geog1012_week5_S1_2024 (2)

10/4/2024
Multi-National Corporations
&
Foreign Direct Investment
Instructor: dr. Frank van der Wouden
GEOG1012 – 1st semester 2024-2025
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Linking MNCs & FDI with earlier weeks

• Week 2 – broad introduction
• Week 3 – basics of capitalist ‘mode of production’ →
competition & urge to grow →
spatial division of labor
• Week 4 – Trade (specialization & export) → benefits for
‘everyone’ (?)
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10/4/2024
Linking MNCs & FDI with earlier weeks

• Week 2 – broad introduction
• Week 3 – basics of capitalist ‘mode of production’ →
competition & urge to grow →
spatial division of labor
• Week 4 – Trade (specialization & export) → benefits for
‘everyone’ (?)
• Today:
• MNCs are a vehicle (embodiment) through which trade happens
• FDI is used by MNCs in their search for profits
1. Multi – National Corporations & Foreign Direct Investment

• Definitions
• Origins
• Growth of MNCs & FDI
• FDI Patterns
• Spatial (where do flows come from and go to?)
• Sectorial (impact on lives…)
• Examples of MNCs
• Why engage in internationalization?
• Two main types of FDI
2. Costs & Benefits of MNCs

• Introduction
• Modes of Entry
• Capital & Finance
• Technology Transfers
• Employment & Labor Issues
3. Conclusions & key take-aways
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Definitions
“A MNC is a firm that coordinates

and controls production in more
than one country.”
Dicken on MNCs:
Definitions
The flow of capital (investment)
across international borders (foreign)
undertaken to own/control
production (direct)
Foreign Direct Investment:
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Country A Country B
Company
X
Country A Country B
Company
X
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Country A Country B
Company
X
Company
X
Origins of MNCs
• Middle-Age Trading Firms
• Hanseatic league
• Medici: Banking to finance trade
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Origins of MNCs
• 16th and 17th century: Trading in raw materials

• East India Company
• Hudson’s Bay Company
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Origins of MNCs
• 16th and 17th century: Trading in raw materials

• East India Company
• Hudson’s Bay Company
• 18th century: Trading in finished products

• Industrial revolution
• MNCs in the “factory age”
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The Economic Significance of MNCs

• Difficult obtaining data on MNCs
• Operate across international borders
• Official (national) statistics rarely capture all their activity
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• Difficult obtaining data on MNCs
• Operate across international borders
• Official (national) statistics rarely capture all their activity
• The usual way to track MNCs:

• Foreign Direct Investment
• Aggregate measures on the scale of MNC activities
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Growth of MNCs
• 1990: 32,000 MNCs with
265,000 foreign branches
21,000,000 million foreign jobs
• 1997: 53,000 MNCs with

• 2016: 100,000 MNCs with

Average
number of
Growth of MNCs jobs per
MNC
• 1990: 32,000 MNCs with 656

• 1997: 53,000 MNCs with 755

• 2016: 100,000 MNCs with 820

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TOYOTA
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EXXON-
MOBIL
SIEMENS
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Why Internationalize?
• Why adopt an international position, rather than serve foreign
markets by exports?
Why Internationalize?
• Why adopt an international position, rather than serve foreign
markets by exports?
• Dunning: “Firms internationalize when…”

• they have ownership-specific advantages (example: superior technologies,
reputation)
• there are location specific factors that make it more profitable for the firm to
exploit its advantages in foreign as opposed to domestic locations (cheap
labor, natural resources)
• the firm desires to internalize these advantages to better control IP,
transaction costs, or coordination between different stages of the production
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Two main types of FDI

• When a firm meets Dunning’s three requirements, it can engage with
go abroad through FDI in two ways:

1. Supply or cost-oriented FDI:

• Access localized supplies of raw materials (oil, coal, minerals etc.) or specific
inputs (low-skilled or high-skilled labor)
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1. Supply or cost-oriented FDI:

• Access localized supplies of raw materials (oil, coal, minerals etc.) or specific
inputs (low-skilled or high-skilled labor)
2. Market-oriented FDI:
• Circumvent trade barriers like tariffs and bans
• Example: foreign car manufacturers in China
EXAMPLE OF
INTERNATIONAL
VARIATIONS IN WAGES
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Development of MNCs
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Development of MNCs
Coca Cola produces and sells in

USA
Coca Cola produces in USA and

also sells to non-Coca Cola sales
agents in China

builds/buys a Coca-Cola sales
office in China to sell in China

builds/buys a Coca-Cola
production facility in China to sell
in China
Geographical
possibilities for
MNC organization
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Nike’s Global Supply Chain Geography
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Key take-aways
• FDI & MNC growth has been extremely rapid over the last 30-40 years
• Firms internationalize for 3 reasons (Dunning)
• Ownership specific advantage (i.e. superior technology)
• Desire to internalize advantage (i.e. don’t want to share their secret sauce)
• Location factors make it profitable to exploit advantage overseas (cheap labor
$$$)
• FDI is primarily undertaken for 2 reasons:
• Access to markets (demand for products)
• Access to supply (localized raw materials or other inputs)
• MNCs seen as the engines of globalization: their operations fragment
& integrate different parts of the global economy
Key take-aways
• FDI & MNC growth has been extremely rapid over the last 30-40 years
• Firms internationalize for 3 reasons (Dunning)
• Ownership specific advantage (i.e. superior technology)
• Desire to internalize advantage (i.e. don’t want to share their secret sauce)
• Location factors make it profitable to exploit advantage overseas (cheap labor
$$$)
• FDI is primarily undertaken for 2 reasons:
• Access to markets (demand for products)
• Access to supply (localized raw materials or other inputs)
• MNCs seen as the engines of globalization: their operations fragment
& integrate different parts of the global economy … AND SHAPE
WINNERS /
LOSERS
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Why do we care about MNCs & FDI
Why do we care about MNCs & FDI
How do MNCs & their FDI shape the fortune of the groups of people located in
different parts of the world?
Ownership & power relations → Are MNCs too powerful? Who regulates and
controls them?
What about income (and gender) equality → exploitation?
“Race to the bottom”?
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1. Multi – National Corporations & Foreign Direct Investment

• Definitions
• Origins
• Growth of MNCs & FDI
• FDI Patterns
• Spatial (where do flows come from and go?)
• Sectorial (impact on lives…)
• Examples of MNCs
• Why engage in internationalization?
• Two main types of FDI
2. Costs & Benefits of MNCs

• Introduction
• Modes of Entry
• Capital & Finance
• Technology Transfers
• Employment & Labor Issues
3. Conclusions & key take-aways
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2 & week 8
1
3
Week 10
4 & week 9
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Mode of Entry
Ranked by impact in host country:
1.
2.
3.
Impact: how much will change in host country
Mode of Entry
1.
2.
3. Joint venture with local firm → merge w/ foreign factory
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Mode of Entry
1.
2. Acquisition of existing firm → buy foreign factory
Mode of Entry
1. Greenfield investment → build a new factory

2. Acquisition of existing firm → buy foreign factory
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Capital & Finance
Deal with these issues in turn:
• Capital investment
• Sources of finance: Where does FDI come from?
• Transfer pricing
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Sources of Financing
Where does the FDI come from?
Example:
Toyota
factories
in the USA
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Sources of Financing
Where does the FDI come from?
Typically, a big chunk is from host countries

that want to attract jobs
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Transfer Pricing
Transfer Pricing
• Put simply: Tool to lower taxes (increase profits) by trading
within company.
• Example: Ford in the USA & Mexico
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Transfer Pricing
within company.
Ford earns Profits in Ford

Corporate taxes revenues in both Ford Mexico Mexico increase.
are: countries. sells auto parts Profits of Ford
It prefers to pay to Ford USA at USA decrease.
- relatively high in
taxes on those How? inflated prices
the USA Total taxes paid
revenues in to move $$$
- relatively low in Mexico in order from the USA drops.
Mexico to maximize to Mexico Total Ford profit
post-tax profits increases.
Transfer Pricing
within company.

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Transfer Pricing
within company.

Transfer Pricing
within company.

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Hiding Profits:
“The Double
Irish Dutch
Sandwich”
Technology Transfer
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Technology Transfer
• Developing host countries seek MNCs so that they can

learn new technologies
• “Learning-by-doing”
Technology Transfer
• Developing host countries seek MNCs so that they can

learn new technologies
• “Learning-by-doing”
• Does technology transfer really occur?
• New data shows MNCs increasingly engaging in R&D in
host economies, even in developing countries
• Does the new technology help host countries develop?
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Next four slides are evidence of:
1. R&D expenditure differs across space

2. Some countries are net importers. Import more than export.
3. Large shares of R&D in (developing) countries is done by
foreign companies → learning?
4. Example of R&D of Motorola across the world
Global
R&D
Spending
in 2011
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72.1% of R&D in
business is done by
foreign companies
Note the
differences
across space
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Employment
How do MNCs impact employment in host country?
• Quantity of employment
– Number of jobs generated
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Employment
How do MNCs impact employment in host country?
• Quantity of employment
– Number of jobs generated
• Quality of employment
– How skill-full are the jobs generated
– What wages are they paying
– What are the working conditions
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But, the actual

in-direct (spin-off)
jobs are even
higher
Quality of Jobs in MNCs
• Very difficult question to answer:

– Historically: exploitation & slavery
– Contemporary: sweat-shops, child-labor & “race-to-the-bottom”
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• Are MNCs responsible for abuses or are they committed by local firms?

• Are MNCs responsible for abuses or are they committed by local firms?
• United Nations Committee on Trade & Development argues that wages &
working conditions, on average, are better in MNCs than in domestic
firms
• But MNCs tend to sub-contract work to local firms… does this mean they
may still be responsible for labor abuses?
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Conclusions & key take-aways

• Capital flows through FDI critical for fueling growth in many emerging economies
– Generates jobs
– Potential for ‘learning-by-doing’ and technology transfer
• Increasing evidence of technology development (R&D) in developing host economies

– Is this the result from MNC activities?
– Role of transfer pricing and tax hiding?
• On average, workers in developing host economies benefit from MNCs

– Wages higher than in domestic plants
– Better working conditions
• (But loss of domestic control of economies?)
How to think about these topics with

respect to the exam?
• What are the potential benefits from MNCs for the host countries?
• What is the relationship between MNCs and FDI?
• What is the definition of FDI?
• What are potential drawbacks from MNCs for host countries?
• Is FDI good for the originating (sending) country?
• What about job-loss in originating country?
• How do MNC and FDI affect the lives of people in our globalizing
world?
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Advantages & Disadvantages of MNC development for MNCs
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10/4/2024

Instructor: dr. Frank van der Wouden

GEOG1012 – 1st semester 2024-2025

Linking MNCs & FDI with earlier weeks

Linking MNCs & FDI with earlier weeks

1. Multi – National Corporations & Foreign Direct Investment

2. Costs & Benefits of MNCs

3. Conclusions & key take-aways

“A MNC is a firm that coordinates

Foreign Direct Investment:

• 16th and 17th century: Trading in raw materials

• 16th and 17th century: Trading in raw materials

• 18th century: Trading in finished products

The Economic Significance of MNCs

The Economic Significance of MNCs

The Economic Significance of MNCs

• The usual way to track MNCs:

• 1997: 53,000 MNCs with

• 2016: 100,000 MNCs with

• 1990: 32,000 MNCs with 656

• 1997: 53,000 MNCs with 755

• 2016: 100,000 MNCs with 820

• Dunning: “Firms internationalize when…”

Two main types of FDI

Two main types of FDI

1. Supply or cost-oriented FDI:

Two main types of FDI

1. Supply or cost-oriented FDI:

Coca Cola produces and sells in

Coca Cola produces in USA and

Coca Cola produces in USA and

Coca Cola produces in USA and

Nike’s Global Supply Chain Geography

Why do we care about MNCs & FDI

Why do we care about MNCs & FDI

What about income (and gender) equality → exploitation?

“Race to the bottom”?

1. Multi – National Corporations & Foreign Direct Investment

2. Costs & Benefits of MNCs

3. Conclusions & key take-aways

Ranked by impact in host country:

Impact: how much will change in host country

Ranked by impact in host country:

Impact: how much will change in host country

Ranked by impact in host country:

Impact: how much will change in host country

Ranked by impact in host country:

1. Greenfield investment → build a new factory

Impact: how much will change in host country

Capital & Finance

Deal with these issues in turn:

Typically, a big chunk is from host countries

Ford earns Profits in Ford

Ford earns Profits in Ford

Ford earns Profits in Ford

Ford earns Profits in Ford

• Developing host countries seek MNCs so that they can

• Developing host countries seek MNCs so that they can

Next four slides are evidence of:

1. R&D expenditure differs across space