MNC’s & FDI

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MNCs FDI
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What is MNCs ?

• The multinational corporation (MNC) is the agent
  of international production. (Sometimes the MNC
  is called a transnational corporation or TNC.)  
• International production is defined as that
  production which is located in one country but
  controlled by a multinational corporation (MNC)
  based in another country. (Cantwell, 1994).
• Thus, an MNC is a corporation that carries out
  production activities in more than one country. 
  In particular, it controls the assets and manages
  the production activities in one or more foreign
  countries.
• To do this, a corporation based in the home
  country must own and operate plants in one or
  more foreign host countries. 

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Foreign Direct Investment

• To obtain plant and other production facilities
  in a foreign countries, an MNC must invest.  Thus
  an MNC has to be a foreign investor.  These
  investment activities show up in the annual
  statistics of the home country and the host
  countries as foreign direct investment.  
• Government regulation of MNCs as such is carried
  out mainly through regulation of foreign
  investment activities at the time the MNC seeks
  to make a foreign investment.  

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• Foreign direct investment is the acquisition of
  assets in which the foreigner has a controlling
  interest. 
• Portfolio investment is the acquisition of assets
  in which the foreign investor does not have a
  controlling interest.
• The US convention, followed by Australia and a
  number of other countries, defines foreign
  direct investment as ownership of 10 per cent or
  more of the ordinary shares of voting stock in
  the corporation.  This known as the 10 per cent
  rule.  It is a rule of thumb.

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• Foreign direct investments may be divided into
  two principal types
• greenfield investments, i.e. the construction of
  new plant and facilities
• Mergers and acquisitions, i.e. the acquisition of
  foreign assets by means of purchasing existing
  plants and facilities previously operated by
  other corporations
• In recent years, FDI is about equally divided
  between these two forms     

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• There are other forms of cross-border
  investments, for example,direct acquisition of
  plant and facilities of state-owned enterprises
  when these are privatised
• Joint ventures
• Strategic alliances these are agreements with
  other corporate partners (either from the host
  economy or a foreign country) that do not involve
  money transfers on the part of the foreign
  partner(s)
• Infrastructure build-own-operate-transfer (BOOT)
  agreements in which a foreign partner builds and
  operates infrastructure facilities for a limited
  period,  with ownership and control returning to
  the government of the host economy. Eg the
  CityLink highway project in Melbourne. 
• Public-private partnerships (PPPs) where one or
  more of the  private partners are foreign
  investors.

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FDI statistics are recorded in two forms

• Flow statistics.  These are the annual values of
  new foreign direct investment
• Stock statistics.  These are the accumulated
  value of all past investments.  Here one needs to
  include the value of all of the earnings of the
  foreign subsidiary or affiliate which are
  reinvested in plant, facilities and other assets,
  rather than being distributed as dividends to the
  parent corporation(s).

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Global distribution of FDI 

• UNCTAD estimates that there are about 77,000 MNCs
  with about 770,000 foreign affiliates.
• Slides on UNCTAD statistics
• The Worlds top 100 non-financial TNCs
• Many of these have production activities in many
  countries eg Royal Dutch/Shell has operations in
  more than 130 countries
• Transnationality indices for individual
  corporations,
• and aggregates for host economies

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Modes of Entry into Foreign Markets 

• When a corporation based in one country wishes to
  enter or expand its corporate sales in another
  country, there are alternative modes of entry
• exporting from the home country, i.e. the
  production facilities remain in the home country
• international production via FDI

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• There are other ways
• joint ventures, strategic alliances and other 
  agreements in which the  parent company is a
  partner in production but does not have a
  controlling interest
• licensing agreements, franchising and other
  contracts in which a foreign partner (s) or
  franchisee is the producer

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Choice of Mode 

• There is a large management literature on the
  factors which determine the choice of mode. This
  the subject matter of Business Strategy courses. 
  
• As a part of this, there is a sub-literature on
  the theory of FDI.  There is no
  universally-agreed theory of FDI.  Obviously, the
  decision to enter a foreign market by the mode of
  FDI is affected by many things commercial and
  sovereign risks, technologies, market access, tax
  liabilities, etc.

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Dunnings OLI paradigm

• The basic rationale for all FDI is to increase or
  protect their profitability, that is, to increase
  the capital value of the firm.
• The most popular model is that of John Dunning. 
  This is known as the eclectic paradigm as it is
  a composite model.
• The OLI paradigm argues that a corporation uses
  direct entry via FDI as the preferred mode if it 
• It has an Ownership Advantage, e.g. a patent or
  other intellectual property, and
• It has a Location Advantage in the host economy,
  eg large domestic market or low production costs,
  and
• An Internalisation Advantage, i.e. it is better
  to undertake production itself
• Such FDI will increase the capital value of the
  foreign-investing corporation.

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Other theories of FDI 

• The Dunning model is an example of what are
  sometimes called asset-exploiting theories.
• There are other theories which emphasis
  asset-augmenting FDI.  In contrast to
  asset-exploiting strategies, these models
  emphasize that firms may undertake FDI in order
  to acquire created assets such as technology,
  brand names, distribution networks, etc which
  other foreign firms have already build up.
• We will not pursue further the theory of FDI as
  we are chiefly interested in the role of
  government in permitting or  regulating
  international business 
•  

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Are International Production and Trade
Complements or Substitute? 

• We should not regard the modes as simple
  alternatives as the relationships may be more
  complex.
• These two modes of supply may be complements
  rather than substitutes, i.e. an increase in FDI
  may lead to an increase in trade in goods or vice
  versa.  This can happen in a number of ways. For
  example, establishing a foreign affiliate may
  lead to new trade in parts, components and
  intermediate and capital goods between the parent
  investing corporation and the affiliate. 
• In fact, there are complex links between the
  investing and trading activities of a corporate
  group, eg global production chains.

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How Governments Regulate FDI 

• National government regulate the entry and the
  production activities of foreign investors (MNCs)
  in many ways
• Restrictions on Market Access
• Rights of establishment notification/screening
  estricted/closed/priority sectors conditions eg
  joint ventures, minimum domestic
  shareholding/maximum foreign shareholding
• Investment protection
• Host country obligations
• expropriation circumstances, compensation
• transfer and repatriation of funds
• Intellectual property protection
• source country actions
• investment guarantees
• Controls on the Movement of natural persons
  entry, residence and work permits for foreign
  workers  

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• How Governments Regulate FDI Continued 
• II National Treatment
•     domestic laws, regulations, policies
•     performance requirements labour training,
  trade-related requirements (TRIMS)
• III FDI Incentives
•  Most governments today have few controls on the
  exit of capital to other countries, except for
  some attempts to regulate bribery and corruption
  involving home country investors and host economy
  governments and, in developing countries, foreign
  exchange limits on foreign investments. Hence,
  most of the controls or restrictions are imposed
  by the host country governments
•  

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Views of MNCs 

• Whereas 30 or 40 year ago many countries,
  Developed as well as Developing, were suspicious
  of FDI and regulated it heavily, FDI has,
  especially since about 1985, come to be regarded
  as a positive factor in the host economies.  In
  particular, foreign investors are seen today by
  economists and governments as agents of
  technology transfer and business organisational
  improvements.
• One should not fall into the opposite trap and
  regard all FDI as benign. One senior executive of
  GM in the USA once famously remarked that What
  is good for GM is good for the country. This is
  palpably wrong.  Host economies must guard
  against anti-competitive behaviour, tax evasion,
  adverse effects of production on the environment
  and other harmful effects of some MNC actions.
• There has been a recent counter-movement among
  NGOs which is highly critical of MNCs on
  particular issues such as
• the need for codes relating to labor standards
  (sweatshops), corporate governance, actions
  that affect the environment
• attacks on biotechnology, eg.movements to ban GM
  technologies
•   criticisms of pharmaceutical corporations and
  patented drugseg compulsory licensing in the WTO
•