-in-Figures-Feb-2014.pdf (2012)

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Capital flows to EEs est. at $1.268 T in 2012
http://www.iif.com/emr/capflows201401.php

Map
 FDI in China
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20% of EE FDI to China
Within China scroll to map, then click on image to bypass log-in
 FDI

out of US
$351 B v. $62.4 B out of China in 2012

US single biggest outward flow at 37% of all G-20 FDI

http://www.oecd.org/daf/inv/FDI%20in%20figures.pdf; also see https://www.ofii.org/sites/default/files/FDIUS_2013_Report.pdf
¤
INVESTS-SOMEWHAT-MORE-WORLD
Note: Data is cumulative
http://www.ritholtz.com/blog/2012/08/stratfor-chinese-investments-in-africa/
EVOLUTION OF
MNCS
HISTORICAL ADVANTAGES OF GN
 Dutch
East India Company
Recognized as early form of an MNC
 Influenced formation of others

East India Company (British)
 French East India Company

 US

encouraged FDI after WWII
Needed to spark growth in allied countries
 Initial

¤
resistance by GS
If you’re a GS leader, why would you resist?
GS RESISTANCE TO MNCS
Initial resistance by GS
 Newly
independent from colonization
 Little leverage to institute regulations

Unable to collectively act to institute rules of
FDI
 Feared


exploitation without compensation
Lacked skilled workers for higher-level
employment
Repatriation of earnings
 Attempted
¤
unilateral development
GS EMBRACES MNCS FOR DEVELOPMENT
 First
in 1960s - into Asia & Central America
 Focus on light industry
 Set up maquilas / maquiladora as export processing
zones (EPZs) in Central America
 Late 1970s – into Africa and China
 In China, Special Economic Zones (SEZs)
 Efforts to entice MNCs
 Over 3,000 in over 120
 Still occurring
 China raised foreign ownership limit from 20% to
30%
 Tesco buys into Star Bazaar Indian grocery chain
 50% ownership
 1st foreign supermarket since gov’t opened grocery
sector to FDI
¤
GS EMBRACES MNCS
China’s SEZs
 4 in 1980; now have 6
GS EMBRACES MNCS
China’s SEZs
 Model for other countries
Russia
 Vietnam
 Philippines
 India (started with 8)
 Cambodia


Authoritarian regimes
Control
 Political stability
 Concerns about nationalizing

¤
GS EMBRACES MNCS
What do you think EPZs have to offer MNCs?
 Skilled labor
 Stable political environment
 Investment incentives, trade concessions
 Exemption from domestic laws
 Infrastructure

Roads, power supplies, transport facilities, low
cost or rent buildings
Waive restrictions on foreign ownership of
business
 Waive repatriation restrictions

¤
MNCS & FDI
1)
2)
3)
4)
5)
What is the investment appeal of Indonesia?
What issues do MNCs encounter doing business
in Indonesia?
Why is Cambodia attracting MNCs?
What challenges do MNCs face in Cambodia?
How do Cambodians benefit from FDI?
MNCS & FDI
MNCs in Indonesia
1) What is the investment appeal of Indonesia?
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¤
Surging domestic market
 Auto sales up 17.8% from previous year
Indonesia = biggest SE Asia market
 Large population
Sales in India, China on decline
Largely unaffected by 2008 global recession
Investment-grade credit rating
Young labor force = new consumers
New interest from US, EU
MNCS & FDI
2)
What issues do MNCs encounter?
 Regulatory issues
 Corruption
Ranked 114/177 on Transparency Int’l index
 Likelihood of bribes to do business 25/28

Lack of infrastructure
 Rising labor costs
 Red tape

80 days for license
 Ease of doing business WB ranking very low (120/189)


Argentina- lower at 126
*These factors slow growth

6 % v. potential 10%
MNCS & FDI
Moving to Cambodia
1) Why is Cambodia attracting MNCs?
up 70% since 2011, at $1.5 B,
 in 2013 more FDI per capita than China


Limit reliance on China
Increased wages
 Younger people don’t want factory jobs
 Shrinking labor force
 Aging population


Can provide labor for low-tech sectors

¤
Textiles
MNCS & FDI
2)
What challenges do MNCs face in Cambodia?
 Provides less of everything than China can
Work force
 Consumer potential
 Electricity access


¤
Limitations  use labor more quickly  higher
wages
MNCS & FDI
3)
How do Cambodians benefit from FDI?
 Wages
 Benefits


Greater leverage

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¤
Medical, accident insurance, education
allowances, free lunches
Strikes for higher wages at Taiwanese-owned
paying less than Japanese-owned textile factory
Housing
MNCS & FDI
What impacts investment decisions?
 Political stability
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Threat of nationalization
Ease of doing business
Potential consumer market
Infrastructure
Geographic location
Skilled labor
Raw materials
Natural disasters
Health
MNCS &
PRODUCTION
NEW INTERNATIONAL DIVISION OF LABOR
 Global
labor shift
 Started with US electronics firms

Japan, then SK, China, SE Asia
 Expanded
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¤
Nike in Japan
Processing raw materials
Semi-finished goods
Components
Finished products
NEW INTERNATIONAL DIVISION OF LABOR
Strategies
 Outsourcing


Using 3rd party
Offshoring
Foreign party
 Suppliers become competitors

¤
ISSUES
 Exploits


foreign labor
MNCs generally follow set standards
Most pay above local minimum going wage rate
 Intra-firm

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Cheats subsidiary countries of profits
 Trade within own set of subsidiaries to avoid taxes
 Lower value to pay lower taxes
 Not actually selling yet
 Export “unfinished” products
 Profit is credited to parent company at home
Inflates trade statistics
 Diffuses
¤
trading
responsibility
RANA
PLAZA
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April 24, 2013; 1,127 died
Worst disaster in history of garment industry
Substandard materials, violated building codes, structural flaws
Workers threatened with being fired
Primark retail- paying out $12m
Hope others will follow suit ¤
RANA PLAZA
What questions are raised about who is responsible in
the new int’l division of labor regarding the Rana Plaza
accident?
 MNCs instituted ‘codes of conduct’ but often go
unenforced
‘Ritual compliance’ checks
 Corruption
 Lack of int’l pressure
 Gov’t fears regulations might drive out MNCs

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Ethical obligation of MNCs, consumers

¤
Consumer awareness/ apathy
RANA PLAZA
What is the impact of flexible supply chains?
 Short product shelf-life
Ramp up, shut down production
 Affects job availability; increased shift hours
 Workers rarely have contracts
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Small profit margins for GS factories
Poorly run, managed factories
 Little to reinvest to improve conditions
 Safety not a priority
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MNCs have leverage
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¤
Product on time or you don’t get the next order
PRODUCTION CHAINS
3 Types Production Chains
#1 Product Specialization

One product for regional market
NAFTA: ingredients in English, French, Spanish;
measurements standard and metric
 EU: ingredients in many languages

¤
PRODUCTION CHAINS
#2 Host-Market Production
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Production for one national market
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¤
Effective for big market countries
 US, China, Brazil, India
Market country’s consumer preferences
PRODUCTION CHAINS
#3 Transnational Vertical Integration
Gap between producer- where goods sold
Parts, final product from different places
Output of one plant goes to one + to complete

¤
RETURN HOME?
Why did MNCs offshore/outsource production?
2. Why are MNCs considering--or even initiating-reshoring?
3. In what ways could reshoring impact the global
economy?
1.
¤
RETURN HOME?
Why did MNCs offshore/outsource production?
1.
Lower cost
 Labor, other overhead, tax incentives, etc.
 Good supply chain in place
 Offers influence over other countries
 Potential consumer markets
 Capital needs to find new markets for investment
 Growth in global economy benefits domestic economy

¤
RETURN HOME?
Why are MNCs considering--or even initiating-reshoring?
2.
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¤
*Various figures about returning
Comparable costs at home
 Unions less of issue
 Rising transport costs
 Lower energy costs
Unhappy with abroad labor
 Complain, diff. to fire, have/exercising more rights, lower
worker quality, fewer workers
Closer to headquarters
Tech better
Image- providing jobs at home
 Requires consumer support to buy American- likely?
RETURN HOME?
3.
In what ways could reshoring impact the global
economy?
 Face skilled labor shortage in US
 Less FDI going abroad = fewer global consumers
 GS depend on FDI for development

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¤
Non-EEs most to lose
EU MNCS outsourcing w/in EU- different situation
RETURN HOME?
MNC investment as threat? See Hidden Persuaders
Reshoring to protect trade secrets (too late?)
 Australia blocking Chinese MNCs from buying their
companies due to security concerns
 Committee on Foreign Investment in US (CFIUS)- senate
asked agency to treat the US food supply as a 'critical
infrastructure' in the US when a Chinese company wanted
to buy Smithfield Foods (it did get to buy it)

¤
RETURN HOME?
Slide about challenges to labor conditions in China
Labor unrest in China disrupted shoemakers’ supply chains. As a strike
over benefits and pay at a massive shoe factory in Dongguan, China extended
into a ninth day, companies that rely on the plant—including Nike, New Balance,
and Puma—began to shift their operations elsewhere. Adidas announced this
morning that it was redirecting orders to other suppliers.
¤
RECAP
1.
2.
3.
4.
5.
How money is invested
Multinational corporations
Where the Money Flows
Evolution of MNCs
MNCs & Production