in the Global Economy
Introduction to the course
• 4 Lectures
• Final exam:
– Written exam only: 10 questions (multiple choice;
true/false, fill in blanks, open questions) in 20
– Based on readings + class material
– Same schedule/room of Economia e Gestione delle
Imprese (corso B)
• See the webpage:
• 1. Why firms become multinational?
• This lecture will discuss the theoretical underpinnings of what a
multinational corporation (MNC) is, why a firm becomes multinational,
what types of strategies do MNC follow in their international expansion.
Also, we will analyse how multinational corporations “work”. Finally, we
will look at statistics about foreign direct investments (FDI) worldwide.
• Dunning J.H. (2000) The eclectic paradigm as an envelope for economic and business
theories of MNC activity, International Business Review, 9: 163-190. ONLY
SECTION 1 (INTRODUCTION) (Downloadable from my website or from the E-
Library in campus).
Other recommended readings (not compulsory for students attending Lecture 1, but
recommended for those not attending the lecture):
• Perlmutter H. (1969) The tortuous evolution of the Multinational Corporation,
Columbia Journal of World Business, 4: 8-18.
• Ghoshal S. (1987) Global strategy: an organizing framework, Strategic Management
Journal, 8 (5).
• Nobel R., Birkinshaw J. (1998) Innovation in Multinational Corporations: Control and3
Communication in International R&D Operations, Strategic Management Journal, 19
What do you think a MNC is?
• A corporation that has its facilities and other
assets in at least one country other than its
• Such companies have offices and/or factories
in different countries and usually have
centralised head office where they coordinate
global management (headquarters)
• Very large multinationals have budgets that
exceed those of many small countries.
• Sometimes referred to as “transnational
How does it occur?
Why are they important?
• In 1969 Howard Perlmutter wrote:
– “multinational corporation is a new kind of institution
- a new type of industrial social achitecture
particularly suitable for the latter third of the
twentieth century.” (p. 10)
– “This type of institution could make a valuable
contribution to world order and conceivably excercise
a constructive impact on the nation-state” (p. 10)
– “The geocentric enterprise [a type of MNC] offers an
institutional and supra-national framework which
could conceivably make war less likely, on the
assumption that bombing costumers, suppliers and
employees is in nobody’s interest” (p. 18)
FDI = Foreign Direct Investment
(measure of foreign ownership of
productive assets, such as factories,
mines and land. )
Average of the four shares :
FDI inflows as a percentage of
gross fixed capital formation
for the past three years 2001-
2003; FDI inward stocks as a
percentage of GDP in 2003;
value added of foreign
affiliates as a percentage of
2003; and employment of
foreign affiliates as a
percentage of total
employment in 2003. For
Belgium and Luxembourg,
the corresponding ratio of FDI
inflows to gross fixed capital
formation refers only to 2002-
Goverments attitudes towards FDI
Goverments attitudes towards FDI
Why firms become multinational?
1. The OLI Paradigm (Dunning J.)
• One of the dominant frameworks for
explaining the existence of MNCs and the
determinants of FDI
• O = Ownership
• L = Location
• I = Internalization
• The firm that invests abroad has a competitive
advantage (to exploit) and out-compete the
firms that operate in the country where the
investment is done
– Economies of scale connected to large-sized
– Possess technologies that give an advantage on the
– Monopolistic advantages in terms of priviledged
access to inputs or outputs markets
– Skills of management
• Advantages of the foreign location:
– Different nations have different factor endowments:
• Natural resources:
• Cheap labour force
• Skills and capabilities
– Country characteristics (political stability,
regulations, cultural distance)
to possess up to
54% of the world's
Underneath the salt lies the world's largest lithium reserves
• Internalization occurs when a firm expands its
operations in another country, by acquiring the
property of the assets that are abroad
• Ownership of foreign assets more convenient
than the market
– Information asymmetries (transaction costs can be
too high) -> Market failures
– Keeping skills and capabilities internal to the firm
Why firms become multinational?
2. Ghoshal (1987)
• Becoming multinational to search a
– National differences: Exploiting national
differences in factor costs
– Scale Economies
– Scope Economies
1. National differences
• Different nations have different factor
– A firm can gain cost advantages by
configuring its value chain so that each
activity is located in the country which has
the least cost for the factor that the activity
uses most intensively
– E.g. Land in Honduras, cheap labour force
in China, cheap but skilled engineers in
India...(changing over time)
2. Scale economies
• A firm expanding its total volume of sales,
reduces its average costs in a given period of
• It is thus important to expand to several
markets as to produce more of a product
• Higher volumes also favour experience
economies (learning by doing)
• However, large scale also implies higher
complexity and organization is critical
3. Scope economies
• Scope economies: when the cost of the
joint production of two or more
products can be less than producing
• Scope economies achieved though:
– Shared equipment, brands, and other assets
– Shared external relations
– Shared knowledge
Main strategies for setting up
• Natural-resource seeking
• Efficiency seeking
• Market seeking
• Capability seeking
How do they operate?
• MNC are very different one to another
• Perlmutter (1969) has been among the
first to identify this heterogeneity and he
distinguished between three types
There are also
different types of subsidiaries
• Nobel and Birkinshaw (1998) distinguish
between 3 different attitudes and modes of
– Local adaptor: limited mandate, only minor adaptation
at the local level
– International adaptor: more creative local laboratories,
eg. To adapt technologies for a continent (Latin
America, Asia) not just a country
– International creator: Internationally interdependent
laboratories which provide inputs into a centrally
coordinated R&D program
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Intel Research Center Opens Its Doors
(China Daily May 13, 2005 )
• International The Intel Corporation yesterday unveiled a
research and development centre in Shanghai's
creator: Waigaoqiao Free Trade Zone.
The newest centre, entitled Intel Technology
Development (Shanghai) Ltd, was set up with an
INTEL investment of US$39 million.
"The establishment of the centre in Shanghai is a
new chapter of Intel's development in China," he
The new centre demonstrates Intel's ongoing
commitment to invest in China and promote new
technologies, he said.
The centre will develop cutting-edge technology
and platforms for Intel's flash products group,
assembly technology development division, user-
centered platform solutions division and assembly
capital equipment development.
"We develop products according to market demands,
serving not only the Chinese market but
worldwide," Soon said.
The centre will develop and promote advanced
cutting-edge technology to push forward the
country's IT industry, he said.
"Our objective is to continually improve local
technical capabilities to drive industrial 37 and
technological development," Soon said.
UNCTAD World Investment Report (2005)
Some MNC have their R&D labs in