Introduction
The size and structure of multinationals
Foreign direct investment
Explaining multinationals
Multinationals in general equilibrium
Characterization of equilibrium
Case study: hard disk drives
Conclusions
CHAPTER 15; MULTINATIONALSInternational Trade & the World Economy; Charles van Marrewijk
Explanations for trade
Classical 2. Opportunity costs 3. Comparative advantage
Neo-classical 4. Production structure 5. Factor prices 6. Production volume 7. Factor abundance
1. The world economy
New trade 9. Imperfect competition 10. Intra-industry trade
Policy
8. Trade policy
11. Strategic trade policy
12. Int. trade organizations 13. Economic integration
17. Applied trade policy modeling
Economicgeography
New interactions 14. Geographical economics 15. Multinationals 16. New goods, growth, and development
Industrialorganization
Internationalbusiness
Growth theory
Part
IPa
rt I
IPa
rt I
IIP
art
IV
18. Concluding remarks
Introduction
The size and structure of multinationals
Foreign direct investment
Explaining multinationals
Multinationals in general equilibrium
Characterization of equilibrium
Case study: hard disk drives
Conclusions
CHAPTER 15; MULTINATIONALSInternational Trade & the World Economy; Charles van Marrewijk
IntroductionInternational Trade & the World Economy; Charles van Marrewijk
Objectives / key terms
Multinationals Transnationality index
Foreign direct investment Mergers and acquisitions
Horizontal/vertical mergers Transfer pricing
OLI framework Hard disk drives
Joseph Schumpeter (1883 - 1950)
Introduction
The size and structure of multinationals
Foreign direct investment
Explaining multinationals
Multinationals in general equilibrium
Characterization of equilibrium
Case study: hard disk drives
Conclusions
CHAPTER 15; MULTINATIONALSInternational Trade & the World Economy; Charles van Marrewijk
The size and structure of multinationals International Trade & the World Economy; Charles van Marrewijk
Table 15.1 Top-20 multinational corporations, ranked by foreign assets, 1997*
Corporation Country Industry Assets Sales Employment TN
Foreign Total Foreign Total Foreign Total Index
1 General El. USA Electronics 97 304 25 91 111 276 33
2 Ford Motor USA Automotive 73 275 48 154 174 364 35
3 Shell Group NL/UK Petroleum 70 115 69 128 65 105 59
4 Gen. Motors USA Automotive 0 229 51 178 ... 608 29
5 Exxon USA Petroleum 55 96 105 120 ... 80 66
6 Toyota Japan Automotive 42 105 50 89 ... 159 40
7 IBM USA Computers 40 82 49 79 135 269 54
8 Volkswagen Germ. Automotive ... 57 43 65 134 280 57
9 Nestlé Switz. Food 32 38 48 48 220 226 93
10 Daimler Germ. Automotive 31 76 46 69 75 300 44
The size and structure of multinationals International Trade & the World Economy; Charles van Marrewijk
a. sales of foreign affiliates(% world GDP)
0
10
20
30
40
50
1982 1990 1999
b. gross product of foreign affiliates (% world GDP)
0
5
10
15
1982 1990 1999
The size and structure of multinationals International Trade & the World Economy; Charles van Marrewijk
c. exports of foreign affiliates(% of world GDP)
0
5
10
15
1982 1990 1999
d. exports of foreign affiliates (% of world exports)
0
10
20
30
40
50
1982 1990 1999
The size and structure of multinationals International Trade & the World Economy; Charles van Marrewijk
Foreign Direct Investment
Greenfield Investments Mergers and Acquisitions (M&A)
Mergers Acquisitions
Full acquisition (100%)
More than 50% acquistion
10% - 49% acquisition
22% 78%
3% of M&A 97% of M&A
65% of M&A 15% of M&A 16% of M&A
The size and structure of multinationals International Trade & the World Economy; Charles van Marrewijk
Mergers and Acquisitions, purchases by region (bill. $)
0
100
200
300
400
500
600
700
800
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
W. Europe N. America other
The size and structure of multinationals International Trade & the World Economy; Charles van Marrewijk
World cross-border Mergers and Acquisitions, by type (% of total, measured in value)
0
20
40
60
80
100
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
horizontal vertical conglomerate
Introduction
The size and structure of multinationals
Foreign direct investment
Explaining multinationals
Multinationals in general equilibrium
Characterization of equilibrium
Case study: hard disk drives
Conclusions
CHAPTER 15; MULTINATIONALSInternational Trade & the World Economy; Charles van Marrewijk
Foreign direct investment International Trade & the World Economy; Charles van Marrewijk
a. GDP, trade and FDI (1970 = 100)
0
100
200
300
400
500
600
1970 1975 1980 1985 1990 1995
FDI
GDP
Trade
Foreign direct investment International Trade & the World Economy; Charles van Marrewijk
a. FDI inflows (billions of $)
0
100
200
300
WesternEurope
Central andEasternEurope
Africa NorthAmerica
LatinAmericaand the
Caribbean
J apan Asian NIC's Other Asia
87-92 av.
1993
1994
1995
1996
1997
1998
Foreign direct investment International Trade & the World Economy; Charles van Marrewijk
b. FDI outflows (billion of $)
0
100
200
300
400
WesternEurope
Central andEasternEurope
Africa NorthAmerica
LatinAmericaand the
Caribbean
J apan Asian NIC's Other Asia
87-92 av.
1993
1994
1995
1996
1997
1998
Foreign direct investment International Trade & the World Economy; Charles van Marrewijk
c. Net FDI flows (billion of $)
-200
-100
0
100
WesternEurope
Central andEasternEurope
Africa NorthAmerica
LatinAmericaand the
Caribbean
J apan Asian NIC's Other Asia
87-92 av.
1993
1994
1995
1996
1997
1998
Introduction
The size and structure of multinationals
Foreign direct investment
Explaining multinationals
Multinationals in general equilibrium
Characterization of equilibrium
Case study: hard disk drives
Conclusions
CHAPTER 15; MULTINATIONALSInternational Trade & the World Economy; Charles van Marrewijk
Dunning’s OLI framework:• Ownership advantages• Location advantages• Internalization advantages
Empirical characteristics of multinationals:• high ratios of R&D relative to sales• employ large numbers of scientific, technical, and other 'white collar' workers as a percentage of their work force• high value of 'intangible' assets • associated with new and/or technically complex products• negatively associated with plant-level scale economies• associated with product-differentiation variables (e.g. advertising/sales)• A minimum or 'threshold' level of firm size seems to be important• Multinationals tend to be older, more established firms.
Explaining multinationals International Trade & the World Economy; Charles van Marrewijk
Introduction
The size and structure of multinationals
Foreign direct investment
Explaining multinationals
Multinationals in general equilibrium
Characterization of equilibrium
Case study: hard disk drives
Conclusions
CHAPTER 15; MULTINATIONALSInternational Trade & the World Economy; Charles van Marrewijk
Multinationals in general equilibrium International Trade & the World Economy; Charles van Marrewijk
Markusen-Venables model
• Perfect competition and CRS for food sector.
• Imperfect competition and IRS for manufacturing sector
Production of manufactures characterized by
• c - the (constant) marginal production costs in terms of labor
• t - the amount of labor needed to transport one unit of manufactures from Austria to Bolivia, or vice versa.
• F - the firm level fixed costs in terms of labor.
• G - the plant level fixed costs in terms of labor.
mB; multinational firm, headquarters in BoliviaMC in A = cwA
MC in B = cwB
Multinationals in general equilibrium International Trade & the World Economy; Charles van Marrewijk
mA; multinational firm, headquarters in AustriaMC in A = cwA
MC in B = cwB
nB; national firm, headquarters in BoliviaMC in A = (c+t)wA
MC in B = cwB
nA; national firm, headquarters in AustriaMC in A = cwA
MC in B = (c+t)wB
Headquarters in Austria
Firm level fixed costs FwA
Plant level fixed costs GwA
Plant level fixed costs GwB
Multi-plant production?
+
yesno
Headquarter locationHeadquarters
in Bolivia
Firm level fixed costs FwB
Plant level fixed costs GwB
Plant level fixed costs GwA
Multi-plant production?
+
yesno
Introduction
The size and structure of multinationals
Foreign direct investment
Explaining multinationals
Multinationals in general equilibrium
Characterization of equilibrium
Case study: hard disk drives
Conclusions
CHAPTER 15; MULTINATIONALSInternational Trade & the World Economy; Charles van Marrewijk
Characterization of equilibrium International Trade & the World Economy; Charles van Marrewijk
labor
capi
tal
OA
OB
Austria largeBolivia small
Austria smallBolivia large
Austria capital abundantBolivia labor abundant
Austria labor abundantBolivia capital abundant
C
Characterization of equilibrium International Trade & the World Economy; Charles van Marrewijk
.95
.90
.80
.85
.75
.70
.65
.30
.35
.60
.55
.50
.45
.40
.25
.15
.10
.05
.20
.95.90.80 .85.75.70.65.30 .35 .60.55.50.45.40.25.15.10.05 .20
Endowment of labor
End
owm
ent o
f ca
pita
l
OA
OBa. Base scenario
Nationalfirms only
Mixedregimes
Multinationalfirms only
Introduction
The size and structure of multinationals
Foreign direct investment
Explaining multinationals
Multinationals in general equilibrium
Characterization of equilibrium
Case study: hard disk drives
Conclusions
CHAPTER 15; MULTINATIONALSInternational Trade & the World Economy; Charles van Marrewijk
Case study: hard disk drives International Trade & the World Economy; Charles van Marrewijk
Substrate
Media
Motors
Head-StackAssembly
Head-GimbalAssembly
HeadFabrication
Semiconductors PCB Stuffing and OtherElectronics Assembly
Head-DiskAssembly
FinalAssembly
Testing
ComponentFabricationActivities
Subassembly Activities FinalAssemblyActivities
Case study: hard disk drives International Trade & the World Economy; Charles van Marrewijk
Table 15.3 Hard Disk Drives; indicators of nationality of production*
Measure# US Japan S.E. Asia Other Asia Europe Other
Nationality of firm 88.4 9.4 0 2.2 0 0
Final assembly 4.6 15.5 64.2 5.7 10.0 0
Employment 19.3 8.3 44.0 17.1 4.7 6.5
Wages paid 39.5 29.7 12.9 3.3 8.5 6.1
*Source: Gourevitch et al. (2000), Table 2 (data for 1995). All numbers as percentage of world total.# Nationality of firm (% of unit output); location of final assembly; employment in value chain; and wagespaid in value chain, respectively.
Introduction
The size and structure of multinationals
Foreign direct investment
Explaining multinationals
Multinationals in general equilibrium
Characterization of equilibrium
Case study: hard disk drives
Conclusions
CHAPTER 15; MULTINATIONALSInternational Trade & the World Economy; Charles van Marrewijk
Conclusions International Trade & the World Economy; Charles van Marrewijk
Multinationals are becoming increasingly important (w.r.t. production, investment, and trade)
Most multinationals in OECD countries
Most FDI horizontal acquisitions between OECD countries
Explaining multinationals
• Descriptive OLI framework
• Modern general equilibrium framework
Modern framework determines market structure endogenously; results confirm reasonably well with stylized facts (multinationals dominate if countries are more similar; national firms dominate if countries differ in size or relative endowment)
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