MGRECON401Economics of International Business

and Multinationals

LECTURE 1Multinationals and the Modern

Firm

What is a Multinational?

What do we need to know to efficiently manage a

multinational?

What is Globalization?

1-5

What is “Globalization?”

“The shift toward a more integrated and

interdependent world economy.”

Markets

Production

1-6

Globalization of Markets

1-7

Swan Optical Manufacturing

Design

Globalization of Production

1-8

International Trade: When a firm exports goods or services to consumers in another country.

Foreign Direct Investment: When a firm invests resources in business activities outside its home country.

1-9

The Growth of World Trade and Output

100

600

1100

1600

2100

2600

1950 1960 1970 1980 1990 2000

TradeOutput

GDP

Trade

1-10

Growth in FDI

Driver’s of Globalization

1-12

Macro Factors

Decline in Trade Barriers

GlobalizationTechnological

Change

1-13

Average Tariff Rates on Manufactured Products as Percent of Value

1-14

Fewer FDI Restrictions Between 1991 and 2000

of the 1,121 changes worldwide in laws governing FDI, 95% created a more favorable investment environment.

During 2000, 69 countries made 150changes to FDI regulations, 147 or 98%

were more favorable to investment.

1-15

The Role of Technological Change

Microprocessors and Telecommunications

The Internet and World Wide Web

1-16

The Shrinking Globe

1-17

Changing TechnologyBetween 1920 and 1990 the average ocean freight and port charges per short ton of US import and export cargo fell from $95 to $29 (in 1990 dollars).Between 1930 and 1990, average air transport revenue per passenger mile fell from $0.68 to $0.11.Between 1930 and 1998 the cost of a 3-minute telephone call from New York to London fell from $244.65 to $0.36. Source: Frankel Globalization of the Economy, 2000.

1-18

Emergence of Global Institutions

Globalization has created the need for institutions to help manage, regulate and police the global marketplace

GATTWTOIMFWorld bankUnited Nations

Globalization and the Changing World

1-20

The Industrial Revolution

1-21

Output Shares in the Long Run?

1-22

The Changing Pattern of World Output and Trade Output measured by GNP.

1-23

BRIC’s and World Output

BRICS’s = Brazil, Russia, India, and China.Source: Goldman Sachs, Global Economics, Paper No. 99

1-24

The National Composition of the 100 Largest Multinationals

1973 1990 1997 2000 U.S.A. 48.5% 31.5% 32.4% 26% J apan 3.5 12 15.7 17 U.K. 18.8 6.8 6.6 8 France 7.3 10.4 9.8 13 Germany 8.1 .9 12.7 12

Table 1.3

1-25

Percentage share of total FDI stock(by source)

1-26

Volume of FDI inflows, 1994-2002 ($ billions)

Globalization and Multinationals

1-28

Multinationals and Missing Markets

Efficient use of resources sometimes requires inputs from various countries.

Unskilled labor in poor countries and managerial talent in rich countries.Natural resources in poor countries and technology in rich countries.

Multinationals coordinate the efficient use of resources: missing markets.

Multinationals also offer more product variety at a lower price (product differentiation).

1-29

Multinationalsand Intra-Industry Trade

Intra-industry trade is trade within an industry.

A significant portion of world trade is intra-industry trade. Why?

What is the significance of this for firm strategy?

1-30

Index of Intra-Industry Trade for US Industries

Power-generating equipment .99Office machines .98Electric machinery .89Inorganic chemicals .88Organic chemicals .81Pharmaceutical products .73Telecommunications equipment .53Road vehicles .53Iron and steel .48Clothing and accessories .15Footwear .00

Index = 1 - |Imports-Exports|/(Imports+Exports)

1-31

Characteristics of Intra-Industry Trade

Sophisticated manufactured goods.

Subject to important economies of scale in production.

Industries with little intra-industry trade are labor intensive products (trade due to comparative advantage).

1-32

Intra-Industry Tradeand Market Structure

Economies of scale in productionAverage cost falls with more productionTVs and Automobiles

Leads to a few large firms, each with some market power

Monopolistic competitionProduct differentiationFixed cost of introducing a new product variety

Firms specialize in producing a few varietiesDifferent countries specialize in different varietiesLeads to intra-industry tradeExample of Canada and the North American Auto Pact

1-33

Implications of Monopolistic Competition

What is the relation between the number of firms and average cost?What is the relation between the number of firms and the average price?What determines the equilibrium number of firms?What is the relation between market size, average price, and product variety?

1-34

The Emergenceof Multinationals

Creating a unique product requires significant R&D.

Large fixed cost leads to economies of scale in production.

Requires a global market to recoup gains from R&D.

1-35

NokiaHow did Nokia’s vision that “voice will go wireless” play into its global strategy?How did Nokia achieve a balance between innovation and execution?What organizational architecture did Nokia choose to achieve this balance?How did Nokia encourage innovation?How much of Nokia’s organizational design is due to its focus on innovations and high growth?

1-36

Overview of the CourseMultinationals and the Modern Firm (Nokia)

Global Sourcing Decisions (Caterpillar)

Multinationals and Global Trade Agreements (Toyota)

Multinational Investments, Outsourcing, and Ethics (Nike)

Formulating a Global Strategy (Komatsu)

1-37

Overview of the CourseChoosing an Optimal Organizational Architecture (BP)

Motivating Employees and Performance Evaluation in a Complex Organization (BMG)

Entry Strategy and Strategic Alliances (Xerox)

Financial Management in Multinationals (GM)

Leadership in a Multinational (GE and Jack Welch)