Lecture 15 - MNEs Flashcards
(15 cards)
What is a Multinational Enterprise (MNE)?
An enterprise that controls and manages production establishments - plants - located in at least two countries
What are the two main types of entities within an MNE?
Parents: entities located in the source country that control productive facilities.
Affiliates: the productive facilities located in host countries that are controlled by Parent
What is Foreign Direct Investment (FDI)?
The form of ownership by which a Parent controls productive facilities in a host country.
Control implies some form of ownership via FDI.
What are the two main forms of FDI?
Cross-border acquisition: a parent buys a controlling interest in an existing foreign firm.
Greenfield investment: a parent establishes an entirely new facility in a foreign country
Explain the ‘Ownership’ advantage in the OLI framework.
An ownership advantage arising from firm-specific assets allows the firm to compete in unfamiliar, foreign environments. This addresses why some firms operate in multiple countries while others do not.
Explain the ‘Location’ advantage in the OLI framework.
A location advantage makes it efficient to exploit the firm’s assets in production facilities in multiple countries. This determines in which countries production facilities are located.
Explain the ‘Internalization’ advantage in the OLI framework.
An internalization advantage makes the within-firm exploitation of assets dominate exploitation via an arm’s length entity.
This explains why firms own foreign facilities rather than contracting with local producers.
What are the two types of MNEs based on production strategy?
- Horizontal FDI: Replicating the production process in a foreign market.
- Vertical FDI: Fragmenting production and undertaking different parts/processes in different countries.
Describe Horizontal FDI
When exporting is costly, replication of the production process in a foreign market may be profit-maximizing. Examples include Nestle, Toyota, Ford, and TSMC.
Describe Vertical FDI.
In the presence of factor price (cost) differences across countries, a producer may find it optimal to fragment production and undertake different parts/processes in different countries. Examples include Toyota, Ford, and Nvidia
What are some stylized facts about MNEs regarding their location?
MNE activity is concentrated in OECD countries.
70% of foreign affiliates’ output is produced in OECD countries.
93% of production by foreign affiliates is ‘controlled’ by OECD economies.
Both outward and inward FDI are increasing in the source/destination country’s per capita GDP
How do MNE parents specialize compared to affiliates?
Within MNEs, parents are relatively specialized in R&D, while affiliates are primarily engaged in selling goods in foreign markets, particularly in the host country.
What is the Proximity-Concentration Trade-off model?
A model proposed by Brainard (1997) to understand the FDI and export decisions of firms.
It highlights a trade-off between concentrating production in one location (due to fixed costs) and locating production proximate to consumers (due to transport costs).
According to Brainard’s model, when will an MNE serve a foreign market with FDI rather than exports? (List factors)
FDI will dominate exporting as a strategy when profit FDI > profit EX. This tends to happen when:
> The unit labor cost in the foreign country (wj aj) is low.
> The distance between the two countries (dij) is high.
> The import tariff (t) is high.
> The fixed cost of establishing the foreign plant (F) is low.
In Brainard’s (1997) empirical evidence, what does EXSH measure?
EXSH measures the share of exports in total foreign sales (exports / total foreign sales). The model predicts EXSH is decreasing in trade costs and increasing in plant scale economies.
