International Resource Movements and Multinational Corporations Flashcards
(29 cards)
Real investments in factories, capital goods, land
and inventories where both capital and
management are involved and the investor retains
control over use of invested capital
■Direct Investments
Usually takes form of a firm starting a subsidiary or
taking control of another firm
■Direct Investments
The basic motive for________ is to earn higher returns abroad.
International Portfolio Investments
tells us that by investing in
securities with yields that are inversely related (like
foreign and domestic securities) over time, a given
yield can be obtained at a smaller risk, or a higher
yield can be earned with the same level of risk for
the portfolio as a whole
■Portfolio theory
So a portfolio including both domestic and foreign
securities can have a higher average yield and/or
lower risk than one containing only domestic
securities
■ International Portfolio Investments
The basic motive for _____ is to
earn higher returns (possibly from higher growth
rates abroad, more favorable tax treatment or greater
availability of infrastructure) and to diversify risks.
direct foreign investment
Large corporations often have unique product
knowledge or managerial skill that could easily and
profitably be used abroad and over which the
corporation wants to retain direct control.
direct foreign investment
is the production abroad of a
differentiated product that is also produced at home.
Horizontal integration
(backward) allows a corporation
to obtain control of a needed raw material and thus
ensure uninterrupted supply at lowest possible cost, or
acquire later stages in the production process, or
ownership of sales or distribution networks abroad
(forward).
Vertical integration
Direct Foreign Investments
■Horizontal integration
■Vertical integration
Vertical integration:
offshoring
Also done to avoid tariffs and other restrictions that
nations impose on imports, or to take advantage of
government subsidies encouraging _
direct foreign
investment
Greenfield FDI:
Set up a new company “from the ground up” in the
foreign country
Merger &Acquisition:
Buying shares of an enterprise in another country
Reasons for rapid increase in FDI
● Flow and stock increased in the last 30 years.
● FDI has grown more rapidly than world trade because:
✔ MNEs see the entire world as their market.
✔ Political and economic environment has changed in favour
of FDI in many countries.
✔ FDI is seen as a way of circumventing trade barriers
Welfare Effects of International Capital
Flows: Benefits of FDI
● Resource Transfer
✔ Stable source of foreign capital
✔ Advanced technology
✔ Advanced management skills
● Creation of employment opportunities
True with greenfield FDI
Not so true with M&E
● Stronger competition
Domestic market becomes more efficient with stronger competition among firms
● Positive effects on Balance of Payment (BOP)
Capital inflow with initial FDI
When the goods/services produced by the FDI substitute for imported goods/services
When the goods/services produced by the FDI are exported to another country
● Economic growth
To some extent, FDI may help the economy grow faste
Welfare Effects of International Capital
Flows: Costs of FDI
● Adverse effects on competition
✔ Foreign firms (MNEs) may have too much power and kill off competition
● Adverse effects on BOP
✔ After initial inflow of capital, subsequent outflow of capital from the earnings
of the FDI
✔ Import inputs from abroad for the foreign firms
● Weakening of national sovereignty
✔ Possible loss of economic independence as some decisions that affect the host
country’s economy may be made by a foreign company that has no real
commitment to the host country
WHAT own, control, or
manage production and distribution facilities in
several countries.
Multinational corporations (MNCs)
MNCs account for about __% of world output,
with intrafirm trade estimated at about one third of
total world trade in manufacturing
25
Most international direct investments are undertaken
by __.
MNCs
Reasons for MNCs
■ Integration may increase profits through better
control of supply chains.
■The larger scale of production may allow the firm to
better exploit economies of scale.
■MNCs can better direct production to low cost
nations.
■MNCs can artificially change prices to only show
profits in low tax nations (transfer pricing).
Multinational Corporations
■Problems in Home Country
■Loss of domestic jobs to other countries.
■MNCs may move technology out of the home
country reducing the technological advantage of the
home country.
■Transfer pricing may reduce taxable income and
tax revenue.
■Access to foreign markets allows MNCs to
circumvent domestic monetary and fiscal policy
control.
Multinational Corporations
Problems in Host Country
■MNCs are alleged to dominate their economies.
■R&D funds are siphoned off to the MNC’s home
nation, keeping host nation technologically
dependent.
■MNCs may extract from host nations most of the
benefits of their investment, either through tax and
tariff benefits or tax avoidance.
■ The geographic separation of activities involved
in producing a good (or service) across two or
more countries’.
international product fragmentation
