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2. Definitions MNC account for half of global GDP The majority of MNC assets are in foreign countries 20% of top MNC come from developing countries Expanding on the international market is based on cost reduction and risk diversification Barriers to MNCs are local language, culture and host government attitude Host countries benefit greatly from MNC activities 2

3. What is a MNC ? A company that owns a subsidiary (affiliate) in more than one foreign country MNC’s size is measured in terms of revenue/profit MNCs locate their production facilities according to factor (resource) endowment The ownership of resources abroad constitutes FDI In 2008 only, 77 000 MNCs controlled 780 000 subsidiary companies. Big MNCs have affiliates in more than 40 countries These enterprises employed 82 million people, made FDI worth $ 16 trillion and generated sales of $ 30 trillion = ½ world GDP 3 (Source: Sloman&Jones, 2011)

4. Super MNCs A Swiss study from 2007 found out that 1318 MNCs control 60% of the world revenues Less than 1% (147) are in charge of 40% of world revenue Top 20 of these companies is dominated by investment banks Such an overdependence explains the deepness of the 2008 crisis (Source: PLoS One, The Network of Global Corporate Control, 2011) 44 out of 100 biggest economies are companies (2009) These 44 MNC generated revenues of $ 6.4 trillion 4 (Source: The Influence of the World’s Largest 100 Economic Entities, 2009)

5. Top 20 MNC (2011) RankCompanyRevenueProfits ($ millions)($ millions) 1Wal-Mart Stores421,84916,389 1Wal-Mart Stores421,84916,389 2Royal Dutch Shell378,15220,127 2Royal Dutch Shell378,15220,127 3Exxon Mobil354,67430,460 3Exxon Mobil354,67430,460 4BP308,928-3,719 4BP308,928-3,719 5Sinopec Group273,4227,629 5Sinopec Group273,4227,629 6China National Petroleum240,19214,367 6China National Petroleum240,19214,367 7State Grid226,2944,556 7State Grid226,2944,556 8Toyota Motor221,7604,766 8Toyota Motor221,7604,766 9Japan Post Holdings203,9584,891 9Japan Post Holdings203,9584,891 10Chevron196,33719,024 10Chevron196,33719,024 11Total186,05514,001 11Total186,05514,001 12ConocoPhillips184,96611,358 12ConocoPhillips184,96611,358 13Volkswagen168,0419,053 13Volkswagen168,0419,053 14AXA162,2363,641 14AXA162,2363,641 15Fannie Mae153,825-14,014 15Fannie Mae153,825-14,014 16General Electric151,62811,644 16General Electric151,62811,644 17ING Group147,0523,678 17ING Group147,0523,678 18Glencore International144,9781,291 18Glencore International144,9781,291 19Berkshire Hathaway136,18512,967 19Berkshire Hathaway136,18512,967 20General Motors135,5926,17 20General Motors135,5926,17 5 (Source: Fortune Global 500)

6. MNC by home country Country20032011 US189133 EU153150 France 35 Germany 34 Britain 30 Netherlands 12 Italy 10 Japan8268 China1561 Switzerland1215 6 (Source: Fortune Global 500)

7. Global FDI ($ billion) 7 (Source: UNCTAD – World Investment Report 2010)

8. FDI inflows 8 (Source: UNCTAD – World Investment Report 2010 & Development and Globalization Report 2004)

9. FDI inflows ($ billion) 9 (Source: UNCTAD – World Investment Report 2010)

10. FDI inflows and outflows 2009 10 (Source: UNCTAD – World Investment Report 2010)

11. Cross border M&A The 1990s saw intensive M&A activity among companies from developed countries During the 2000s M&A targeted companies in East- European states, South-East Asia and Latin America 11 (Source: UNCTAD – World Investment Report 2000 & 2010)

12. FDI inflows in BG (€ million) 12 (Source: BNB)

13. Reasons to become a MNC Cost reduction:  different business activities are located according to factor endowment – cost and quality of inputs; managerial talent Risk spreading:  escaping saturated home market  falling revenues in one country can be off set by rising revenues in another Access to new markets:  gaining from competitive advantage in developing markets  attaining knowledge from the international scene 13

14. Multinational expansion Horizontal integration – produce the same product in different markets, with minimum/some product tailoring Vertical integration – different stages of production are undertaken in different countries Conglomerate – produce different products in different countries 14

15. Degree of internationalization License – sell a license to a foreign company to produce and sell the product abroad, obtain a fee Export – use a foreign distributor, or set up own distribution center abroad Set up own packaging unit to finish the products abroad FDI – set up whole production division M&A – acquire a whole foreign company 15 License Export (distributor) Export (subsidiary) Local packaging FDI M&A Investment/Risk Time

16. Internationalization of PLC In the Growth phase, substitutes will emerge, to lower costs, the firm might shift production where inputs are cheap + exports At the Maturity stage, the market is almost saturated, whole production units will be set in new, developing markets + exports At the Decline stage subsidiaries of the firm import the product in the original market. Strategies during PLC: In the Intro phase, the new product generates increasing revenue and profit, exporting is a good strategy 16

17. Barriers for MNCs Language – in some markets English is barely spoken:  Africa, Latin America Marketing – host culture needs to absorb the product:  Carrefour &Tesco in China Host governments – extensive regulation for MNC  Dubai Communication & coordination – too big MNC deal with internal bureaucracy 17

18. Advantages for host country Employment – MNC’s subsidiaries create many new jobs Balancing the BoP – inflows of money to the economy, import substitution and export promotion Technological spillover – transfer of knowledge, practice, better production practices Taxation revenues – inflow of money to the economy 18

19. Disadvantages for host country Uncertainty – MNC might switch host countries easily Tax evasion – ‘transfer’ pricing Power – MNC may exert power to avoid regulation in developing countries Environmental damage – developing countries, rich in natural resources, but with weak institutional framework suffer from environmental damage 19

20. Sources: Lecture is based on: Business strategy in a global economy in Sloman, J. and Jones, E. (2011) Economics and the Business Environment (3 rd ed) UK: Pearson For further reading check:  http://american-business.org/581-multinational-corporation.html http://american-business.org/581-multinational-corporation.html  UNCTAD – World Investment Report 2010  КНСБ – МУЛТИНАЦИОНАЛНИТЕ КОМПАНИИ – 2008 (европейски аспекти на индустриалните отношения) 20