INTERNATIONAL INVESTMENT & FINANCIAL FLOWS

INVESTMENT & FINANCIAL FLOWS

1. How money is invested2. Multinational corporations3. Where the money flows4. Evolution of MNCs

Historical advantages of GN GS resistance GS embraces Changes in production

HOW MONEY IS INVESTEDForeign 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 bonds

Subsidiary branches and/or joint ventures

To earn interest through dividends

To earn profits

No asset control Controls assets of company

As shareholder, may vote on directors and possibly resolutions

Determines policies, locations, products, product volume, personnel, etc.

Short-term commitment

Long-term commitment

MNCS

ABOUT MNCSOwnership

PlantsResource extractionProcessing operationsServices

AssetsCapitalTechnologyManagerial skillsMarketing skills

Measured in Gross Corporate Product (GCP)Total value of all goods & services revenues for one year

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http://www.economist.com/news/finance-and-economics/21594476-scarce

CHARACTERISTICS OF MNCS

How would you describe the influence of MNCs?

Lots of $ Lots of powerTransnationality= mobility

Leverage over governmentsLocate favorable conditions

Influence jobs growth potentialPromote globalization

Influence culture, valuesPromote capitalism & materialismInfluential actors in global system

Offer domestic/ global competition¤

WHO OWNS WHAT

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 yearsLots of $ Lots of power

Link URL for Who Owns What siteStats for how many MNCs dominate

which sectors? Like the 7 controlling 2/3 of all global media?

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WHERE MNCS ARE: GNGN has majority of MNCs Product of post-WWII US hegemonyTop 500 80% GN

Rank Country # of top 500 MNCs

1 US 132

2 China 73

3 Japan 68

4 (tie) France 32

4 (tie) Germany 32http://money.cnn.com/magazines/fortune/global500/2012/countries/Australia.html?iid=top3

WHERE MNCS ARE: 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¤

MNCS RIVAL STATES IN WEALTH

MNC Country Rank Country

Shell $484.5 B GCP

25 Belgium $483.5 GDP

Walmart 26 Norway

Exxon-Mobil 27 Argentina

GE 52 New Zealand

Ford 59 Hungary

Apple 60 MoroccoIMF data 2013; Fortune 500 http://money.cnn.com/magazines/fortune/global500/2012/full_list/; http://www.businessinsider.com/25-corporations-bigger-tan-countries-2011-6?op=1

WHERE THE MONEY FLOWS

DESIRABLE FDI LOCATIONS

http://www.finfacts.ie/irishfinancenews/article_1026203.shtml

WHERE FDI GOES Global FDI

2013: $1.3 THigh point 2007 at $2.1 T http://www.oecd.org/daf/inv/investment-policy/FDI-in-Figures-Feb-2014.pdf

More FDI goes into which country? China at $253 BU.S. with $166 B (#2) http://www.oecd.org/daf/inv/investment-policy/FDI-in-Figures-Feb-2014.pdf (2012)

Capital flows to EEs est. at $1.268 T in 2012 http://www.iif.com/emr/capflows201401.php

Map FDI in China

20% of EE FDI to ChinaWithin China scroll to map, then click on image to bypass log-in

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 http://www.oecd.org/daf/inv/FDI%20in%20figures.pdf; also see https://www.ofii.org/sites/default/files/FDIUS_2013_Report.pdf

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CHINA’S FDI –UPDATE WITH HTTP://WWW.USCHINA.ORG/CHINA-HUB/CHINA-INVESTS-SOMEWHAT-MORE-WORLD

Note: Data is cumulative

http://www.ritholtz.com/blog/2012/08/stratfor-chinese-investments-in-africa/

EVOLUTION OF MNCS

HISTORICAL ADVANTAGES OF GN

Dutch East India CompanyRecognized as early form of an MNCInfluenced formation of others

East India Company (British)French East India Company

US encouraged FDI after WWIINeeded to spark growth in allied

countries Initial resistance by GS

If you’re a GS leader, why would you resist?

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GS RESISTANCE TO MNCSInitial resistance by GS Newly independent from colonization Little leverage to institute regulations

Unable to collectively act to institute rules of FDI

Feared exploitation without compensationLacked skilled workers for higher-level

employmentRepatriation of earnings

Attempted unilateral development¤

GS EMBRACES MNCS FOR DEVELOPMENT First in 1960s - into Asia & Central America

Focus on light industrySet 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%

Tesco buys into Star Bazaar Indian grocery chain50% ownership1st foreign supermarket since gov’t opened grocery sector to FDI

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GS EMBRACES MNCSChina’s SEZs

4 in 1980; now have 6

GS EMBRACES MNCSChina’s SEZs

Model for other countriesRussiaVietnamPhilippinesIndia (started with 8)Cambodia

Authoritarian regimesControlPolitical stabilityConcerns about nationalizing

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GS EMBRACES MNCSWhat do you think EPZs have to offer MNCs?

Skilled laborStable political environmentInvestment incentives, trade

concessionsExemption from domestic lawsInfrastructure

Roads, power supplies, transport facilities, low cost or rent buildings

Waive restrictions on foreign ownership of business

Waive repatriation restrictions¤

MNCS & FDI1) 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?

MNCS & FDIMNCs in Indonesia1) What is the investment appeal of

Indonesia?Surging domestic market

Auto sales up 17.8% from previous yearIndonesia = biggest SE Asia market

Large populationSales in India, China on declineLargely unaffected by 2008 global recessionInvestment-grade credit ratingYoung labor force = new consumersNew interest from US, EU

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MNCS & FDI2) What issues do MNCs encounter?

Regulatory issuesCorruption

Ranked 114/177 on Transparency Int’l indexLikelihood of bribes to do business 25/28

Lack of infrastructureRising labor costsRed tape

80 days for licenseEase of doing business WB ranking very low (120/189)Argentina- lower at 126

*These factors slow growth6 % v. potential 10%

MNCS & FDIMoving to Cambodia1) Why is Cambodia attracting MNCs?

up 70% since 2011, at $1.5 B,in 2013 more FDI per capita than China

Limit reliance on ChinaIncreased wagesYounger people don’t want factory jobsShrinking labor forceAging population

Can provide labor for low-tech sectorsTextiles

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MNCS & FDI

2) What challenges do MNCs face in Cambodia?

Provides less of everything than China canWork forceConsumer potentialElectricity access

Limitations use labor more quickly higher wages

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MNCS & FDI3) How do Cambodians benefit from FDI?

WagesBenefits

Medical, accident insurance, education allowances, free lunches

Greater leverageStrikes for higher wages at Taiwanese-owned paying less than Japanese-owned textile factory

Housing ¤

MNCS & FDIWhat impacts investment decisions?

Political stabilityThreat of nationalization

Ease of doing businessPotential consumer marketInfrastructureGeographic locationSkilled labor Raw materialsNatural disastersHealth¤

MNCS & PRODUCTION

NEW INTERNATIONAL DIVISION OF LABOR

Global labor shift Started with US electronics firms

Japan, then SK, China, SE Asia Expanded

Nike in JapanProcessing raw materialsSemi-finished goodsComponentsFinished products¤

NEW INTERNATIONAL DIVISION OF LABOR

StrategiesOutsourcing

Using 3rd partyOffshoring

Foreign partySuppliers become competitors

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ISSUES Exploits foreign labor

MNCs generally follow set standardsMost pay above local minimum going wage rate

Intra-firm trading Cheats subsidiary countries of profits

Trade within own set of subsidiaries to avoid taxesLower value to pay lower taxes

Not actually selling yetExport “unfinished” products

Profit is credited to parent company at homeInflates trade statistics

Diffuses responsibility¤

RANA PLAZA

April 24, 2013; 1,127 diedWorst disaster in history of garment industrySubstandard materials, violated building codes, structural

flawsWorkers threatened with being fired Primark retail- paying out $12mHope others will follow suit ¤

RANA PLAZA

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’ checksCorruption Lack of int’l pressureGov’t fears regulations might drive out MNCs

Ethical obligation of MNCs, consumersConsumer awareness/ apathy

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RANA PLAZAWhat is the impact of flexible supply chains?

Short product shelf-lifeRamp up, shut down productionAffects job availability; increased shift hoursWorkers rarely have contracts

Small profit margins for GS factoriesPoorly run, managed factoriesLittle to reinvest to improve conditionsSafety not a priority

MNCs have leverageProduct on time or you don’t get the next order

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PRODUCTION CHAINS3 Types Production Chains

#1 Product SpecializationOne product for regional market

NAFTA: ingredients in English, French, Spanish; measurements standard and metric

EU: ingredients in many languages¤

PRODUCTION CHAINS#2 Host-Market Production

Production for one national marketEffective for big market countries

US, China, Brazil, IndiaMarket country’s consumer preferences¤

PRODUCTION CHAINS#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

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THE NEXT FASHION CRAZE

RETURN HOME?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?¤

RETURN HOME?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¤

RETURN HOME?2. Why are MNCs considering--or even initiating--

reshoring?*Various figures about returning

Comparable costs at home Unions less of issueRising transport costsLower energy costs

Unhappy with abroad laborComplain, diff. to fire, have/exercising more rights, lower worker quality, fewer workers

Closer to headquartersTech betterImage- providing jobs at home

Requires consumer support to buy American- likely?¤

RETURN HOME?3. In what ways could reshoring impact the

global economy?Face skilled labor shortage in USLess FDI going abroad = fewer global

consumersGS depend on FDI for development

Non-EEs most to loseEU MNCS outsourcing w/in EU- different

situation¤

RETURN HOME?MNC investment as threat? See Hidden 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)

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RETURN HOME?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.

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RECAP

1. How money is invested2. Multinational corporations3. Where the Money Flows4. Evolution of MNCs5. MNCs & Production