Topic 1: Business Across Borders - Multinational

Topic 1: Business Across BordersMultinational Corporations in Asia

Xiaonan Sun

Asian Growth Research Institute

Kyushu University

May 27, 2020

Sun (AGI) MNCs in Asia May 27, 2020 1 / 48

Feedback

Your answers to the questions: variety and challenge

Social science is an explanatory science.

Adjustments:

More group discussions in class to practice communicationskills.Presentation opportunities in class.Case study: your presentations & Fuyao.

Clarifications: 10 min break between sessions; Evaluation;

Schedule


Evaluations

Component Percentage

Attendance 40%

Presentations 60%

Attendance: Half-page summary of designated paper; “Readers

choice”

Presentations: academic paper; case study; research proposal


Schedule


Overview

Motivation: Importance of multinational corporations

Definition of international business and boundaries of MNEs

The six forms of separation

Yeaple (2013 ARE)

Antrás et al. (2009 QJE)


Top 100 Global Brand in 2018

Top 100 Global Brand vs Top 100 MNEs


The rising Asia

With a rise of 42%, Asia led the regions in value growth on the

strength of China and technology.


Motivation: Why do we care?

Wake up to Samsung alarm clock

Shower using L’Oreal shampoo

Drink a Starbucks coffee

Drive Toyota to work

Buy your lunch bento with Alipay

Our everyday life has been shaped by multinational corporations

from Korea, France, the U.S., Japan, and China, at the least

Move from daily experience to data.


https://www.brandinginasia.com/top-100-global-brands-2018/

https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Annex-Tables.aspx

Motivation: Importance of MNEs

The sales of foreign affiliates is larger than total exports andaccounts for over 30% of world GDP.

Value at current prices 1990 2005-07 2015 2016 2017(billions of dollars) (average)FDI inflows 205 1,415 1,921 1,868 1,430FDI outflows 244 1,452 1,622 1,473 1,430Foreign AffiliatesSales 6,755 24,217 27,559 29,057 30,823Value added 1,264 5,264 6,457 6,950 7,317Employment (th) 27,034 57,392 69,683 71,157 73,209AggregatesGDP 23,433 52,383 74,407 75,463 79,814Exports 4,414 14,957 20,953 20,555 22,558

Data source: UNCTAD World Investment Report, 2018Sun (AGI) MNCs in Asia May 27, 2020 9 / 48

Motivation: Importance of MNEs

Among OECD countries, MNEs account for half of global exports

and 1/4 of employment.

Data source: OECD analytical AMNE database.Sun (AGI) MNCs in Asia May 27, 2020 10 / 48

FDI flows: country break-down

Please check the UNCTAD World Investment Report to explore industryvariations.


Questions

Is FDI flow a good measure of MNE activities?

Who keeps records of FDI flows?

When does a firm become a MNE? How do we define MNEs?

What does it mean by international transactions?


http://www.oecd.org/sti/ind/analytical-amne-database.htm

Overview

Motivation: Importance of multinational corporations

Definition of international business and boundaries of MNEs

The six forms of separation

Yeaple (2013 ARE)



Are they international transactions?

Toyota, a Japanese multinational corporation, exports cars

built at its Thailand subsidiary to China

German-resident honeymooners pay to stay in Sun Peaks

Lodge (a hotel owned by Germans residing in Canada)

At Tokyo University, a researcher from Indonesia bought a

Lenovo (a Chinese MNE) laptop designed by its R&D office in

the US and assembled in Yamato (Kanagawa prefecture,

Japan).


What is an international transaction?

Residence Test: A business transaction is considered to be

international if the entities involved reside in different countries.

For households, residence is the place where the members live.

For firms, it is an establishment (factory, office) where itengages in the production of goods and services.

For transactions involving goods, there is another criteria:Rules of origin.


The International Balance of Payments System

The organization in charge of measuring international

transactions in a systematic way is the International Monetary

Fund (IMF).

It summarizes all international transactions between

“institutional units” (households and firms) in the Balance ofPayments (BoP).

International business comprises exchange transactions in

which at least one of the parties is a firm.

The BoP considers branches and subsidiaries of MNEs to be

separate entities.


The International Balance of Payments System

Current Account

Records all international transactions in goods and services

Merchandise Trade (Goods)

Exports - Imports

Non-Merchandise Trade (Services and Transfers)

Service Exports – Service Imports

Income Receipts – Income Payments

Government and Other Receipts – Transfers to Foreign Countries

+

Capital Account

Records all international investment flows

Portfolio Investments

Inflows - OutflowsDirect Investments

Other Investments

= Change in Foreign Reserves


IMF classifications for international investment

Branches vs subsidiaries: separately incorporated or not

acquisition of intangible assetsi.e., transactions involving changes in ownership of patents andfranchisescounted as trade in services for inter-firm transactionscounted as investment in intangible assets for intra-firm deals


Entities in International Business I

1 "Uninational" Enterprise: firm that owns a permanent

establishment only in its home country and engages in

importing and exporting

2 Multinational Contractual Network (MNCN): collection ofbuyers and sellers from different countries linked togetherthrough long-term contractual relationships withoutsubstantial equity cross-holding.

Apple working with independent suppliers such as Foxconn towhom Apple sub-contract the manufacture of iPhones.Lawson opens stores in China under franchise and licenseagreements.Agreements between firms that normally compete in the sameindustry, e.g., “alliances” in airline industry.


Entities in International Business II

3 Multinational Enterprise (MNE): firm consisting ofpermanent establishments in more than one country by way offoreign direct investment (FDI)

Multinational Partnership: a collection of offices jointlyowned by a set of partners. Examples: McKinsey,Saatchi&Saatchi

Multinational Corporation (MNC): parent firm incorporatedunder the laws of the HQ nation; (→TransnationalCorporation). Examples: IBM, Nestle.In this course, we use MNE and MNC interchangeably.


http://lawson.jp/en/news/detail/1319545_3566.html

http://lawson.jp/en/news/detail/1319545_3566.html

What do MNCs do?

Engage in foreign production through their affiliates located in

several countries.

Exercise direct control over the policies of their affiliates, and

Implement transnational business strategies in production,

marketing, finance and staffing that transcend national

boundaries.

How do we measure MNCs activities?


Supplement material

Is FDI flow a good measure of MNE activities?

FDI data from the BoP have historically been a key source of

information on the international activity of MNEs, especially

for developing economies. (WIR 2018 p.21)

The annual estimates of total sales, value added and employees

of MNE affiliates are extrapolated based on FDI data.

Main critique: FDI is a financing instrument, not necessarily

an investment in productive assets.

Alternatives: OECD analytical AMNE database. OECD

Orbis: “masters of corporate ownership” Orbis homepage

Toyo Keizai database: Overseas Japanese companies and

Foreign companies in JapanSun (AGI) MNCs in Asia May 27, 2020 22 / 48

The Six forms of separations

Political – the nation state

Physical – distance

Relational – networks and trust

Environmental – natural resources and climate

Developmental – income

Cultural – norms and behavior


1. Political Separation

Main Theme: Nation states are separated by borders

National governments set policies autonomously within

territory

Political borders impede:

Movement of goods: CustomsMovement of people: ImmigrationMovement of money: Currency exchangeMovement of capital: Regulation, TaxationMovement of ideas: Censorship, firewalls

International relations are governed by international law that is

created through bilateral or multilateral treaties


http://www.oecd.org/sti/ind/analytical-amne-database.htm

https://www.bvdinfo.com/en-us/our-products/data/international/orbis#secondaryMenuAnchor3

https://biz.toyokeizai.net/en/data/service/detail/id=860

https://biz.toyokeizai.net/data/service/detail/id=418

1. Political Separation


2. Physical Separation

Main Theme: Countries are often separated by physical

barriers such as oceans or mountains; they also tend to be far

away from each other.

Key Observation: Trade volume is inversely related to

geographic distance.

Discussion Questions:

What are the major modes of transportation?Which types of goods are cheap to transport, which areexpensive?How can we assess transportation infrastructure?


Economic Activity on Planet Earth

Light distribution at night identifies centers of economic

activity

Urban agglomeration and cost lines are very prominent


Physical Separation and Transportation Modes

Roughly 23 percent of world trade by value occurs between

countries that share a land border.

The existing data suggest that trade with land neighbors is

dominated by surface modes like truck, rail, and pipeline, with

perhaps 10 percent of trade going via air or ocean

Nevertheless, nearly all trade with nonadjacent partners moves

via ocean and air modes

Because the heaviest goods travel via ocean, weight-based

data on international trade significantly understate the

economic importance of air shipping


3. Relational Separation

Trust and Trade

Transactions rely on:

Matching: a buyer to a sellerTrust between the buyer (to pay) and the seller (to deliver)

Trust an enforcement agency (usually, the government)Trust an intermediary agency (example: letter of credit)

International transactions undermine matching and trust

Lack of information on existence and reliability of potentialtrading partnersMore unforeseen contingencies make contracts incompleteUnfamiliar legal systemDistant and possibly biased courts


4. Environmental Separation

Main Theme: Environmental conditions (climate, geographic

latitude, natural resources) strongly influence production

possibilities and consumer demand.

Production Effect:Countries with different climates can produce different thingsThere is nowhere in Canada – a big country with environmentalvariation – where one can profitably grow bananas or coffeeThis creates opportunity for trade

Demand Effect:Countries with different climates will demand different types ofgoodsThere is nowhere in Brazil where consumers demand snow tires fortheir carsThis creates a limit to trade opportunities


Climate Zones of Planet Earth


5. Developmental Separation

200 Countries, 200 Years

https://www.youtube.com/watch?v=jbkSRLYSojo


https://www.youtube.com/watch?v=jbkSRLYSojo

5. Developmental Separation – How to measure it?

Multiple indices: life expectancy, extreme poverty, years ofeducation

Canada: 79.2 years, 0% live on <$1/dayChina: 70.2 years, 16% live on <$1/dayIndonesia: 66.2 years, 7.2% live on <$1/dayNigeria: 51.8 years, 70% live on <$1/day

Economists focus on real income per person (also known as

per capita GDP)The Human Development Index (HDI) constructed by UnitedNations consider three components

Income per-capitaLife expectancyyears of primary educationenvironmental factors (work in progress)


Keep in mind: averages don’t tell the whole story


Keep in mind: averages don’t tell the whole story


Difficulties for Comparing Country’s Development Levels

Prices differ a great deal across countries

Low average income countries tend to have lower price levels

(the Penn Effect)

$100 can usually buy more goods and services in a poor

country than a rich country

To compare standards of living we need to use special

exchange rates, called PPP rates to convert local currency

GDP per capita into price-adjusted incomes.


The "Penn" Effect


Income per-capita

Decomposition of per-capita income y into capital per person

K/N , labor participation L/N , human capital per worker

H/L, and factor prices (wage w and market returns rK and

rH for physical and human capital)

y =Y

N=

wL+ rKK

N= w

[L

N

]+rK

[K

N

]= rH

[H

L

] [L

N

]+rK

[K

N

]

Income differences affect how much consumers can purchase

and also the attributes of goods that they demand

Low income may correspond to poor infrastructure, legal

institutions and challenging business environmentsSun (AGI) MNCs in Asia May 27, 2020 38 / 48

Where do differences in income per capita arise from?

Different rates of labor participation

Differences in "capital" per worker (broadly defined)

And narrowly defined capital per worker cannot explaindevelopmental differences

Capital takes many forms:

Physical capital (plat and equipment)Natural capital (rivers, sunshine, oil reserves)Human capital (skills from education and experience)Intellectual capital (patents and brands)Social capital (trust, associations and institutions)


5. Developmental Separation

So what?

Income differences affect how much consumers can purchaseand also the attributes of goods that they demand.

Many goods have strong positive income effects

Incomes differences reflect differences in capital endowmentsthat determine workers productivity.

Poor countries are often not cheap countries due to corruption,lack of infrastructure, etc.


Development, Affluence, and Corruption


6. Cultural Separation

Two mechanisms of cultural transmission:

Vertical transmission: people inherit traditions from their

ancestors; tastes and preferences and passed on from parents

to children; parents contribute to habit formation

Horizontal transmission: people in a society are part of a

network and appreciate behavior similar to their own in other

people. Standards (norms, customs) lower the cost of

interactions.



Conventions

Culture adopts certain conventions in order to facilitateinteractions:

Business etiquettecurrencylanguagevoltagepaper size

Some of these conventions become legally binding standards

within political boundaries


What share of the world drives on the left?

1/3 of the world’s population drives on the left!



How do cultural differences affect international business?

Affect the employment relationships at overseas affiliates of

MNEs.

Important for MNEs market adaptation decisions.


Summary

Definition of MNEs and its importance in the global economy.

Measurement of MNEs activities: advantages and critiques.

The world is not flat due to the six forms of separation.

Yeaple (2013 ARE)



Documents

Topic 1: Business Across Borders - Multinational