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Lecture 6

Lecture 6 - Transnational Corporations.docx

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Geography 3422A/B
Milford Green

Transnational Corporations 3/19/2013 11:21:00 AM TNCs  Transnational corporation – a firm that has the power to coordinate and control operations in more than one country, even if it does not own them  World’s largest transnational corporations as of April 2011: o JP Morgan Chase o HSBC Holdings o General Electric  Corporate evolution: o Hudson’s Bay Company – Canada o Berkshire Hathaway – US o DuPont – US o Samsung – Korea o Shell – Britain o 3M – US o Nintendo – Japan o Ikea – Sweden o American Express – US o Mitsubishi – Japan o Wrigley – US o Suzuki – Japan o Lamborghini – Italy o Wipro – India o Nokia – Finland o Vivendi – France  3 characteristics (coordinate geographic advantages) o Ability to coordinate and control various processes and transactions within production networks, both within and between countries o Potential ability to take advantage of geographical differences in the distribution of factors of production o Potential geographical flexibility – ability to switch and re- switch its resources and operations  Global Shifts Towards MNE’s o Liberalization of cross-border movements (government policy) o Development of institutions and service firms facilitating trade  WTO, IMF  Transportation, banking, etc. o Consumer pressures o Increasing global competition o Technological advances o Ease of doing business (from easiest to hardest)  Singapore  UK  US  China  India  Chad  Why go multinational? o To increase profit and stockholder wealth o To gain access to foreign markets o To diversify risk o To take advantage of a specific region or country’s core competencies (government policies, labor practices, technology, etc.) o To avoid market saturation by continued growth o To maintain ownership and control  Social Impacts of MNE’s o Institutional development o Effects on the natural environment o Ethical business practices o Labour standards o Customs and traditions  Technological impacts o Increased accessibility to innovative and advanced technology o Sophistication in infrastructure (transportation and communication) o Transfer and sharing of knowledge  Hardware – machines and equipment  Software – human skills and information  CSR (corporate social responsibility) o The issue of whether businesses should promote CSR is hotly debated o Many of the world’s biggest companies (including BP and the now defunct Enron) have embraced the notion o From most responsible to least:  Countries:  UAE  Japan  India  Canada – 12th (50% believe in CSR)  Companies:  Johnson and Johnson  Disney  Kraft  Micro-level approach o Stephen Hymer o Institutional organization theory – foreign firm needs firm specific advantage to offset advantages of domestic firms such as:  Firm size  Economies of scale  Market power and marketing skills (Coke)  Technological expertise (Microsoft)  Access to cheaper sources of finance (corporate bonds) TNC Evolution  4 stages: (demand, produce, sell, export) o Demand abroad – export of a commodity from home country to a new foreign market o Establishment of production facilities abroad, exports of the same item drop o Foreign production facilities now also services foreign markets other than the first o Foreign production facilities export back to home country  Extensions to this pattern of TNC evolution are called the product life cycle model o Phase 1 – all production in the US, export to many countries o Phase 2 – production started in Europe, US exports mostly to LDCs o Phase 3 – Europe exports to LDCs, US exports to LDCs displaced o Phase 4 – Europe exports to US o Phase 5 – LDCs export to US o Urbanization economies – benefits companies receive from operating in urban areas  Eclectic paradigm (OLI model – ownership advantages, internalization, location specific) o Dunning 1980 o Ownership-specific advantages  Property rights and/or intangible asset advantages  Product innovations, production, management, organizational and marketing systems  Tacit knowledge  Human capital experience  Marketing and finance know-how  Advantages of common governance  Due mainly to size and established position  Economies of scope  Monopoly power  Better resource capacity and usage  Exclusive or favoured access to resources  Ability to get favoured terms for resources  Exclusive or favoured access to product markets  Advantages because of multi-nationality  Favoured and/or better knowledge about international markets  Information  Finance  Labour  Take advantage of geographic differences in factor endowments and markets  Ability to diversify risks o Internalization – advantages must be most suitably exploited by the firm rather than selling or leasing to another firm, must be able to be used internally as opposed to licensing out  Avoidance of search and negotiation costs  To avoid costs of enforcing property rights  Buyer uncertainty (about nature and value of inputs being sold)  Where market doesn’t permit price discrimination  Need of seller to protect quality of intermediate or final products  To capture economies of interdependent activities  To compensate for absence of future markets o Location-specific variables  Natural and created resource endowments  Input prices, quality and productivity  International transport and communication costs  Investment incentives and disincentives  Artificial barriers (e.g. tariffs)  Infrastructure  Psychic distance – perceived distance between places  Economies of centralization of R&D and marketing  Economic system and government policy o Criticisms  Just a list of factors is likely to be important  Too micro-oriented  No temporal element – can these advantages be maintained over time?  In the market model for FDI, the size of the market determines whether exporting, licensing or foreign direct investment is the most efficient form of access to a foreign market  Sequential development (slide 34) o Serve domestic market only  Export to overseas markets  License foreign manufacturer to produce for overseas markets  Establish sales outlets in overseas markets  By acquiring local firm  By setting up new facility  Establish production facilities overseas  By acquiring local firm  By setting up new facility Types TNC production  Market-oriented production o Size – GNP/capita o Different structures of demand based on income levels  Asset-oriented production o Geographical variations in labour knowledge and skills o Geographical variations in wage costs o Geographical differences in labour productivity o Geographical variations in labour controllability o Labour is not very mobile TNC Governance  One of the basic laws of growth of any organism or organization is that as growth occurs its internal structure has to change o The firm’s component parts tend to become more specialized and the links between the parts become more complex  As the size, organizational complexity and geographical spread of TNCs have increased, the internal relationships between their geographically separated parts have become a significant element in the global economy  The way TNCs organize and configure their production chains arises from a number of inter-related influences: o The firm's specific history o Its culture and administrative heritage in the form of accepted practices built up over a period of time o The nature and complexity of the industry environment in
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