Introduction The size and structure of multinationals Foreign direct investment Explaining...

Introduction

The size and structure of multinationals

Foreign direct investment

Explaining multinationals

Multinationals in general equilibrium

Characterization of equilibrium

Case study: hard disk drives

Conclusions

CHAPTER 15; MULTINATIONALSInternational Trade & the World Economy; Charles van Marrewijk

Explanations for trade

Classical 2. Opportunity costs 3. Comparative advantage

Neo-classical 4. Production structure 5. Factor prices 6. Production volume 7. Factor abundance

1. The world economy

New trade 9. Imperfect competition 10. Intra-industry trade

Policy

8. Trade policy

11. Strategic trade policy

12. Int. trade organizations 13. Economic integration

17. Applied trade policy modeling

Economicgeography

New interactions 14. Geographical economics 15. Multinationals 16. New goods, growth, and development

Industrialorganization

Internationalbusiness

Growth theory

Part

IPa

rt I

IPa

rt I

IIP

art

IV

18. Concluding remarks

Introduction







Conclusions


IntroductionInternational Trade & the World Economy; Charles van Marrewijk

Objectives / key terms

Multinationals Transnationality index

Foreign direct investment Mergers and acquisitions

Horizontal/vertical mergers Transfer pricing

OLI framework Hard disk drives

Joseph Schumpeter (1883 - 1950)

Introduction







Conclusions


The size and structure of multinationals International Trade & the World Economy; Charles van Marrewijk

Table 15.1 Top-20 multinational corporations, ranked by foreign assets, 1997*

Corporation Country Industry Assets Sales Employment TN

Foreign Total Foreign Total Foreign Total Index

1 General El. USA Electronics 97 304 25 91 111 276 33

2 Ford Motor USA Automotive 73 275 48 154 174 364 35

3 Shell Group NL/UK Petroleum 70 115 69 128 65 105 59

4 Gen. Motors USA Automotive 0 229 51 178 ... 608 29

5 Exxon USA Petroleum 55 96 105 120 ... 80 66

6 Toyota Japan Automotive 42 105 50 89 ... 159 40

7 IBM USA Computers 40 82 49 79 135 269 54

8 Volkswagen Germ. Automotive ... 57 43 65 134 280 57

9 Nestlé Switz. Food 32 38 48 48 220 226 93

10 Daimler Germ. Automotive 31 76 46 69 75 300 44


a. sales of foreign affiliates(% world GDP)

0

10

20

30

40

50

1982 1990 1999

b. gross product of foreign affiliates (% world GDP)

0

5

10

15

1982 1990 1999


c. exports of foreign affiliates(% of world GDP)

0

5

10

15

1982 1990 1999

d. exports of foreign affiliates (% of world exports)

0

10

20

30

40

50

1982 1990 1999


Foreign Direct Investment

Greenfield Investments Mergers and Acquisitions (M&A)

Mergers Acquisitions

Full acquisition (100%)

More than 50% acquistion

10% - 49% acquisition

22% 78%

3% of M&A 97% of M&A

65% of M&A 15% of M&A 16% of M&A


Mergers and Acquisitions, purchases by region (bill. $)

0

100

200

300

400

500

600

700

800

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

W. Europe N. America other


World cross-border Mergers and Acquisitions, by type (% of total, measured in value)

0

20

40

60

80

100

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

horizontal vertical conglomerate

Introduction







Conclusions


Foreign direct investment International Trade & the World Economy; Charles van Marrewijk

a. GDP, trade and FDI (1970 = 100)

0

100

200

300

400

500

600

1970 1975 1980 1985 1990 1995

FDI

GDP

Trade


a. FDI inflows (billions of $)

0

100

200

300

WesternEurope

Central andEasternEurope

Africa NorthAmerica

LatinAmericaand the

Caribbean

J apan Asian NIC's Other Asia

87-92 av.

1993

1994

1995

1996

1997

1998


b. FDI outflows (billion of $)

0

100

200

300

400

WesternEurope


Africa NorthAmerica

LatinAmericaand the

Caribbean


87-92 av.

1993

1994

1995

1996

1997

1998


c. Net FDI flows (billion of $)

-200

-100

0

100

WesternEurope


Africa NorthAmerica

LatinAmericaand the

Caribbean


87-92 av.

1993

1994

1995

1996

1997

1998

Introduction







Conclusions


Dunning’s OLI framework:• Ownership advantages• Location advantages• Internalization advantages

Empirical characteristics of multinationals:• high ratios of R&D relative to sales• employ large numbers of scientific, technical, and other 'white collar' workers as a percentage of their work force• high value of 'intangible' assets • associated with new and/or technically complex products• negatively associated with plant-level scale economies• associated with product-differentiation variables (e.g. advertising/sales)• A minimum or 'threshold' level of firm size seems to be important• Multinationals tend to be older, more established firms.

Explaining multinationals International Trade & the World Economy; Charles van Marrewijk

Introduction







Conclusions


Multinationals in general equilibrium International Trade & the World Economy; Charles van Marrewijk

Markusen-Venables model

• Perfect competition and CRS for food sector.

• Imperfect competition and IRS for manufacturing sector

Production of manufactures characterized by

• c - the (constant) marginal production costs in terms of labor

• t - the amount of labor needed to transport one unit of manufactures from Austria to Bolivia, or vice versa.

• F - the firm level fixed costs in terms of labor.

• G - the plant level fixed costs in terms of labor.

mB; multinational firm, headquarters in BoliviaMC in A = cwA

MC in B = cwB

Multinationals in general equilibrium International Trade & the World Economy; Charles van Marrewijk

mA; multinational firm, headquarters in AustriaMC in A = cwA

MC in B = cwB

nB; national firm, headquarters in BoliviaMC in A = (c+t)wA

MC in B = cwB

nA; national firm, headquarters in AustriaMC in A = cwA

MC in B = (c+t)wB

Headquarters in Austria

Firm level fixed costs FwA

Plant level fixed costs GwA

Plant level fixed costs GwB

Multi-plant production?

+

yesno

Headquarter locationHeadquarters

in Bolivia

Firm level fixed costs FwB

Plant level fixed costs GwB

Plant level fixed costs GwA

Multi-plant production?

+

yesno

Introduction







Conclusions


Characterization of equilibrium International Trade & the World Economy; Charles van Marrewijk

labor

capi

tal

OA

OB

Austria largeBolivia small

Austria smallBolivia large

Austria capital abundantBolivia labor abundant

Austria labor abundantBolivia capital abundant

C

Characterization of equilibrium International Trade & the World Economy; Charles van Marrewijk

.95

.90

.80

.85

.75

.70

.65

.30

.35

.60

.55

.50

.45

.40

.25

.15

.10

.05

.20

.95.90.80 .85.75.70.65.30 .35 .60.55.50.45.40.25.15.10.05 .20

Endowment of labor

End

owm

ent o

f ca

pita

l

OA

OBa. Base scenario

Nationalfirms only

Mixedregimes

Multinationalfirms only

Introduction







Conclusions


Case study: hard disk drives International Trade & the World Economy; Charles van Marrewijk

Substrate

Media

Motors

Head-StackAssembly

Head-GimbalAssembly

HeadFabrication

Semiconductors PCB Stuffing and OtherElectronics Assembly

Head-DiskAssembly

FinalAssembly

Testing

ComponentFabricationActivities

Subassembly Activities FinalAssemblyActivities

Case study: hard disk drives International Trade & the World Economy; Charles van Marrewijk

Table 15.3 Hard Disk Drives; indicators of nationality of production*

Measure# US Japan S.E. Asia Other Asia Europe Other

Nationality of firm 88.4 9.4 0 2.2 0 0

Final assembly 4.6 15.5 64.2 5.7 10.0 0

Employment 19.3 8.3 44.0 17.1 4.7 6.5

Wages paid 39.5 29.7 12.9 3.3 8.5 6.1

*Source: Gourevitch et al. (2000), Table 2 (data for 1995). All numbers as percentage of world total.# Nationality of firm (% of unit output); location of final assembly; employment in value chain; and wagespaid in value chain, respectively.

Introduction







Conclusions


Conclusions International Trade & the World Economy; Charles van Marrewijk

Multinationals are becoming increasingly important (w.r.t. production, investment, and trade)

Most multinationals in OECD countries

Most FDI horizontal acquisitions between OECD countries


• Descriptive OLI framework

• Modern general equilibrium framework

Modern framework determines market structure endogenously; results confirm reasonably well with stylized facts (multinationals dominate if countries are more similar; national firms dominate if countries differ in size or relative endowment)

Introduction The size and structure of multinationals Foreign direct investment Explaining...

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