INTERNATIONAL
INVESTMENT
&
FINANCIAL FLOWS
INVESTMENT & FINANCIAL FLOWS
1.
2.
3.
4.
How money is invested
Multinational corporations
Where the money flows
Evolution of MNCs




Historical advantages of GN
GS resistance
GS embraces
Changes in production
HOW MONEY IS INVESTED
Foreign Portfolio
Investment (FPI)
Foreign Direct Investment
(FDI)
Mostly by individuals;
may be used by MNCs
Mostly stocks and bonds
Used by MNCs—returns
higher yield than FPI
Subsidiary branches and/or
joint ventures
To earn profits
To earn interest through
dividends
No asset control
As shareholder, may vote
on directors and possibly
resolutions
Short-term commitment
Controls assets of company
Determines policies, locations,
products, product volume,
personnel, etc.
Long-term commitment
MNCS
ABOUT MNCS



Ownership
 Plants
 Resource extraction
 Processing operations
 Services
Assets
 Capital
 Technology
 Managerial skills
 Marketing skills
Measured in Gross Corporate Product (GCP)

¤
Total value of all goods & services revenues
for one year
CHARACTERISTICS OF MNCS
How would you describe the influence of MNCs?
 Lots of $ Lots of power
 Transnationality= mobility
Leverage over governments
 Locate favorable conditions

Influence jobs growth potential
 Promote globalization

Influence culture, values
 Promote capitalism & materialism
 Influential actors in global system


¤
Offer domestic/ global competition
WHERE MNCS ARE: GN
GN has majority of MNCs
 Product of post-WWII US hegemony
 Top 500 80% GN


Top GCP MNCs
 Only
3 MNCs not GN or EE are petroleum
companies= <1%
Rank Country # of top



¤
Colombia
Saudi Arabia
Venezuela
500 MNCs
1
2
3
4 (tie)
4 (tie)
US
China
Japan
France
Germany
128
95
68
32
32
http://money.cnn.com/magazines/fortune/global500/2012/countries/Australia.html?iid=top3

http://www.economist.com/news/finance-and-economics/21594476-scarce
WHERE THE
MONEY FLOWS
DESIRABLE FDI LOCATIONS
http://www.finfacts.ie/irishfinancenews/article_1026203.shtml
WHERE FDI GOES
 Global

FDI
2013: $1.3 T
 High 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 B
 U.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

 FDI


20% of EE FDI to China
Within China scroll to map, then click on image to bypass log-in
 FDI

in China
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
¤
http://www.ritholtz.com/blog/2012/08/stratfor-chinese-investments-in-africa/
EVOLUTION OF
MNCS
HISTORICAL ADVANTAGES OF GN
 Dutch
East India Company
Recognized as early form of an MNC
 Influenced formation of others

East India Company (British)
 French East India Company

 US

encouraged FDI after WWII
Needed to spark growth in allied countries
 Initial

¤
resistance by GS
If you’re a GS leader, why would you resist?
GS RESISTANCE TO MNCS
Initial resistance by GS
 Newly
independent from colonization
 Little leverage to institute regulations

Unable to collectively act to institute rules of
FDI
 Feared


exploitation without compensation
Lacked skilled workers for higher-level
employment
Repatriation of earnings
 Attempted
¤
unilateral development
GS EMBRACES MNCS FOR DEVELOPMENT
 First
in 1960s - into Asia & Central America
 Focus on light industry
 Set 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 chain
 50% ownership
 1st foreign supermarket since gov’t opened grocery
sector to FDI
¤
GS EMBRACES MNCS
China’s SEZs
 4 in 1980; now have 6
GS EMBRACES MNCS
China’s SEZs
 Model for other countries
Russia
 Vietnam
 Philippines
 India (started with 8)
 Cambodia


Authoritarian regimes
Control
 Political stability
 Concerns about nationalizing

¤
GS EMBRACES MNCS
What do you think EPZs have to offer MNCs?
 Skilled labor
 Stable political environment
 Investment incentives, trade concessions
 Exemption from domestic laws
 Infrastructure

Roads, power supplies, transport facilities, low
cost or rent buildings
Waive restrictions on foreign ownership of
business
 Waive repatriation restrictions

¤
MNCS & FDI
1)
2)
3)
Why is Cambodia attracting MNCs?
What challenges do MNCs face in Cambodia?
How do Cambodians benefit from FDI?
MNCS & FDI
Moving to Cambodia
1) Why is Cambodia attracting MNCs?
up 70% since 2011, at $1.5 B,
 in 2013 more FDI per capita than China


Limit reliance on China
Increased wages
 Younger people don’t want factory jobs
 Shrinking labor force
 Aging population


Can provide labor for low-tech sectors

¤
Textiles
MNCS & FDI
2)
What challenges do MNCs face in Cambodia?
 Provides less of everything than China can
Work force
 Consumer potential
 Electricity access


¤
Limitations  use labor more quickly  higher
wages
MNCS & FDI
3)
How do Cambodians benefit from FDI?
 Wages
 Benefits


Greater leverage


¤
Medical, accident insurance, education
allowances, free lunches
Strikes for higher wages at Taiwanese-owned
paying less than Japanese-owned textile factory
Housing
MNCS & FDI
What impacts investment decisions?
 Political stability









¤
Threat of nationalization
Ease of doing business
Potential consumer market
Infrastructure
Geographic location
Skilled labor
Raw materials
Natural disasters
Health
MNCS &
PRODUCTION
NEW INTERNATIONAL DIVISION OF LABOR
 Global
labor shift
 Started with US electronics firms

Japan, then SK, China, SE Asia
 Expanded





¤
Nike in Japan
Processing raw materials
Semi-finished goods
Components
Finished products
NEW INTERNATIONAL DIVISION OF LABOR
Strategies
 Outsourcing


Using 3rd party
Offshoring
Foreign party
 Suppliers become competitors


Reshoring
Returning to home country
 GE in U.S.

¤
ISSUES
 Exploits


foreign labor
MNCs generally follow set standards
Most pay above local minimum going wage rate
 Intra-firm


Cheats subsidiary countries of profits
 Trade within own set of subsidiaries to avoid taxes
 Lower value to pay lower taxes
 Not actually selling yet
 Export “unfinished” products
 Profit is credited to parent company at home
Inflates trade statistics
 Diffuses
¤
trading
responsibility
RANA
PLAZA






April 24, 2013; 1,127 died
Worst disaster in history of garment industry
Substandard materials, violated building codes, structural flaws
Workers threatened with being fired
Primark retail- paying out $12m
Hope 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’ checks
 Corruption
 Lack of int’l pressure
 Gov’t fears regulations might drive out MNCs


Ethical obligation of MNCs, consumers

¤
Consumer awareness/ apathy
RANA PLAZA
What is the impact of flexible supply chains?
 Short product shelf-life
Ramp up, shut down production
 Affects job availability; increased shift hours
 Workers rarely have contracts


Small profit margins for GS factories
Poorly run, managed factories
 Little to reinvest to improve conditions
 Safety not a priority


MNCs have leverage

¤
Product on time or you don’t get the next order
PRODUCTION
CHAINS
PRODUCTION CHAINS
3 Types Production Chains
#1 Product Specialization

One 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 market


¤
Effective for big market countries
 US, China, Brazil, India
Market 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

¤
RECAP
1.
2.
3.
4.
5.
How money is invested
Multinational corporations
Where the Money Flows
Evolution of MNCs
MNCs & Production
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