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INVESTMENT & FINANCIAL FLOWS
1. How money is invested2. Multinational corporations3. Where the money flows4. Evolution of MNCs
Historical advantages of GN GS resistance GS embraces Changes in production
HOW MONEY IS INVESTEDForeign Portfolio Investment (FPI)
Foreign Direct Investment (FDI)
Mostly by individuals; may be used by MNCs
Used by MNCs—returns higher yield than FPI
Mostly stocks and bonds
Subsidiary branches and/or joint ventures
To earn interest through dividends
To earn profits
No asset control Controls assets of company
As shareholder, may vote on directors and possibly resolutions
Determines policies, locations, products, product volume, personnel, etc.
Short-term commitment
Long-term commitment
ABOUT MNCSOwnership
PlantsResource extractionProcessing operationsServices
AssetsCapitalTechnologyManagerial skillsMarketing 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 powerTransnationality= mobility
Leverage over governmentsLocate favorable conditions
Influence jobs growth potentialPromote globalization
Influence culture, valuesPromote capitalism & materialismInfluential actors in global system
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 siteStats for how many MNCs dominate
which sectors? Like the 7 controlling 2/3 of all global media?
¤
WHERE MNCS ARE: GNGN has majority of MNCs Product of post-WWII US hegemonyTop 500 80% GN
Rank Country # of top 500 MNCs
1 US 132
2 China 73
3 Japan 68
4 (tie) France 32
4 (tie) Germany 32http://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 MoroccoIMF data 2013; Fortune 500 http://money.cnn.com/magazines/fortune/global500/2012/full_list/; http://www.businessinsider.com/25-corporations-bigger-tan-countries-2011-6?op=1
DESIRABLE FDI LOCATIONS
http://www.finfacts.ie/irishfinancenews/article_1026203.shtml
WHERE FDI GOES Global FDI
2013: $1.3 THigh 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 BU.S. with $166 B (#2) http://www.oecd.org/daf/inv/investment-policy/FDI-in-Figures-Feb-2014.pdf (2012)
Capital flows to EEs est. at $1.268 T in 2012 http://www.iif.com/emr/capflows201401.php
Map FDI in China
20% of EE FDI to ChinaWithin 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
¤
CHINA’S FDI –UPDATE WITH HTTP://WWW.USCHINA.ORG/CHINA-HUB/CHINA-INVESTS-SOMEWHAT-MORE-WORLD
Note: Data is cumulative
http://www.ritholtz.com/blog/2012/08/stratfor-chinese-investments-in-africa/
HISTORICAL ADVANTAGES OF GN
Dutch East India CompanyRecognized as early form of an MNCInfluenced formation of others
East India Company (British)French East India Company
US encouraged FDI after WWIINeeded to spark growth in allied
countries Initial resistance by GS
If you’re a GS leader, why would you resist?
¤
GS RESISTANCE TO MNCSInitial resistance by GS Newly independent from colonization Little leverage to institute regulations
Unable to collectively act to institute rules of FDI
Feared exploitation without compensationLacked skilled workers for higher-level
employmentRepatriation of earnings
Attempted unilateral development¤
GS EMBRACES MNCS FOR DEVELOPMENT First in 1960s - into Asia & Central America
Focus on light industrySet 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 chain50% ownership1st foreign supermarket since gov’t opened grocery sector to FDI
¤
GS EMBRACES MNCSChina’s SEZs
Model for other countriesRussiaVietnamPhilippinesIndia (started with 8)Cambodia
Authoritarian regimesControlPolitical stabilityConcerns about nationalizing
¤
GS EMBRACES MNCSWhat do you think EPZs have to offer MNCs?
Skilled laborStable political environmentInvestment incentives, trade
concessionsExemption from domestic lawsInfrastructure
Roads, power supplies, transport facilities, low cost or rent buildings
Waive restrictions on foreign ownership of business
Waive repatriation restrictions¤
MNCS & FDI1) What is the investment appeal of
Indonesia?2) What issues do MNCs encounter doing
business in Indonesia?3) Why is Cambodia attracting MNCs? 4) What challenges do MNCs face in
Cambodia?5) How do Cambodians benefit from FDI?
MNCS & FDIMNCs in Indonesia1) What is the investment appeal of
Indonesia?Surging domestic market
Auto sales up 17.8% from previous yearIndonesia = biggest SE Asia market
Large populationSales in India, China on declineLargely unaffected by 2008 global recessionInvestment-grade credit ratingYoung labor force = new consumersNew interest from US, EU
¤
MNCS & FDI2) What issues do MNCs encounter?
Regulatory issuesCorruption
Ranked 114/177 on Transparency Int’l indexLikelihood of bribes to do business 25/28
Lack of infrastructureRising labor costsRed tape
80 days for licenseEase of doing business WB ranking very low (120/189)Argentina- lower at 126
*These factors slow growth6 % v. potential 10%
MNCS & FDIMoving to Cambodia1) Why is Cambodia attracting MNCs?
up 70% since 2011, at $1.5 B,in 2013 more FDI per capita than China
Limit reliance on ChinaIncreased wagesYounger people don’t want factory jobsShrinking labor forceAging population
Can provide labor for low-tech sectorsTextiles
¤
MNCS & FDI
2) What challenges do MNCs face in Cambodia?
Provides less of everything than China canWork forceConsumer potentialElectricity access
Limitations use labor more quickly higher wages
¤
MNCS & FDI3) How do Cambodians benefit from FDI?
WagesBenefits
Medical, accident insurance, education allowances, free lunches
Greater leverageStrikes for higher wages at Taiwanese-owned paying less than Japanese-owned textile factory
Housing ¤
MNCS & FDIWhat impacts investment decisions?
Political stabilityThreat of nationalization
Ease of doing businessPotential consumer marketInfrastructureGeographic locationSkilled labor Raw materialsNatural disastersHealth¤
NEW INTERNATIONAL DIVISION OF LABOR
Global labor shift Started with US electronics firms
Japan, then SK, China, SE Asia Expanded
Nike in JapanProcessing raw materialsSemi-finished goodsComponentsFinished products¤
NEW INTERNATIONAL DIVISION OF LABOR
StrategiesOutsourcing
Using 3rd partyOffshoring
Foreign partySuppliers become competitors
¤
ISSUES Exploits foreign labor
MNCs generally follow set standardsMost pay above local minimum going wage rate
Intra-firm trading Cheats subsidiary countries of profits
Trade within own set of subsidiaries to avoid taxesLower value to pay lower taxes
Not actually selling yetExport “unfinished” products
Profit is credited to parent company at homeInflates trade statistics
Diffuses responsibility¤
RANA PLAZA
April 24, 2013; 1,127 diedWorst disaster in history of garment industrySubstandard materials, violated building codes, structural
flawsWorkers threatened with being fired Primark retail- paying out $12mHope 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’ checksCorruption Lack of int’l pressureGov’t fears regulations might drive out MNCs
Ethical obligation of MNCs, consumersConsumer awareness/ apathy
¤
RANA PLAZAWhat is the impact of flexible supply chains?
Short product shelf-lifeRamp up, shut down productionAffects job availability; increased shift hoursWorkers rarely have contracts
Small profit margins for GS factoriesPoorly run, managed factoriesLittle to reinvest to improve conditionsSafety not a priority
MNCs have leverageProduct on time or you don’t get the next order
¤
PRODUCTION CHAINS3 Types Production Chains
#1 Product SpecializationOne 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
Production for one national marketEffective for big market countries
US, China, Brazil, IndiaMarket 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?1. 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?¤
RETURN HOME?1. Why did MNCs offshore/outsource production?
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?2. Why are MNCs considering--or even initiating--
reshoring?*Various figures about returning
Comparable costs at home Unions less of issueRising transport costsLower energy costs
Unhappy with abroad laborComplain, diff. to fire, have/exercising more rights, lower worker quality, fewer workers
Closer to headquartersTech betterImage- 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 USLess FDI going abroad = fewer global
consumersGS depend on FDI for development
Non-EEs most to loseEU 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.
¤