BUS 203: BUSINESS ENVIRONMENT

Section: 03

Fall 2013
Oct 06, 2013

L7

Admin
Anyone who hasnt submitted the completed SIS?
Everyone has the course pack?
Handing out of RP1; Discuss the questions and logistics
Q1 (25 mins)
Todays topic

Topics
Multinational Corporations/ FDI
1.

Worthington and Chris Britton. 2009. The Business Environment, pp.

42-50.

2.

Hand-out

Global Context of Business

Foreign Direct Investment (FDI)

Refers to establishment of production facilities in overseas

countries
Represents a more direct involvement in the local economy
A longer term relationship

The fifth edition of the IMFs Balance of Payments Manual

(BPM5) defines FDI as a category of international investment
that reflects the objective of a resident in one economy (the
direct investor) obtaining a lasting interest in an enterprise
resident in another economy (the direct investment enterprise).

Between 1990 and 2000, worldwide FDI doubled

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Global Context of Business

Multinational Companies (MNC)/ Multinational Enterprises (MNE)

Enterprises operating in a number of countries and having

production or service facilities outside the country of their
origin.
Earlier, globalization: developed economies -> developing economies
(now?)
Now, emerging economy companies in Fortune 500 31-62 between
2003 and 2007 (BRIC countries)

Examples: Infosys from India, Lenovo from China.

Lenovo, no HQ, marketing operation from Bangalore and management
meetings on rotation in different countries.

Largest MNC/MNEs

Global Context of Business

Benefits and concerns for MNC/MNE being footloose
1.

MNEs can establish their activities in the best suited location.

2.

MNEs can cross-subsidize their operations.

3.

The risk is spread over different countries.

4.

MNEs can avoid tax by negotiating special tax arrangements with the
host countries (tax holidays) or use of transfer pricing.

5.

Can take advantage of subsidies and tax exceptions in the host countries

Some concerns of the host country: dividend outflow, goods flow, effect on
BoP, effect on exchange rate, etc.
These effects are bigger for smaller economies
Possibility of exploitation of less developed countries

Global Context of Business

Globalization and Business: Related Issues
Some of the issues faced by business as a result of globalization:
1.

Markets: Bigger market, various regional and global treaties and

agreements, new market and related demand, shift in domestic market
and demand. Examples?

2.

Labor markets: International labor mobility and migration. Population

living outside their country doubled between 1985 and 2000. Half among
developed countries and the rest developing to developed.

3.

Other resources: Raw materials, energy, natural resources.

4.

Financial markets: Raising capitals with international connections. Banks

often accesses fund internationally even for local clients.

Global Context of Business

Case discussion: Recent global financial crisis
Started of in 2007 Citigroup announced a $6.5b write off of sub-primes
Credit crunch felt globally and then in Sep 15, 2008 Lehman Brothers
declared bankruptcy largest in US history
On Sep 25, Washington Mutual was closed - Federal Deposit Insurance
Corporation (FDIC) took control
On Sep 29, House of Rep rejected a $700b rescue plan; Ireland officially
declared recession

In Iceland, three biggest banks failed right around then

In Russia, several banks were rescued by the government
Effects in Bangladesh? Your experience?
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Global Context of Business

Globalization and the Small and Medium-sized firm angle
Their struggle is more in getting access to resources, finance and markets in
this complex system. To tackle with that, they have the following options:
1.

Strategic alliances
Utilize capacities of individual firms nationally and globally

2.

Franchising
International expansion without undertaking direct investment. Many
forms.

3.

Licensing
License to use IP in return of royalties and such.

4.

Joint ventures
Benefit from experience and skills of the other. When large number of
firms get involved, its called a consortium.
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The handout on MNC (On the class page)

The history
Organization of MNCs
Diffusion of org. knowledge
Economics and politics of MNCs
Globalization

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