I NTERNATIONAL I NVESTMENT & F INANCIAL F LOWS

I NVESTMENT & F INANCIAL F LOWS 1. How money is invested 2. Multinational corporations 3. Where the money flows 4. Evolution of MNCs Historical advantages of GN GS resistance GS embraces Changes in production

H OW M ONEY IS I NVESTED Foreign 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 bondsSubsidiary branches and/or joint ventures To earn interest through dividends To earn profits No asset controlControls assets of company As shareholder, may vote on directors and possibly resolutions Determines policies, locations, products, product volume, personnel, etc. Short-term commitmentLong-term commitment

MNC S

A BOUT MNC S 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 ¤

C HARACTERISTICS OF MNC S 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 Offer domestic/ global competition ¤

W HO O WNS W HAT 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 years Lots of $  Lots of powerthe quickest rate in seven years 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? ¤

W HERE MNC S A RE : GN GN has majority of MNCsmajority Product of post-WWII US hegemony Top 500  80% GN RankCountry# of top 500 MNCs 1US132 2China73 3Japan68 4 (tie) France32 4 (tie) Germany32

W HERE MNC S A RE : 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 ¤

MNC S R IVAL S TATES IN W EALTH MNCCountry RankCountry Shell $484.5 B GCP 25Belgium $483.5 GDP Walmart26Norway Exxon-Mobil27Argentina GE52New Zealand Ford59Hungary Apple60Morocco IMF data 2013; Fortune ?op=1http://money.cnn.com/magazines/fortune/global500/2012/full_list/ ?op=1

W HERE THE M ONEY F LOWS

D ESIRABLE FDI L OCATIONS

W HERE FDI G OES Global FDI 2013: $1.3 T High point 2007 at $2.1 T More FDI goes into which country? China at $253 B U.S. with $166 B (#2) (2012) Capital flows to EEs est. at $1.268 T in Map FDI in China 20 % of EE FDI to China Within China scroll to map, then click on image to bypass log-inChina 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 also see ¤

C HINA ’ S FDI – UPDATE WITH HTTP :// WWW. USCHINA. ORG / CHINA - HUB / CHINA - INVESTS - SOMEWHAT - MORE - WORLD HTTP :// WWW. USCHINA. ORG / CHINA - HUB / CHINA - INVESTS - SOMEWHAT - MORE - WORLD Note: Data is cumulativecumulative

E VOLUTION OF MNC S

H ISTORICAL A DVANTAGES 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 R ESISTANCE TO MNC S 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 E MBRACES MNC S FOR D EVELOPMENT 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%raised foreign ownership limit Tesco buys into Star Bazaar Indian grocery chainStar Bazaar 50% ownership 1 st foreign supermarket since gov’t opened grocery sector to FDI ¤

GS E MBRACES MNC S China’s SEZs 4 in 1980; now have 6

GS E MBRACES MNC S China’s SEZs Model for other countries Russia Vietnam Philippines India (started with 8) Cambodia Authoritarian regimes Control Political stability Concerns about nationalizing ¤

GS E MBRACES MNC S 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 ¤

MNC S & FDI 1) 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?

MNC S & FDI MNCs in Indonesia 1) What is the investment appeal of Indonesia? 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 ¤

MNC S & 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 %

MNC S & 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 ¤

MNC S & 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 ¤

MNC S & FDI 3) How do Cambodians benefit from FDI? Wages Benefits Medical, accident insurance, education allowances, free lunches Greater leverage Strikes for higher wages at Taiwanese-owned paying less than Japanese-owned textile factory Housing ¤

MNC S & FDI What impacts investment decisions? Political stability Threat of nationalization Ease of doing business Potential consumer market Infrastructure Geographic location Skilled labor Raw materials Natural disasters Health ¤

MNC S & P RODUCTION

N EW I NTERNATIONAL D IVISION OF L ABOR Global labor shift Started with US electronics firms Japan, then SK, China, SE Asia Expanded Nike in Japan Processing raw materials Semi-finished goods Components Finished products ¤

N EW I NTERNATIONAL D IVISION OF L ABOR Strategies Outsourcing Using 3 rd party Offshoring Foreign party Suppliers become competitors ¤

I SSUES Exploits foreign labor MNCs generally follow set standards Most pay above local minimum going wage rate Intra-firm trading 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 responsibility ¤

R ANA P LAZA 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 Primark Hope others will follow suit ¤

R ANA P LAZA 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 Ethical obligation of MNCs, consumers Consumer awareness/ apathy ¤

R ANA P LAZA 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 Small profit margins for GS factories Poorly run, managed factories Little to reinvest to improve conditions Safety not a priority MNCs have leverage Product on time or you don’t get the next order ¤

P RODUCTION C HAINS 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 ¤

P RODUCTION C HAINS #2 Host-Market Production Production for one national market Effective for big market countries US, China, Brazil, India Market country’s consumer preferences ¤

P RODUCTION C HAINS #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 ¤

R ETURN H OME ? 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? ¤

R ETURN H OME ? 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 ¤

R ETURN H OME ? 2. Why are MNCs considering--or even initiating-- reshoring? *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? ¤

R ETURN H OME ? 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 Non-EEs most to lose EU MNCS outsourcing w/in EU- different situation ¤

R ETURN H OME ? MNC investment as threat? See Hidden PersuadersHidden 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) ¤

R ETURN H OME ? 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.announced this morning ¤

R ECAP 1. How money is invested 2. Multinational corporations 3. Where the Money Flows 4. Evolution of MNCs 5. MNCs & Production