Capital flows

What are the five flows of globalisation?

Capital

Labour

Products

Information

Services

What are the four components to capital flows?

FDI and TNCS

Remittances

Private Investment

ODA (aid)

What is the average value of FDI annually?

US $2 trillion.

What and when was peak FDI?

US $12 trillion in 2007, preceding the financial crash.

What is the target and real percentage of national budget spent on ODA?

Target= 0.7%

Reality= 0.5%

What  is the estimated value of remittances?

US $500 billion- this is 3x the value of international aid.

How stable is FDI?

It is very volatile and only informed by market investment, so a small event can crash FDI.

How stable is remittance?

It is the most stable form of capital flow.

What is UNCTAD?

UN Trade And Development- they work in FDI.

When did FDI bottom out?

2021.

What happened to FDI in 2020?

It fell from 1.5T to 1T, a fall which was skewed towards more developed economies.

By what percent did FDI in the developed world fall in 2020?

58%

Where does most of FDI happen?

Within the developed world.

What happened to FDI in developing countries in 2020?

The fall was only 8%, mainly due to robust flows in Asia.

What fraction of FDI did developing economies account for in 2020?

2/3.

What phrase describes TNCs?

‘The architects of globalisation’

What is a TNC?

A company that has operations in more than one country to produce/sell products and services.

The roots of TNCs are..?

In colonialism- 17th century East India Company:

• controlled trade routes

• ruled 20% of the world’s population

How many TNCs exist worldwide?

100 000.

How much of global financial assets do the top 100 TNCs own?

20%

What industry are most TNCs in?

Assembly industries.

What is a GPN?

A global production network.

How many suppliers does the company Kraft have?

30 000.

What is JIT production?

Just in time production- it prevents overstocking.

Who built the foundation of lean manufacture in the 20th century?

Toyota.

How was Dell so successful as a computer producer?

• They found parts and produced computers fast with JIT production

• Delivery was quicker than competitors who stocked

• Inventory costs were low, so the company became successful

What are the three factors of growth in TNCs?

Motive

Means

Mobility

How does motive drive a TNC’s growth?

The motive is profit.

If they can control raw material and production costs, they will make more profit.

They do this through:

• Horizontal integration

• Vertical integration

• Economies of scale

What is horizontal integration?

Where a company buys out its competition.

What is vertical integration?

Where a company owns and controls every stage of production.

What are economies of scale?

Where a company expands production to increase efficiency and reduce unit production costs.

How does means drive a TNC’s growth?

The means will be a bank.

Companies invest overseas to boost the market or take advantage of laws.

Flows of money around the world connect businesses and countries.

How does mobility drive a TNC’s growth?

Better transport and faster production (e.g JIT) increase a company’s profit overall.

What are four main TNC investment strategies?

Offshoring

Mergers/ acquisitions

Joint ventures

Glocalisation

What is offshoring?

Where TNCs move parts of their own production process overseas.

What is a merger?

Where two companies combine into one.

What is an acquisition?

Where one company buys another.

What is a joint venture?

Where two companies form a partnership to handle a business in one territory. Sometimes it is required by investment law.

What is glocalisation?

Adapting a global product to take account of local wants and needs, e.g Mcdonalds menus.

What are positives of offshoring?

Cost saving

It takes advantage of lax laws in other countries

Opens up markets

What are negatives of offshoring?

Tax responsibility

Diluted control

Exploitation is common and affects the reputation of a company

What are positives of mergers and acquisitions?

Make a lot of money

Shared risk, thus lower risk

More ideas in combination

In 2015, what proportion of global FDI was made up by cross-border mergers and acquisitions?

1/3

What are negatives of mergers and acquisitions?

The reputations oof the companies involved will affect one another

Conflict can be created within companies

Job losses from ‘streamlining’ the workforce

What are positives of joint ventures?

The overall risk from working as an individual company is reduced

Local knowledge tends to be very valuable

What are negatives of joint ventures?

It is difficult to properly divide profit between the two companies.

What are positives of glocalisation?

It increases sales abroad

It helps companies to reach areas they would not otherwise be able to

What are negatives of glocalisation?

Some products cannot be glocalised, such as lego

For industries such as oil, glocalisation is impossible

Economic benefits of TNCs:

Host country:

Investment into the local economy helps it to grow

TNC presence can motivate developments in transport infrastructure

Taxes paid by TNCs improve the host country’s economy

Source country:

Easy and cheap material access

Tariffs can increase earnings

Cheap labour

Access to local markets

Economic costs of TNCs:

Host country:

GPNs mean that job provision is not guaranteed

Workers are underpaid and abused

Large TNCs will shut down local small businesses

TNC tax avoidance

Source country:

Increased transport costs

Layoffs when the TNC moves (area deindustrialisation)

Tariffs can increase costs

Social benefits of TNCs:

Host country:

Multiplier effect- job provision leads to more job provision

Technology transfer

Healthcare and infrastructure improvements

Scholarship provision

Source country:

TNCs gain knowledge of the specifics of the local market

TNCs can sell more ‘unique’ products which aren’t so common in the source country

Social costs of TNCs:

Host country:

High-paid roles still go to those from the source country

TNCs don’t care about the wellbeing of locals

Source country maintains a sense of control

Local businesses can easily be overshadowed

Source country:

TNCs can lose their reputations over local controversies

Community outreach programs cost money

Environmental benefits of TNCs:

Host country:

TNCs may invest into helping the local environment

Source country:

Lax environmental laws make more production methods become available to the TNC

Environmental costs of TNCs:

Host country:

TNC production can cause pollution

Inadequate environmental laws can lead to contamination

Source country:

Scandals cause TNCs to lose reputation and money

Political benefits of TNCs:

Host country:

Helps the host gain political stability

One of the most effective wealth distribution tools

Increased cultural tolerance

Source country:

Increased links with many countries

Political costs of TNCs:

Host country:

Increased urbanisation

Can amplify the global divide

What is a maquiladora?

A factory in Mexico run by a foreign company and exporting its products to that company’s country of origin.

What are the stages of import substitution?

1- traditional society:

• labour intensive

• low technology

• local raw materials

2- import substitution industries:

• development of home industries reduces expensive imports

• industries are protected by policies such as high trade tariffs on manufactured goods

3- export oriented industries:

• high tech, capital intensive industries

• research and development functions

• rapid growth and development

Since when have maquiladoras experienced rapid growth?

Mid 1960s.

How has the number of workers in maquiladoras grown from the 1960s to now?

3000 workers → 1 million workers

What did investment in Mexico require before maquiladoras?

51%+ Mexican ownership

Some local content

How was importing goods into Mexico made difficult before maquiladoras?

Requirement for import permits

Imposition of high tariffs

Tariffs often exceeded 20% value

What was the Bracero program?

Mexican workers coming over to the US in agricultural times of need to work for US farms. In other words, seasonal work.

When was the first Maquiladora law put in place?

1971

What was proportion of US wages were Mexican wages after maquiladora law came in?

25%

What did maquiladora laws allow?

100% foreign ownership for brands operating factories in Mexico

Foreign technicians

Duty-free importation of raw materials, supplies and machinery

In terms of industry, why was the introduction of maquiladora law an issue for Mexico?

They became stuck with ‘low-value’ manufacture- this means they can’t produce higher-value products and therefore they are stuck with low pay. This gives them a reputation of being a cheap labour provider.

What was the lowest proportion of US wages that Mexican wages dropped to?

10% in the 1980s.

Maquiladoras 1965-1971:

Entrepreneurial expansion phase:

3000 workers

Mexican wages 25% of US

Small businesses= sewing + furniture

Larger firms= electronics

First maquiladora law 1971

Maquiladoras 1972-1981:

Regional expansion phase:

Main industries= electrical assembly and garments- 71% of maquiladora employment

70% American owned businesses in Mexico

Mexican wages higher than Asia

Employment grew 48000-131000

Maquiladoras 1982-1988:

Multinational expansion phase:

Three factors- Mexican policies favouring Maquiladora owners, devaluation of peso, declining oil prices

Dramatic increase in non-US TNC presence

Sony + samsung

Mexican wages= 10% of US

+40 000 workers per year

What is NAFTA?

The North American Free Trade Agreement. It meant there were no tariffs between the US, Canada and Mexico over a 10 year period.

When was NAFTA introduced?

January 1994

How did NAFTA affect Mexico?

Devaluations of the peso occurred annually

Mexican wages fell to amongst the lowest in the world

What was the successor to NAFTA?

The United States - Mexico - Canada agreement. It is intended to create more balance among the countries.

What is an argument for supporting north American free trade agreements such as NAFTA?

“Free trade has brought strong economic growth and NEE status to Mexico and has provided the US and Canada with a low-cost investment location.”

What value did NAFTA add to US GDP?

0.5% (estimated)

How did Donald Trump refer to NAFTA?

“The worst trade deal ever.”

What is the role of maquiladoras in job and plant losses?

They take jobs and plants from countries that:

• have relatively high labour costs

• produce the same products as maquiladoras

What country is going to retain a foothold in the system of maquiladoras taking jobs and plants?

Japanese companies that employ 20k workers in 66+ plants in Mexico are positioned to retain a sizable foothold in this system.

What is the future for maquiladoras?

Plentiful labour supply

Low labour costs

Easy access to US markets

Textiles, clothing and electronics make up majority of industry

The most likely scenario is that maquiladoras will remain supplies of cheap labour

What is the impact of maquiladoras on urbanisation?

1930 → 1990 - urbanisation in all Mexican states

Mexico’s border cities became important economic, social and political entities and major areas of economic growth

Baja, California is growing above the average rate in population

Tamaulipas has grown at a much slower rate

What is a sovereign wealth fund?

A state-owned investment fund. They buy influence.

What do countries mostly have in order to have a sovereign wealth fund?

Oil and gas reserves

Mineral resources

Balance of payment surpluses

How do sovereign wealth funds work?

They have direct-state purchasing or purpose-built investment banks.

Who mostly has sovereign wealth funds?

Poorer countries

They are centred in Asia