MASECO 3

Chapter 5-6

Foreign Direct Investment (FDI)

refers to a business investment made by a firm or individual in one country into business interests located in another country.

Greenfield investment

is a type of foreign direct investment where a parent company builds a brand-new business operation, facility, or office in a foreign country from the ground up.

Mergers and acquisitions (M&A)

refer to financial transactions where companies combine, consolidate, or transfer ownership to a single entity

joint venture

is a business arrangement where two or more parties pool their resources and expertise to achieve a specific goal while keeping their separate business identities

multinational enterprises (MNEs)

Firms engaging in FDI are known as

High Transportation Costs

Trade Barriers

ADVANTAGES OVER EXPORTING

High Transportation Costs

For low-value or bulky goods like cement and soft drinks, local production is more economical.

Trade Barriers

Tariffs and quotas can make exporting costly.

Example: Japanese car manufacturers build plants in the U.S. to

bypass tariffs.

Protection of Intellectual Property

Operational Control

Transfer of Skills

ADVANTAGES OVER LICENSING

Protection of Intellectual Property

Licensing may lead to loss of proprietary technology. Example: RCA licensed to Sony, which later became a major competitor.

Operational Control

FDI gives firms better control over quality, branding, and strategy

Transfer of Skills

Complex management practices and systems are hard to transfer through licensing.

Overpayment

Cultural Differences

Integration Issues

Insufficient Due Diligence

CHALLENGES & RISKS OF ACQUISITIONS

Overpayment

Companies may bid too high due to overconfidence in projected returns (Hubris Hypothesis).

Cultural Differences

Misaligned values and management styles may cause friction and employee turnover.

Integration Issues

Combining two organizations’ operations and systems can be complex and slow.

Insufficient Due Diligence

Acquiring troubled firms without proper evaluation may lead to poor post-acquisition performance.

Product Life Cycle Theory

Firms begin production abroad as product demand grows and matures in international markets.

Example: As demand for Coca-Cola products expanded internationally, the company established production and bottling operations in countries such as the Philippines to serve growing local demand.

Raymond Vernon

Proponent of Product Life Cycle Theory

Eclectic Paradigm

FDI happens when firms combine internal strengths (technology, management) with location-specific advantages (resources, skilled labor).

Example: Texas Instruments combines its semiconductor technology and expertise with the Philippines’ skilled workforce and competitive costs, leading to FDI in the country.

John Dunning

Proponent of Eclectic Paradigm

Radical View

FDI is seen as exploitation by capitalist firms of host countries. This theory has lost popularity.

Example: OceanaGold extracts mineral resources in the Philippines and has faced environmental and community concerns, illustrating this as the potential exploitation of host-country resources.

Free Market View

FDI is viewed as a way to improve global efficiency by allocating resources where they are most productive, in line with comparative advantage.

Example: Nestlé invests in Philippine food production, leveraging local agricultural resources, labor, and the country’s growing consumer market.

Pragmatic Nationalism

FDI is welcomed if the benefits (employment, tech transfer, infrastructure) outweigh the drawbacks (profit repatriation, competition). Governments regulate FDI to protect national interest.

Example: In New Clark City, the government welcomes FDI that creates jobs, develops infrastructure, and brings technology while regulating investments to protect national interests.

Multinational Corporation (MNC)

is a large business organization that owns or controls production, services, or operations in more than one country.

It establishes branches, subsidiaries, or joint ventures abroad to access global markets and resources.

By Size

By Structure

By Performance

By Behavior

TYPES OF MULTINATIONAL CORPORATION (MNC)

By Size

MNCs are generally large firms in terms of sales, profits, or global reach. However, size alone does not define a company as multinational.

By Structure

MNCs have a presence in multiple countries and often have top executives and owners from diverse national backgrounds.

By Performance

MNCs generate a significant portion of their revenue, employment, or assets from operations outside their home country.

By Behavior

MNCs differ in management orientation

Ethnocentric

Centralized management and decisions from the home country; foreign markets are secondary.

Polycentric

Decentralized approach where local managers in host countries make decisions.

Geocentric

Global mindset where operations are integrated and managed worldwide.

Economic Development

Technology Transfer

Social Responsibility

Balanced Global Economy

BENEFITS OF MULTINATIONAL CORPORATIONS

Economic Development

MNCs contribute to job creation, infrastructure, and capital investment in host countries.

Technology Transfer

They introduce new technologies, management skills, and innovations to less developed markets.

Social Responsibility

Many MNCs support community projects.

Balanced Global Economy

MNCs help distribute goods, capital, and expertise across nations, reducing economic inequality.

Exploitation of Resources

Profit-Driven Relocation

Cultural Erosion and Sovereignty Issues

CRITICISMS OF MULTINATIONAL CORPORATIONS

Exploitation of Resources

MNCs may extract profits from host countries without reinvesting locally.

Profit-Driven Relocation

Firms sometimes relocate to countries with lower costs, leaving workers jobless.

Cultural Erosion and Sovereignty Issues

Some countries see MNCs as threats to local culture and autonomy.

Regional Cooperation Groups

Free Trade Areas (FTA)

Customs Union

Common Market

Political Union

PATTERNS OF MULTINATIONAL CORPORATIONS

Regional Cooperation Groups

Countries agree to collaborate on shared infrastructure or industries.

Free Trade Areas (FTA)

Member nations remove or reduce tariffs and trade barriers among themselves, but retain separate policies for non-members.

Customs Union

Like an FTA but with a common external tariff policy.

Common Market

Promotes full economic integration by allowing free movement of goods, services, capital, and labor. Adds harmonized economic policies.

Political Union

The highest level of integration, combining full economic and political unity.