topic 1: business across borders - multinational
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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
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Evaluations
Component Percentage
Attendance 40%
Presentations 60%
Attendance: Half-page summary of designated paper; “Readers
choice”
Presentations: academic paper; case study; research proposal
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Schedule
Sun (AGI) MNCs in Asia May 27, 2020 4 / 48
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)
Sun (AGI) MNCs in Asia May 27, 2020 5 / 48
Top 100 Global Brand in 2018
Top 100 Global Brand vs Top 100 MNEs
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The rising Asia
With a rise of 42%, Asia led the regions in value growth on the
strength of China and technology.
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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.
Sun (AGI) MNCs in Asia May 27, 2020 8 / 48
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.
Sun (AGI) MNCs in Asia May 27, 2020 11 / 48
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?
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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)
Sun (AGI) MNCs in Asia May 27, 2020 13 / 48
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).
Sun (AGI) MNCs in Asia May 27, 2020 14 / 48
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.
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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.
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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
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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
Sun (AGI) MNCs in Asia May 27, 2020 18 / 48
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.
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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.
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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?
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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
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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
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1. Political Separation
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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?
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Economic Activity on Planet Earth
Light distribution at night identifies centers of economic
activity
Urban agglomeration and cost lines are very prominent
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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
Sun (AGI) MNCs in Asia May 27, 2020 28 / 48
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
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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
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Climate Zones of Planet Earth
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5. Developmental Separation
200 Countries, 200 Years
https://www.youtube.com/watch?v=jbkSRLYSojo
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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)
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Keep in mind: averages don’t tell the whole story
Sun (AGI) MNCs in Asia May 27, 2020 34 / 48
Keep in mind: averages don’t tell the whole story
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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.
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The "Penn" Effect
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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)
Sun (AGI) MNCs in Asia May 27, 2020 39 / 48
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.
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Development, Affluence, and Corruption
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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.
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6. Cultural Separation
Conventions
Culture adopts certain conventions in order to facilitateinteractions:
Business etiquettecurrencylanguagevoltagepaper size
Some of these conventions become legally binding standards
within political boundaries
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What share of the world drives on the left?
1/3 of the world’s population drives on the left!
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6. Cultural Separation
How do cultural differences affect international business?
Affect the employment relationships at overseas affiliates of
MNEs.
Important for MNEs market adaptation decisions.
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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)
Antrás et al. (2009 QJE)
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