MKT3000: Multinationals: should we care?
Multinational
Companies (MNCs - aka Multinational Enterprises (MNEs)) are:
How big are they really? Commentaries and press reports often claim that these companies are larger than some reasonably sized countries - but beware: Total Sales (often used as the measure of size) cannot be directly compared with national GDP - national GDP measures income of people (stakeholders), which for firms is equivalent to 'value added' - the margin between sales revenues and purchased inputs and materials, or the incomes generated for their labour force and shareholders, which is typically only a fraction of total sales revenues.
Major source of data and commentary: UNCTAD: "The Division on Investment and Enterprise of UNCTAD is a global center of excellence, dealing with issues related to investment and enterprise development in the United Nations System. It builds on three and a half decades of experience and international expertise in research and policy analysis, intergovernmental consensus-building and technical assistance to developing countries."
From UNCTAD's World Investment Report, 2010: "Global foreign direct investment (FDI) witnessed a modest, but uneven recovery in the first half of 2010. This sparks some cautious optimism for FDI prospects in the short run and for a full recovery further on. UNCTAD expects global inflows to reach more than $1.2 trillion in 2010, rise further to $1.3–1.5 trillion in 2011, and head towards $1.6–2 trillion in 2012. However, these FDI prospects are fraught with risks and uncertainties, including the fragility of the global economic recovery. Developing and transition economies attracted half of global FDI inflows, and invested one quarter of global FDI outflows. They are leading the FDI recovery and will remain favourable destinations for FDI."
"All components of foreign direct investment (FDI) declined in 2009 and are now recovering slowly. According to figures for 35 mainly rich countries compiled by the UN Conference on Trade and Development, most of the fall can be attributed to a decline in foreign acquisitions, which contracted by 34%, compared with a 15% fall in the number of greenfield FDI projects. Reinvested earnings started to rise in mid-2009, driven by improved corporate profits. The disruption in FDI flows has not stopped the trend of globalised production. The share of GDP attributed to foreign companies reached an historic high of 11% last year, when 80m people worked for multinational companies." (Economist, July 22, 2010)
(For 2011, and 2012 outlook, see: UNCTAD, Jan, 2012.
From Economist, 11.11.2010 (Chinese takeovers) "Control of the world’s stock of foreign direct investment (FDI), which includes takeovers and companies’ greenfield investments, tends to reflect a country’s economic muscle. Britain owned 45% of the world’s FDI in 1914; America’s share peaked at 50% in 1967. Today China, including Hong Kong and Macau, has a share of just 6% (see chart 1). Listed Chinese firms, which are largely state-controlled, are already some of the world’s biggest, and account for over a tenth of global stockmarket value. Most are still mainly domestic outfits."
This article brought the following comment from a Professor of Business, University of California, Irvine (27.11.10); "China will buy foreign companies for two main reasons: strip them of their technology and acquire their marketing and distribution channels, for the broader goal of improving the competitive advantage of their national champions. When China comes calling to buy up your publication and muzzles your coverage of China, perhaps then you will understand the fundamental difference between the Dragon and the rest of the free and democratic world." In contrast, someone from Washington DC responded (27.11.10):"To expect the Chinese to adopt a new nice-guy playbook that no other powerful nation has ever followed requires a revolutionary change in human nature in a Chinese leadership that has shown itself to be every bit as human as the rest of us."
See, especially, Economist special report on State Owned Enterprises (SOEs) - the 21st Century version of the East India Companies - Jan. 2012.
Who are they?
Forbes lists the Global 2000 companies with the following introduction: "The Forbes Global 2000 are the biggest, most powerful listed companies in the world. These global giants usually reorder themselves at a glacial pace, but sometimes--as with the volatile financial sector of late--with more abruptness.
Extreme vagaries of business or poor performance can take them off the list entirely. In any case, our composite ranking is the best snapshot of just how these titans compare. As we show, the corporate dominance of the developed nations is steadily receding. With respect not just to size but to what investors care most about, see our Global High Performers, an elite list of companies that set the pace in their respective industries. Forbes' ranking of the world's biggest companies departs from lopsided lists based on a single metric, like sales. Instead we use an equal weighting of sales, profits, assets and market value to rank companies according to size. This year's list reveals the dynamism of global business. The rankings span 62 countries, with the U.S. (515 members) and Japan (210 members) still dominating the list, but with a combined 33 fewer entries." Banks and financial companies dominate the list (308/2000), with oil & gas second (115 companies).
See, also, the Forbes list of Global High Performers, and related articles on world's most valuable, leading and biggest companies
What are they?
Ownership: Owned by nationals of more than two countries? (listed on more than one stock exchange?)
Nationalities of Senior (Headquarters) staff?
Business Strategy? Perlmutter's suggestion that MNCs can be classified along the dimensions: ethnocentric (Home based and biased); polycentric (host based and biased); geocentric (the world is our oyster)
Operations? has plants and offices throughout the world?
According to Franklin Root (International Trade & Investment, 1994), an MNC (also known as MNE) is a company that
(i) engages in foreign production through its affiliates located in several countries,
(ii) exercises direct control over the policies of its affiliates, and
(iii) implements business strategies in production, marketing, finance and staffing that transcend national boundaries.
In other words, MNCs exhibit no necessary loyalty to the country in which they are incorporated (as opposed to national companies who do?)
Why are some firms Multinational? one approximate (generalised) evolution (Perlmutter, 1969)
Exporter Phase:
either Licensing/Franchising - [Kentucky Fried Chicken, MacDonalds]: Licensing does not require any capital expenditure; Financial risk is zero; royalty payment = a fixed % of sales
Motives:
John Kay wrote Foundations of Corporate Success: How business strategies add value, 1993. In essence:
The concept of the production/marketing processesin economics (comparative advantage) is very simple - it simply involves organising resources (land, labour, capital and management) to produce products which are wanted (that is, for which people are prepared to pay good money). While it will still pay you to produce the products which you are best at, there is clearly more to it than that.
Inclusion of the key elements of products, as opposed to commodities, suggests that competitiveness will depend on being distinctive from the competition in ways which are, and will continue to be, regarded as valuable by the user. This implies that the product (or the resources which are needed for its production) are relatively rare, otherwise the consumer or user can turn to other sources than yours. It also implies that there should be few, ideally no imitations or substitutes available, since the existence of either good imitations or substitutes for your product will reduce the amounts consumers and users are willing to pay for your product. In shorthand, these attributes of competitive products (valuable, rare, inimitable, unsubstitutable) can be labelled as the products competitive advantage (which is obviously rather different from and more sophisticated than comparative advantage).
What is that makes firms (production/marketing systems) and their resources distinctive? Since technologies are frequently easily copied and most resources are fairly commonly available, distinctiveness must rely on more intangible aspects of business organisation. Kay identifies four key elements to a firms (or marketing chains) distinctiveness:
Kay labels these firm or chain characteristics (architecture, reputation, innovation and strategic assets) as the firms distinctive capabilities.
Brainard, 1993, developed a simple model examining the case where firms in a differentiated products sector choose between exporting and multinational expansion as alternative modes of foreign market penetration, based on a trade-off between proximity and concentration advantages. The differentiated sector is characterized by multi-stage production, with increasing returns at the corporate level associated with some activity such as R&D, scale economies at the plant level, and a variable transport cost that rises with distance. A pure multinational equilibrium, where two-way horizontal expansion across borders completely supplants two-way trade in differentiated products, is possible even in the absence of factor proportion differences. It is more likely the greater are transport costs relative to fixed plant costs, and the greater are increasing returns at the corporate level relative to the plant level.
For an apparently seminal paper on the development of theories about why MNCs exist, and how they are likely to behave, see: Dunning & Pitelis, 2008, Journal of International Business Studies 39, 167–176. doi:10.1057/palgrave.jibs.8400328, who examine the development, testing and relevance of Hymer's ideas (Hymer, S. H. 1970a. The efficiency (contradictions) of multinational corporations. The American Economic Review: Papers and Proceedings, 60(2): 441–448.)
For a current study of MNCs (in the UK) and their employment practices, see Warwick Business School: Employment Practices of Multinational Companies in Organisational Context.
Ann E. Harrison, Margaret S. McMillan, NBER Working Paper No. 12372, July 2006: Abstract: "Critics of globalization claim that US manufacturing firms are being driven to shift employment abroad by the prospects of cheaper labor. Others argue that the availability of low-wage labor has allowed US based firms to survive and even prosper. Yet evidence for either hypothesis, beyond anecdotes, is slim. Using firm-level data collected by the US Bureau of Economic Analysis (BEA), we estimate the impact on US manufacturing employment of changes in foreign affiliate wages, controlling for changing demand conditions and technological change. We find that the evidence supports both perspectives on globalization. For firms most likely to perform the same tasks in foreign affiliates and at home ("horizontal" foreign investment), foreign and domestic employees appear to be substitutes. For these firms, lower wages in affiliate locations are associated with lower employment in the US. However, for firms which do significantly different tasks at home and abroad ("vertical" foreign investment), foreign and domestic employment are complements. For vertical foreign investment, lower wages abroad are associated with higher US manufacturing employment. These offsetting effects may be combined to show that offshoring is associated with a quantitatively small decline in manufacturing employment. Other factors, such as declining prices for consumer goods, import competition, and falling prices for investment goods (which substitute for labor) play a more important role." - the link is to a published paper based on this work in the Academy of Management Perspectives, November, 2006: Dispelling Some Myths About Offshoring.
OECD Employment Outlook, 2008: Chapter 5: "Do multinationals promote better pay and working conditions?": "Foreign direct investment (FDI) by OECD-based multinational enterprises (MNEs) in developing and emerging economies has increased dramatically over the past two decades. While generally perceived as beneficial for local development, it has also raised concerns about unfair competition and the protection of workers’ rights in host countries. This chapter assesses the effects of FDI on wages and working conditions for workers of foreign affiliates of MNEs and those of their independent supplier firms. The evidence suggests that MNEs tend to provide better pay than their domestic counterparts, especially when they operate in developing and emerging economies, but not necessarily better non-wage working conditions. The effects on wages may also spread to the foreign suppliers of MNEs, but those spillover effects are small."
Are they a good or bad thing? (relative to what?) And for whom?
Good for developed countries? See a recent Economist Briefing, prompted by Kraft's takeover of Cadbury "Small island for sale: The takeover of Cadbury by Kraft seems to symbolise a hollowing-out of corporate Britain. The truth is rather more complicated"(25.03.10)
Bad for developing countries? See, again, another recent article in the Economist "Companies aren’t charities. In poor countries the problem is not that businesses are unethical but that there are too few of them" (21.10.10)
Morton Winston (1999) Review of Human Rights and International Political Economy in Third World Nations: Multinational Corporations, Foreign Aid, and Repression, by William H. Meyer (Westport, Connecticut: Praeger, 1998), Human Rights Quarterly 21.3 (1999) 824-830, provides a good, if now somewhat dated, outline of the pros and cons of MNCs (and international aid programmes) on developing countries. He says:
"Globalization's boosters, mainly multinational corporations (MNCs), neo-liberal economists, and their political allies, argue that direct foreign investment and MNC production and marketing operations in developing countries promote economic development, which helps to protect economic and social rights. MNC activities promote these human rights, according to this view, by creating jobs, improving living standards, bringing new capital and technology, and providing employee benefits such as housing and health care. As the effects of these economic benefits percolate through the societies of the host countries, a middle class is created whose members demand greater liberalization of thought, speech, and movement, better education for their children, and greater participation in government--in short, better protection for civil and political rights. Governments in these countries come to recognize that continued economic development and integration into the global economy works to the advantage of all, and sooner or later these governments become liberal democracies which respect the human rights of their citizens and seek peaceful coexistence with their neighbors. This argument proposes that economic development leads to democracy and human rights, which in turn lead to peace and prosperity for all.
On the other hand, globalization's critics, mainly environmental and human rights activists and their allies, hold that MNCs directly and indirectly contribute to human rights violations in developing countries. This view is associated with the work of economists such as Stephen Hymer and Jagdish Bagwati and leftist intellectuals such as Noam Chomsky and Edward Herman. The argument here is that MNCs drain resources and exploit labor from poor host countries and transfer wealth to already much richer home countries. By doing this, MNCs promote uneven development in which some countries become richer and more developed while others slip further into poverty and misery. It is claimed that MNCs often eliminate more jobs than they create in host countries by introducing new and often inappropriate technologies; they overwhelm small entrepreneurs, and, as the Asian economic crisis shows, the quixotic flow of capital across borders can destabilize whole national economies and throw millions into poverty overnight. Economic exploitation and instability increases the immiseration of the local population which in turn creates an atmosphere of social unrest. Social unrest brings on political repression by security forces that are under the control of domestic ruling elites whose interests, along with those of the foreign investors, are threatened. The repression targets social reformers, dissidents, labor organizers, and human rights workers, all of whom become victims of serious human rights violations such as arbitrary imprisonment, torture, and extra-judicial execution. Thus, according to this argument, globalization deprives millions of people of the resources necessary to survive, while also triggering government repression of dissent, all in the name of profit for foreign investors."
The review outlines Meyer's model of Foreign Direct Investment (usually called FDI, here called DFI -) as a measure of MNCs impact on developing countries (53, in 1985), and including allowance for the effects of (US) aid and also of the home country's total foreign debt (the extent to which these host countries have to repay the direct investments and the associated changes). "The results are striking. Meyer found that greater DFI has a strong positive correlation with higher levels of enjoyment of civil and political rights as well as economic, social, and cultural rights. He also found that GNP per capita, US economic aid, and foreign debt stand in a positive relation to civil and political rights in the third world nations which he studied. These same results were found when he looked at thirty-nine of these countries in terms of 1990 data." However, "his model is merely correlational and does not distinguish between the causal hypothesis (H1) that DFI is attracted to host countries which have better human rights conditions (that is, the hypothesis that "human rights are good for business") and the hypothesis (H2) that DFI produces better human rights conditions (that "business is good for human rights"). It could, of course, be the case that the significant correlations which Meyer has found provide evidence that both of these causal hypotheses are correct. ... It could well be the case that some kinds of MNC involvement do indeed produce positive changes in the human rights in some countries while other kinds of MNC involvement produce negative changes in these same countries, or that MNC activities in one country may produce positive changes while those in another country might have the opposite effect." Indeed, there are examples (Chile is a 'classic') where MNCs in at least clandestine cooperation with the US government, have conspired to create havoc in developing countries - Winston outlines the story.
Winston elegantly outlines the more general theory: "In the twentieth century, and especially following the Second World War, countries that tried to exercise their economic sovereignty by pursuing policies that were viewed as inimical to the interests of global capitalism became the targets of US-led attempts to destabilize or overthrow their governments and replace them with regimes that would be friendlier to capital. The main point of the Cold War, after all, was to "contain" the spread of communism. Third World countries that refused to conform to the wishes of the West, particularly the United States, were shunned or attacked, while those that accepted foreign investment as beneficial or inevitable were largely left alone or enlisted as allies. Better protection of human rights and gradual democratization were allowed to grow within the context of a free market economy in the more pliant or cooperative countries, such as Costa Rica, Jordan, and Thailand. However, in the countries that chose to pursue a socialist course, such as Cuba and North Korea, war and economic boycott led to the immiseration of their populations while internal authoritarianism produced repression and violation of first generation rights. Meanwhile, in countries such as Chile, Indonesia, El Salvador, and Zaire, where US policies succeeded in either squashing internal socialist movements or overthrowing leftist governments, major human rights violations took place within the context of the US-supported anti-Communist authoritarian regimes that came to power."
Multinationals don't always get what they want: (Economist, 16.09.10: Buying a stake in China Inc is no shortcut to market share): "AT FIRST glance, Vodafone has nothing to complain about. On September 8th it sold for $6.6 billion the 3.2% stake in China Mobile that it had bought for $3.3 billion between 2000 and 2002. Such a handsome profit ought to be a cue to crack open the champagne and roast some Beijing duck. Yet the British mobile-phone giant did not get what it really wanted: a way into China. In other countries, Vodafone has had a knack of turning a small investment into a controlling stake, but not in the Middle Kingdom. And it is not alone.
Since the late 1990s, several large state-owned Chinese companies have listed their shares. These initial public offerings typically included “cornerstone” investments by big Western firms. For example, BP, Exxon and Shell (three oil firms) and ABB (a Swiss-Swedish conglomerate) took strategic stakes in PetroChina and Sinopec (two big Chinese oil companies). Alcoa, an American aluminium company, invested in Chalco, a Chinese one. And Western banks bought chunks of the leading Chinese state banks when they were listed.
Foreign firms brought several things to the table: capital, technology, management skills and the prospect of better corporate governance. The Chinese press often referred to them as “elder brothers”. In return, these Western firms wanted access to China’s huge domestic market.
It did not work out that way. The Chinese state-owned firms did not need capital so badly that they were prepared to cede control to foreigners. Some also found that the Westerners had less to teach them than they had hoped. “Fly-in” expat managers were often unfamiliar with China, says David Michael, a partner at the Boston Consulting Group. Chinese firms tended to learn more from multinationals that had taken the trouble to build their own large sales forces in China, he says.
Chinese firms no longer feel like little brothers. China Mobile now has a market value half as large again as Vodafone’s. PetroChina is much bigger than BP. Both Chinese firms are now rich enough to buy whatever expertise they want.
Western energy companies were quick to notice this shift. BP, Shell, ABB and Exxon all sold their holdings in state-owned Chinese firms by 2005. Alcoa got out in 2007. Financial firms followed, in whole or part, during the financial crisis. When China’s state-owned Agricultural Bank was recently listed, no big Western bank bought a significant stake.
Western firms grumble about their failure to turn their stakes in China Inc into a foothold in the Chinese market, but not too loudly, so that they do not annoy the government. Besides, thanks to a rising stockmarket, most made sacks of money from their investments.
A few have not yet cashed out. Telefónica, a Spanish telecoms firm, owns 8.8% of China Unicom and politely rebuffs bankers who advise it to sell. AT&T has 25% of a telecoms business in the Pudong district of Shanghai. Despite regulatory problems, it provides a nationwide service from Pudong, largely to multinational clients. It is a nice business, but a far cry from the dreams some Westerners once had about China."
Does Multinational mean 'one size fits all' - is the globalised world 'flat', or is it 'glocal'? “Leading with Cultural Intelligence”, by David Livermore, a management guru, explains why modern multinational organisations need to be glocal in the original sense, and why they must understand that “There’s really no such thing as a uniform global culture”. This message, he says, applies not just to marketing but to recruiting and managing teams of workers in different parts of the world. Drawing on academic research and his consulting experience, Mr Livermore argues that managing effectively across multiple cultures is one of the toughest tasks facing multinational companies, not least American ones that are increasingly relying on emerging economies for their workers and future sales growth. According to a survey of senior executives from 68 countries quoted in the book, around 90% see “cross-cultural leadership” as the biggest management challenge of this century. Up to 40% of managers sent on foreign assignments end them early. Different studies have found that 16-40% of all managers sent on foreign assignments end them early. The cost to employers of each early return has been estimated at between $250,000 and $1.25m, when moving expenses, downtime and other factors are taken into account. In almost every case, the reason things do not work out is cultural problems rather than job skills." (Economist, 6.04.10)
Some Case Studies and Illustrations:
BBC2 – The foods that make billions: Episode 1 Liquid Gold - available to watch until 13.12.2010 – global branding and multinational sales of bottled water. – the product we never knew we needed! -
“The first episode (23.11.10) tells the extraordinary story of how the bottled water industry has grown from nothing to become one of the biggest success stories in the modern food and beverage industry in just 40 years. With unprecedented access to the world's largest food and beverage companies, including Nestle and Danone, this is the inside story of how the bottled water business has become emblematic of an age of plenty in the West. With billions at stake, the market is fiercely fought over by the world's multinationals who promise us health, convenience and youth. It is natural and pure and sourced at minimal cost, its real value lies in the marketing and branding. Told by the Money Programme team, this film takes us to Hawaii, Japan, North America, France, Switzerland and Scotland to chart what lies behind the incredible success of this industry and explore what it tells us about ourselves.”
What is bottled water? – oil and water – two most precious and polluting resources on the planet
1 bottle of water is 1/5 oil & takes between 1.5 and 3 litres of water to make 1 litre;
Being sold to who? - people who already have perfectly potable water free on tap! & are rich enough to be more than adequately satisfied.
Evian – engineered (and reconstituted, based on NASA’s work for water in space) – versus the Japanese pure stuff de-salinated from the bottom of the ocean in Hawaii.
Perrier – the founder member of the club, along with Evian, and the Benzene scandal, catastrophe & product –> recall. 70% withdrawn within 48 hours! And off the shelves for 8 weeks – a gap filled by competitors – e.g. Highland Spring (1979), which picked up 20% of the (British) market in 1 year, promoted by Mrs T’s buy British slogan
Jo Beeston’s (Highland Spring) product placement – recruiting F1 Racing (Jackie Stewart), who persuaded BA to stock HS rather than Perrier, and snooker tournaments and stars.
Market expanded and evolved – still water taking over from sparkling! Bottle of cold water taking over from tap – and buying the bottle (package and convenience) PET bottles as a by-product of oil – with an environmental impact, but allowed bottled water to jump from 7th to 2nd in the beverage market, behind cokes etc. Tap water not seen as a competitor – safe but poor taste chlorinated/ - ’impure’ and full of chemicals
‘pure’ water as ultimate tabula rasa on which people can write/believe what they like! Healthy hydration and healthy life.
WHO (World Health Organisation) provided a real boost reporting that – drinking water is v. important for health – 2 litres per day – 8 glasses! – a blessing from ‘science’ and from internationally respected objective ‘governor’ – bottled water = health and wellness,
Pepsi – can we develop brands fast enough to get ahead of the trend – non carbonated beverage, closely followed by Coke, both losing market share to water. – which everyone drinks.
Pepsi’s AquaFina – pure and American, and cheaper/non elitist and fun (democratising a European product) Prime time and major sports shows advertising – to put aquafina on a par with pepsi, and delivered through Pepsi’s logistics network.
Coke’s Dasani – purified local water – targeted at the girls/women/female – young, single and city dwellers (70% of the market), and attacked the European market (bad decision!). 2004 UK Urban water for the fast living generation! (but didn’t let on just ‘purified’ Thames tap water! – which blew up in the media as an (American) con. + included bromate in the water, (exceeding legal levels, and carcenogenic, and added deliberately by Coke) 5 weeks after launch – Desani (markup 3000%) blew up and collapsed in the UK (and European) markets.
Classic example of global capitalist market – buying choice, freedom?? And representing the stupidity and immorality of the market – with people dying of thirst while we spend billions moving water about and marking it up!
A partial repsonse: One Water – broke into the market with a target at a small segment of the market – no shareholders, no dividends, 100% of profit to African water projects. ‘positive brand choice’ – gives consumers personal responsibility for bringing clean water to 10 Africans a day! – ‘play pumps’ (powered by children’s merry-go-rounds). 1.4 million people benefited (with help of major multiples) cashing in on ethical (fair trade etc. markets) on less than £5m turnover, versus £13bn of majors.
Volvic 1 for 10 – for every 1 litre bought, would supply 10 litres for those in need. – 240,000 people helped – but a drop in the ocean. – but enough drops give you an ocean. Volvic planting mangrove trees to offset CO2 footprint.
Market now subject to serious backlash, and sales are dropping, for the first time. So multinationals targeting emerging markets
Nestle (Pure Life, launched in Pakistan – local and locally priced – capitalising on Nestle brand, purity, safe, pure) and Danone – specific brands for specific markets - 60% of volume in high growth economies.
Will history go on repeating itself in the emerging and developing markets. – need for water, purity and convenience?
Its success driven by our demand and choice – consumers voting with their choices.
And see related blog. – one comment: “I would never buy bottled water unless I was in a place where the tap water was unfit to drink. Evian is a reversal of naive, which is what the people who buy it are! It is a shame on the human race that we buy water, transported thousands of miles, in bottles, when we have an adequate supply on tap. The damage done, to the environment (global warming, etc.) is immense. If people have the money to waste, on bottled water, why not use it, instead, to fund a well in some country which does not have an adequate supply of fresh water.”
See, also:– the Open University site on Branding, related to this 3 part series on Foods that made Billions..
Episode 2: Breakfast Cereals - "add value" (really??) to a cheap commodity (corn) and sell it dear (on the back of seriously expensive advertising (which keeps out competitors). Is this really progress? US nutritional backlash puts cereals in the dock of public opinion -> rats better off eating the box than the cereal! -> so fortify the cereal and boast about how much they are fortified.
Then 'counter-culture' of the muslie generation and Jordons rise to greatness on the back of granola - crunchy whole grains -> Alpen (Weetabix) and market began to fragment or diversify.
Then diet concerns -> need for roughage (fibre) and Kellogs come back into the market with All-Bran and Bran Flakes catering for "desire for self-medication through food" - "out of the medicine cabinet and onto the breakfast table.' Advertising critical once again - "a bit of art, a bit of magic, and a bit of alchemy."
Big brands and the supermarkets - own brands/own labels threatening the MNC brands -> response? fight or submit? Weetabix chose to make the 'own-label' products, Kellogs didn't, and chose to fight on quality terms, and trade on brand loyalty. Branded cereals maintained an 80% share of the market, unlike other sectors of the food market, because of 'legacy' effects - long term memories of the early days of advertising and cereal marketing? When will these wear out? Plus the increasing activities of FSA and food regulators on nutritional values of foods, and restrictions on advertsing to children (2007).
MNCs & poverty rates?
At the more local level, Goetz and Swaminathan, 2004, analyse the relationships between Walmart's opening of stores and rural poverty rates (at the county level) in North America. Even in the US, Walmart's size and reputation as an 'energetic' negotiator and 'rigorous' employer has lead to at least one web-sites devoted to monitoring the company's behaviour - Walmartwatch. Goetz and Swaminathan conclude: "After carefully and comprehensively accounting for other local determinants of poverty, we find that Wal-Mart unequivocally raised family poverty rates in US counties during the 1990s. This was true not only as a consequence of existing stores, but it was also an independent outcome of the contemporaneous construction of new stores between 1987 and 1998. This happened even as average poverty rates declined nation-wide. The question whether the cost of higher poverty is offset by the benefits of lower prices and wider choices available to consumers in counties with Wal-Mart stores cannot be answered here."
See, also, Ans Kolka, Rob van Tuldera and and Bart Westdijk, "Poverty alleviation as business strategy? Evaluating commitments of frontrunner Multinational Corporations", World Development, Volume 34, Issue 5, May 2006, Pages 789-801. (doi:10.1016/j.worlddev.2005.10.005). "In the debate on how to combat poverty, the positive role of MNCs is frequently mentioned nowadays, although doubts and criticism remain. Facing this societal debate, MNCs feel the pressure to formulate a position. This paper analyzes MNCs’ policies on their poverty-alleviating potential. “Frontrunner” MNCs turn out not to be very outspoken, especially not on those issues that have the largest potential to help alleviate poverty. Placed in the context of other MNCs’ behavior, a sector-coordinated morality seems important, which means that a meso approach to poverty alleviation needs to complement the current global (macro) and individual company (micro) focus."
References:
Perlmutter - "The tortuous evolution of the MNC, Columbia Journal of World Business, 4, 9-18, 1969
Kogut & Zander (2003). "Knowledge of the firm and the evolutionary theory of the multinational corporation", Journal of International Business Studies, Volume 34, Number 6, November 2003 , pp. 516-529(14)
See also: Rhys Jenkins: (2005) "Globalization, Corporate Social Responsibility and poverty" International Affairs, Volume 81, Issue 3, pages 525–540, May 2005, which concludes that CSR (by MNCs) "is unlikely to play the significant role in poverty reduction in development countries that its proponents claim for it."
Pranab Bardhan: (2006): "Globalisation and Rural Poverty" World Development, Volume 34, Issue 8, August 2006, Pages 1393-1404 (doi:10.1016/j.worlddev.2005.10.010). "an analytical account of the mechanisms through which globalization, in the sense of increased foreign trade and long-term capital flows, affects the lives of the rural poor in developing countries (in their capacity as workers, consumers, recipients of public services, or users of common property resources). Globalization can not only cause many hardships for the rural poor, but it can also open up some opportunities which some countries can utilize and others do not, largely depending on their domestic political and economic institutions, and the net outcome is often quite complex and almost always context dependent, belying the glib pronouncements for or against globalization made in the opposing camps."
Questions or Comments?
Back to MKT3000 Index.
- archetypical manifestations of globalisation;
- often seen as exploiting labour and natural resources, if not countries, for their own ends;
- seen as being beyond the control and scrutiny, and taxation, of national governments;
- but also major engines of foreign direct investment
(FDI), employment and economic growth (though perhaps their influence
can be exagerated).
How big are they really? Commentaries and press reports often claim that these companies are larger than some reasonably sized countries - but beware: Total Sales (often used as the measure of size) cannot be directly compared with national GDP - national GDP measures income of people (stakeholders), which for firms is equivalent to 'value added' - the margin between sales revenues and purchased inputs and materials, or the incomes generated for their labour force and shareholders, which is typically only a fraction of total sales revenues.
Major source of data and commentary: UNCTAD: "The Division on Investment and Enterprise of UNCTAD is a global center of excellence, dealing with issues related to investment and enterprise development in the United Nations System. It builds on three and a half decades of experience and international expertise in research and policy analysis, intergovernmental consensus-building and technical assistance to developing countries."
From UNCTAD's World Investment Report, 2010: "Global foreign direct investment (FDI) witnessed a modest, but uneven recovery in the first half of 2010. This sparks some cautious optimism for FDI prospects in the short run and for a full recovery further on. UNCTAD expects global inflows to reach more than $1.2 trillion in 2010, rise further to $1.3–1.5 trillion in 2011, and head towards $1.6–2 trillion in 2012. However, these FDI prospects are fraught with risks and uncertainties, including the fragility of the global economic recovery. Developing and transition economies attracted half of global FDI inflows, and invested one quarter of global FDI outflows. They are leading the FDI recovery and will remain favourable destinations for FDI."
"All components of foreign direct investment (FDI) declined in 2009 and are now recovering slowly. According to figures for 35 mainly rich countries compiled by the UN Conference on Trade and Development, most of the fall can be attributed to a decline in foreign acquisitions, which contracted by 34%, compared with a 15% fall in the number of greenfield FDI projects. Reinvested earnings started to rise in mid-2009, driven by improved corporate profits. The disruption in FDI flows has not stopped the trend of globalised production. The share of GDP attributed to foreign companies reached an historic high of 11% last year, when 80m people worked for multinational companies." (Economist, July 22, 2010)
(For 2011, and 2012 outlook, see: UNCTAD, Jan, 2012.
From Economist, 11.11.2010 (Chinese takeovers) "Control of the world’s stock of foreign direct investment (FDI), which includes takeovers and companies’ greenfield investments, tends to reflect a country’s economic muscle. Britain owned 45% of the world’s FDI in 1914; America’s share peaked at 50% in 1967. Today China, including Hong Kong and Macau, has a share of just 6% (see chart 1). Listed Chinese firms, which are largely state-controlled, are already some of the world’s biggest, and account for over a tenth of global stockmarket value. Most are still mainly domestic outfits."
This article brought the following comment from a Professor of Business, University of California, Irvine (27.11.10); "China will buy foreign companies for two main reasons: strip them of their technology and acquire their marketing and distribution channels, for the broader goal of improving the competitive advantage of their national champions. When China comes calling to buy up your publication and muzzles your coverage of China, perhaps then you will understand the fundamental difference between the Dragon and the rest of the free and democratic world." In contrast, someone from Washington DC responded (27.11.10):"To expect the Chinese to adopt a new nice-guy playbook that no other powerful nation has ever followed requires a revolutionary change in human nature in a Chinese leadership that has shown itself to be every bit as human as the rest of us."
See, especially, Economist special report on State Owned Enterprises (SOEs) - the 21st Century version of the East India Companies - Jan. 2012.
Who are they?
Forbes lists the Global 2000 companies with the following introduction: "The Forbes Global 2000 are the biggest, most powerful listed companies in the world. These global giants usually reorder themselves at a glacial pace, but sometimes--as with the volatile financial sector of late--with more abruptness.
Extreme vagaries of business or poor performance can take them off the list entirely. In any case, our composite ranking is the best snapshot of just how these titans compare. As we show, the corporate dominance of the developed nations is steadily receding. With respect not just to size but to what investors care most about, see our Global High Performers, an elite list of companies that set the pace in their respective industries. Forbes' ranking of the world's biggest companies departs from lopsided lists based on a single metric, like sales. Instead we use an equal weighting of sales, profits, assets and market value to rank companies according to size. This year's list reveals the dynamism of global business. The rankings span 62 countries, with the U.S. (515 members) and Japan (210 members) still dominating the list, but with a combined 33 fewer entries." Banks and financial companies dominate the list (308/2000), with oil & gas second (115 companies).
See, also, the Forbes list of Global High Performers, and related articles on world's most valuable, leading and biggest companies
What are they?
Ownership: Owned by nationals of more than two countries? (listed on more than one stock exchange?)
Nationalities of Senior (Headquarters) staff?
Business Strategy? Perlmutter's suggestion that MNCs can be classified along the dimensions: ethnocentric (Home based and biased); polycentric (host based and biased); geocentric (the world is our oyster)
Operations? has plants and offices throughout the world?
According to Franklin Root (International Trade & Investment, 1994), an MNC (also known as MNE) is a company that
(i) engages in foreign production through its affiliates located in several countries,
(ii) exercises direct control over the policies of its affiliates, and
(iii) implements business strategies in production, marketing, finance and staffing that transcend national boundaries.
In other words, MNCs exhibit no necessary loyalty to the country in which they are incorporated (as opposed to national companies who do?)
Why are some firms Multinational? one approximate (generalised) evolution (Perlmutter, 1969)
Exporter Phase:
(i) initial inquiries ⇒ result in
first exports.
(ii) Initially, firms rely on export agents. ⇒ expansion of export sales
(iii) ⇒ foreign sales branch or assembly operations are established (to save transport cost)
Foreign production stage:
Why?(ii) Initially, firms rely on export agents. ⇒ expansion of export sales
(iii) ⇒ foreign sales branch or assembly operations are established (to save transport cost)
(i) There is a limit to foreign
exports, due to tariffs, quotas and transportation costs.
(ii) Wage rates may be lower in LDCs.
(iii) Environmental regulations may be lax in LDCs (e.g., China)
(iv) meet Consumer demands in the foreign countries
How? (ii) Wage rates may be lower in LDCs.
(iii) Environmental regulations may be lax in LDCs (e.g., China)
(iv) meet Consumer demands in the foreign countries
either Licensing/Franchising - [Kentucky Fried Chicken, MacDonalds]: Licensing does not require any capital expenditure; Financial risk is zero; royalty payment = a fixed % of sales
Problems:
the mother firm cannot exercise any
managerial control over the licensee (it is independent) - better with
a franchise.
The licensee may transfer industrial secrets to another independent firm, thereby creating a rival.
or Foreign Direct Investment (FDI) (including
aquisition of foreign firms - Walmart's aquisition of Asda). Requires
the decision of top management because it is risky (lack of information)The licensee may transfer industrial secrets to another independent firm, thereby creating a rival.
Motives:
- Business Growth - exploit foreign markets when domestic markets become saturated or stagnant;
- Pursuit of high returns:
Investing capital where it earns the greatest returns
- Local Market Compliance: meet local (host) rules and regulations on, e.g. Health & Safety, Environment;
- Avoid Import taxes and restrictions: Import tariffs and protection encouraging FDI? - probably in EU (e.g. Honda, Toyota etc.);
- Avoid Transport costs: Transportation costs are like tariffs - barriers to trade which raise consumer prices (and make competition with domestic companies difficult). Multinational firms want to build production plants close to either the input source or to the market to save transportation costs;
- Avoid Exchange rate
risk: manufacture within the currency zone of your market,
rather than outside it;
- Reduce Costs:
take advantage of low labour/ land costs. [The effect of containerisation of world trade
cannot be underestimated here. Only in 1960 did the first container
ship cross the Atlantic, cutting shipping costs from 30% of total cost
to little more than 1% - it costs less to ship a TV from China to the
UK than it does to move it from the shop to your house - leading to
Just in Time and fragmented manufacturing (supply chains around the
world) and storage on the move rather than in stores and warehouses -
smaller and more efficient factories and fabrication shops - most of
the container traffic is now components rather than finished goods -
see, for some recent info. Economist, Nov. 12, 2011 - Economies of Scale made
Steel]
- Economies of Scale: If the minimum efficient plant size (e.g. car plants) is greater than the demand in the home country, then export the excess. If the minimum effcient scale is equal to or less than the sales potential in the host country, then FDI.
- Tax Competition: Since countries have different tax rates, multinational companies choose low tax countries to save, invest, and produce. Governments may compete to attract multinational enterprises by offering them lower tax rates and other incentives. Since high tax countries lose lucrative businesses, they want to harmonize tax rates, especially within a free trade area or customs union (e.g., European Community). MNCs can and do manipulate prices between the headquarters and the subsidiaries so that profits are highest in the low tax country, since the prices at which products and assets are transfered between branches of the same MNC (transfer prices) are under the control of the company, these can be manipulated so as to accumulate profits in the country with the lowest corporate tax rate. However, abuses in pricing across national borders are illegal (if they can be proved). MNCs are required to set prices at "arms length" (set prices as if the corporate branches are unrelated).
- Extending the scope
of succesful business architectures (Kay) - Kogut &
Zander (refs below) argue that "Firms are social communities that
specialize in the
creation and internal transfer of knowledge. The multinational
corporation arises not out of the failure of markets
for the buying and selling of knowledge, but out of its superior
efficiency as an organizational vehicle by which to transfer this
knowledge across borders." They examine the decision to transfer
manufacture of new products to wholly owned subsidiaries or
to other parties. Their results show that the less codifiable
and the harder to teach is the technology, the more likely the transfer
will be to wholly owned operations." Innovation in emerging
economies seems likely to change the landscape of multinational
business rather substantially in the future (Economist,
April 15, 2010), and is exhibiting a range of new business
models: Here be dragons:
The emerging world is teeming with new business models (ibid.)
- Aquire new techniques
& architectures: Emerging market multinationals need to
defend their home markets and aquire new technologies quickly -
becoming multinational is almost a side-effect - Indian foreign
aquisitians (Economist, May 28,
2009)
John Kay wrote Foundations of Corporate Success: How business strategies add value, 1993. In essence:
The concept of the production/marketing processesin economics (comparative advantage) is very simple - it simply involves organising resources (land, labour, capital and management) to produce products which are wanted (that is, for which people are prepared to pay good money). While it will still pay you to produce the products which you are best at, there is clearly more to it than that.
Inclusion of the key elements of products, as opposed to commodities, suggests that competitiveness will depend on being distinctive from the competition in ways which are, and will continue to be, regarded as valuable by the user. This implies that the product (or the resources which are needed for its production) are relatively rare, otherwise the consumer or user can turn to other sources than yours. It also implies that there should be few, ideally no imitations or substitutes available, since the existence of either good imitations or substitutes for your product will reduce the amounts consumers and users are willing to pay for your product. In shorthand, these attributes of competitive products (valuable, rare, inimitable, unsubstitutable) can be labelled as the products competitive advantage (which is obviously rather different from and more sophisticated than comparative advantage).
What is that makes firms (production/marketing systems) and their resources distinctive? Since technologies are frequently easily copied and most resources are fairly commonly available, distinctiveness must rely on more intangible aspects of business organisation. Kay identifies four key elements to a firms (or marketing chains) distinctiveness:
- the network of relationships the firm has with its suppliers and customers, as well as the internal networks the firm uses to keep its parts and people working together - which together Kay calls architecture;
- innovative capacity, reflecting the extent to which you identify new customer requirements and new niches and invent or discover new, different and valuable ways of meeting these emerging and growing requirements - which, as Kay points out, is frequently and strongly associated with architecture above, since it involves continual and accurate transmission of final customer requirements back up and through the marketing chain to the producers;
- the reputation of the firm or chain, which is clearly of vital importance in signaling to the customer the quality and reliability of products, especially for search products - which customers buy infrequently and so have limited personal experience of the actual quality, value for money and reliability of the product;
- strategic assets - the extent to which you have control over a limited resource (such as a gold mine) or have a naturally or legally restricted market, and can thus trade on a degree of monopoly power.
Kay labels these firm or chain characteristics (architecture, reputation, innovation and strategic assets) as the firms distinctive capabilities.
Competitiveness, according to these concepts, now involves
harnessing
a firms distinctive capabilities to the competitive
advantage
of the actual and potential products (and their underlying resources),
with the primary objective of adding value to the product (as a
combination of inputs and resources), since it is the added value which
provides the income and profit to the firm or chain. It is this
combination
of competitive advantage and distinctive capability which determines
the
competitiveness of the firm or chain.
Using these concepts, it is possible to make educated guesses about
what it is which makes our leading MNCs so big and apparently
successful, at least in some cases. But, as Kay notes - When
capitalism and corporate self-interest collide - big powerful
companies are not to be trusted, whether or not they are
multinationals, but perhaps even more if they are.
Brainard, 1993, developed a simple model examining the case where firms in a differentiated products sector choose between exporting and multinational expansion as alternative modes of foreign market penetration, based on a trade-off between proximity and concentration advantages. The differentiated sector is characterized by multi-stage production, with increasing returns at the corporate level associated with some activity such as R&D, scale economies at the plant level, and a variable transport cost that rises with distance. A pure multinational equilibrium, where two-way horizontal expansion across borders completely supplants two-way trade in differentiated products, is possible even in the absence of factor proportion differences. It is more likely the greater are transport costs relative to fixed plant costs, and the greater are increasing returns at the corporate level relative to the plant level.
For an apparently seminal paper on the development of theories about why MNCs exist, and how they are likely to behave, see: Dunning & Pitelis, 2008, Journal of International Business Studies 39, 167–176. doi:10.1057/palgrave.jibs.8400328, who examine the development, testing and relevance of Hymer's ideas (Hymer, S. H. 1970a. The efficiency (contradictions) of multinational corporations. The American Economic Review: Papers and Proceedings, 60(2): 441–448.)
For a current study of MNCs (in the UK) and their employment practices, see Warwick Business School: Employment Practices of Multinational Companies in Organisational Context.
Ann E. Harrison, Margaret S. McMillan, NBER Working Paper No. 12372, July 2006: Abstract: "Critics of globalization claim that US manufacturing firms are being driven to shift employment abroad by the prospects of cheaper labor. Others argue that the availability of low-wage labor has allowed US based firms to survive and even prosper. Yet evidence for either hypothesis, beyond anecdotes, is slim. Using firm-level data collected by the US Bureau of Economic Analysis (BEA), we estimate the impact on US manufacturing employment of changes in foreign affiliate wages, controlling for changing demand conditions and technological change. We find that the evidence supports both perspectives on globalization. For firms most likely to perform the same tasks in foreign affiliates and at home ("horizontal" foreign investment), foreign and domestic employees appear to be substitutes. For these firms, lower wages in affiliate locations are associated with lower employment in the US. However, for firms which do significantly different tasks at home and abroad ("vertical" foreign investment), foreign and domestic employment are complements. For vertical foreign investment, lower wages abroad are associated with higher US manufacturing employment. These offsetting effects may be combined to show that offshoring is associated with a quantitatively small decline in manufacturing employment. Other factors, such as declining prices for consumer goods, import competition, and falling prices for investment goods (which substitute for labor) play a more important role." - the link is to a published paper based on this work in the Academy of Management Perspectives, November, 2006: Dispelling Some Myths About Offshoring.
OECD Employment Outlook, 2008: Chapter 5: "Do multinationals promote better pay and working conditions?": "Foreign direct investment (FDI) by OECD-based multinational enterprises (MNEs) in developing and emerging economies has increased dramatically over the past two decades. While generally perceived as beneficial for local development, it has also raised concerns about unfair competition and the protection of workers’ rights in host countries. This chapter assesses the effects of FDI on wages and working conditions for workers of foreign affiliates of MNEs and those of their independent supplier firms. The evidence suggests that MNEs tend to provide better pay than their domestic counterparts, especially when they operate in developing and emerging economies, but not necessarily better non-wage working conditions. The effects on wages may also spread to the foreign suppliers of MNEs, but those spillover effects are small."
Are they a good or bad thing? (relative to what?) And for whom?
Good for developed countries? See a recent Economist Briefing, prompted by Kraft's takeover of Cadbury "Small island for sale: The takeover of Cadbury by Kraft seems to symbolise a hollowing-out of corporate Britain. The truth is rather more complicated"(25.03.10)
Bad for developing countries? See, again, another recent article in the Economist "Companies aren’t charities. In poor countries the problem is not that businesses are unethical but that there are too few of them" (21.10.10)
Morton Winston (1999) Review of Human Rights and International Political Economy in Third World Nations: Multinational Corporations, Foreign Aid, and Repression, by William H. Meyer (Westport, Connecticut: Praeger, 1998), Human Rights Quarterly 21.3 (1999) 824-830, provides a good, if now somewhat dated, outline of the pros and cons of MNCs (and international aid programmes) on developing countries. He says:
"Globalization's boosters, mainly multinational corporations (MNCs), neo-liberal economists, and their political allies, argue that direct foreign investment and MNC production and marketing operations in developing countries promote economic development, which helps to protect economic and social rights. MNC activities promote these human rights, according to this view, by creating jobs, improving living standards, bringing new capital and technology, and providing employee benefits such as housing and health care. As the effects of these economic benefits percolate through the societies of the host countries, a middle class is created whose members demand greater liberalization of thought, speech, and movement, better education for their children, and greater participation in government--in short, better protection for civil and political rights. Governments in these countries come to recognize that continued economic development and integration into the global economy works to the advantage of all, and sooner or later these governments become liberal democracies which respect the human rights of their citizens and seek peaceful coexistence with their neighbors. This argument proposes that economic development leads to democracy and human rights, which in turn lead to peace and prosperity for all.
On the other hand, globalization's critics, mainly environmental and human rights activists and their allies, hold that MNCs directly and indirectly contribute to human rights violations in developing countries. This view is associated with the work of economists such as Stephen Hymer and Jagdish Bagwati and leftist intellectuals such as Noam Chomsky and Edward Herman. The argument here is that MNCs drain resources and exploit labor from poor host countries and transfer wealth to already much richer home countries. By doing this, MNCs promote uneven development in which some countries become richer and more developed while others slip further into poverty and misery. It is claimed that MNCs often eliminate more jobs than they create in host countries by introducing new and often inappropriate technologies; they overwhelm small entrepreneurs, and, as the Asian economic crisis shows, the quixotic flow of capital across borders can destabilize whole national economies and throw millions into poverty overnight. Economic exploitation and instability increases the immiseration of the local population which in turn creates an atmosphere of social unrest. Social unrest brings on political repression by security forces that are under the control of domestic ruling elites whose interests, along with those of the foreign investors, are threatened. The repression targets social reformers, dissidents, labor organizers, and human rights workers, all of whom become victims of serious human rights violations such as arbitrary imprisonment, torture, and extra-judicial execution. Thus, according to this argument, globalization deprives millions of people of the resources necessary to survive, while also triggering government repression of dissent, all in the name of profit for foreign investors."
The review outlines Meyer's model of Foreign Direct Investment (usually called FDI, here called DFI -) as a measure of MNCs impact on developing countries (53, in 1985), and including allowance for the effects of (US) aid and also of the home country's total foreign debt (the extent to which these host countries have to repay the direct investments and the associated changes). "The results are striking. Meyer found that greater DFI has a strong positive correlation with higher levels of enjoyment of civil and political rights as well as economic, social, and cultural rights. He also found that GNP per capita, US economic aid, and foreign debt stand in a positive relation to civil and political rights in the third world nations which he studied. These same results were found when he looked at thirty-nine of these countries in terms of 1990 data." However, "his model is merely correlational and does not distinguish between the causal hypothesis (H1) that DFI is attracted to host countries which have better human rights conditions (that is, the hypothesis that "human rights are good for business") and the hypothesis (H2) that DFI produces better human rights conditions (that "business is good for human rights"). It could, of course, be the case that the significant correlations which Meyer has found provide evidence that both of these causal hypotheses are correct. ... It could well be the case that some kinds of MNC involvement do indeed produce positive changes in the human rights in some countries while other kinds of MNC involvement produce negative changes in these same countries, or that MNC activities in one country may produce positive changes while those in another country might have the opposite effect." Indeed, there are examples (Chile is a 'classic') where MNCs in at least clandestine cooperation with the US government, have conspired to create havoc in developing countries - Winston outlines the story.
Winston elegantly outlines the more general theory: "In the twentieth century, and especially following the Second World War, countries that tried to exercise their economic sovereignty by pursuing policies that were viewed as inimical to the interests of global capitalism became the targets of US-led attempts to destabilize or overthrow their governments and replace them with regimes that would be friendlier to capital. The main point of the Cold War, after all, was to "contain" the spread of communism. Third World countries that refused to conform to the wishes of the West, particularly the United States, were shunned or attacked, while those that accepted foreign investment as beneficial or inevitable were largely left alone or enlisted as allies. Better protection of human rights and gradual democratization were allowed to grow within the context of a free market economy in the more pliant or cooperative countries, such as Costa Rica, Jordan, and Thailand. However, in the countries that chose to pursue a socialist course, such as Cuba and North Korea, war and economic boycott led to the immiseration of their populations while internal authoritarianism produced repression and violation of first generation rights. Meanwhile, in countries such as Chile, Indonesia, El Salvador, and Zaire, where US policies succeeded in either squashing internal socialist movements or overthrowing leftist governments, major human rights violations took place within the context of the US-supported anti-Communist authoritarian regimes that came to power."
Multinationals don't always get what they want: (Economist, 16.09.10: Buying a stake in China Inc is no shortcut to market share): "AT FIRST glance, Vodafone has nothing to complain about. On September 8th it sold for $6.6 billion the 3.2% stake in China Mobile that it had bought for $3.3 billion between 2000 and 2002. Such a handsome profit ought to be a cue to crack open the champagne and roast some Beijing duck. Yet the British mobile-phone giant did not get what it really wanted: a way into China. In other countries, Vodafone has had a knack of turning a small investment into a controlling stake, but not in the Middle Kingdom. And it is not alone.
Since the late 1990s, several large state-owned Chinese companies have listed their shares. These initial public offerings typically included “cornerstone” investments by big Western firms. For example, BP, Exxon and Shell (three oil firms) and ABB (a Swiss-Swedish conglomerate) took strategic stakes in PetroChina and Sinopec (two big Chinese oil companies). Alcoa, an American aluminium company, invested in Chalco, a Chinese one. And Western banks bought chunks of the leading Chinese state banks when they were listed.
Foreign firms brought several things to the table: capital, technology, management skills and the prospect of better corporate governance. The Chinese press often referred to them as “elder brothers”. In return, these Western firms wanted access to China’s huge domestic market.
It did not work out that way. The Chinese state-owned firms did not need capital so badly that they were prepared to cede control to foreigners. Some also found that the Westerners had less to teach them than they had hoped. “Fly-in” expat managers were often unfamiliar with China, says David Michael, a partner at the Boston Consulting Group. Chinese firms tended to learn more from multinationals that had taken the trouble to build their own large sales forces in China, he says.
Chinese firms no longer feel like little brothers. China Mobile now has a market value half as large again as Vodafone’s. PetroChina is much bigger than BP. Both Chinese firms are now rich enough to buy whatever expertise they want.
Western energy companies were quick to notice this shift. BP, Shell, ABB and Exxon all sold their holdings in state-owned Chinese firms by 2005. Alcoa got out in 2007. Financial firms followed, in whole or part, during the financial crisis. When China’s state-owned Agricultural Bank was recently listed, no big Western bank bought a significant stake.
Western firms grumble about their failure to turn their stakes in China Inc into a foothold in the Chinese market, but not too loudly, so that they do not annoy the government. Besides, thanks to a rising stockmarket, most made sacks of money from their investments.
A few have not yet cashed out. Telefónica, a Spanish telecoms firm, owns 8.8% of China Unicom and politely rebuffs bankers who advise it to sell. AT&T has 25% of a telecoms business in the Pudong district of Shanghai. Despite regulatory problems, it provides a nationwide service from Pudong, largely to multinational clients. It is a nice business, but a far cry from the dreams some Westerners once had about China."
Does Multinational mean 'one size fits all' - is the globalised world 'flat', or is it 'glocal'? “Leading with Cultural Intelligence”, by David Livermore, a management guru, explains why modern multinational organisations need to be glocal in the original sense, and why they must understand that “There’s really no such thing as a uniform global culture”. This message, he says, applies not just to marketing but to recruiting and managing teams of workers in different parts of the world. Drawing on academic research and his consulting experience, Mr Livermore argues that managing effectively across multiple cultures is one of the toughest tasks facing multinational companies, not least American ones that are increasingly relying on emerging economies for their workers and future sales growth. According to a survey of senior executives from 68 countries quoted in the book, around 90% see “cross-cultural leadership” as the biggest management challenge of this century. Up to 40% of managers sent on foreign assignments end them early. Different studies have found that 16-40% of all managers sent on foreign assignments end them early. The cost to employers of each early return has been estimated at between $250,000 and $1.25m, when moving expenses, downtime and other factors are taken into account. In almost every case, the reason things do not work out is cultural problems rather than job skills." (Economist, 6.04.10)
Some Case Studies and Illustrations:
- BHP Billiton: Making the earth move. BHP Billiton’s remarkable growth has been driven by luck, shrewd dealmaking and, above all, China’s demand for steel (Economist, 19.08.10)
- The evil villain of unsustainable practice? - now committed to sustainability: Walmart Unveils Global Sustainable Agriculture Goals (24.10.10)
- Carrefour in
India (Economist, May, 2010)
BBC2 – The foods that make billions: Episode 1 Liquid Gold - available to watch until 13.12.2010 – global branding and multinational sales of bottled water. – the product we never knew we needed! -
“The first episode (23.11.10) tells the extraordinary story of how the bottled water industry has grown from nothing to become one of the biggest success stories in the modern food and beverage industry in just 40 years. With unprecedented access to the world's largest food and beverage companies, including Nestle and Danone, this is the inside story of how the bottled water business has become emblematic of an age of plenty in the West. With billions at stake, the market is fiercely fought over by the world's multinationals who promise us health, convenience and youth. It is natural and pure and sourced at minimal cost, its real value lies in the marketing and branding. Told by the Money Programme team, this film takes us to Hawaii, Japan, North America, France, Switzerland and Scotland to chart what lies behind the incredible success of this industry and explore what it tells us about ourselves.”
What is bottled water? – oil and water – two most precious and polluting resources on the planet
1 bottle of water is 1/5 oil & takes between 1.5 and 3 litres of water to make 1 litre;
Being sold to who? - people who already have perfectly potable water free on tap! & are rich enough to be more than adequately satisfied.
Evian – engineered (and reconstituted, based on NASA’s work for water in space) – versus the Japanese pure stuff de-salinated from the bottom of the ocean in Hawaii.
Perrier – the founder member of the club, along with Evian, and the Benzene scandal, catastrophe & product –> recall. 70% withdrawn within 48 hours! And off the shelves for 8 weeks – a gap filled by competitors – e.g. Highland Spring (1979), which picked up 20% of the (British) market in 1 year, promoted by Mrs T’s buy British slogan
Jo Beeston’s (Highland Spring) product placement – recruiting F1 Racing (Jackie Stewart), who persuaded BA to stock HS rather than Perrier, and snooker tournaments and stars.
Market expanded and evolved – still water taking over from sparkling! Bottle of cold water taking over from tap – and buying the bottle (package and convenience) PET bottles as a by-product of oil – with an environmental impact, but allowed bottled water to jump from 7th to 2nd in the beverage market, behind cokes etc. Tap water not seen as a competitor – safe but poor taste chlorinated/ - ’impure’ and full of chemicals
‘pure’ water as ultimate tabula rasa on which people can write/believe what they like! Healthy hydration and healthy life.
WHO (World Health Organisation) provided a real boost reporting that – drinking water is v. important for health – 2 litres per day – 8 glasses! – a blessing from ‘science’ and from internationally respected objective ‘governor’ – bottled water = health and wellness,
Pepsi – can we develop brands fast enough to get ahead of the trend – non carbonated beverage, closely followed by Coke, both losing market share to water. – which everyone drinks.
Pepsi’s AquaFina – pure and American, and cheaper/non elitist and fun (democratising a European product) Prime time and major sports shows advertising – to put aquafina on a par with pepsi, and delivered through Pepsi’s logistics network.
Coke’s Dasani – purified local water – targeted at the girls/women/female – young, single and city dwellers (70% of the market), and attacked the European market (bad decision!). 2004 UK Urban water for the fast living generation! (but didn’t let on just ‘purified’ Thames tap water! – which blew up in the media as an (American) con. + included bromate in the water, (exceeding legal levels, and carcenogenic, and added deliberately by Coke) 5 weeks after launch – Desani (markup 3000%) blew up and collapsed in the UK (and European) markets.
Classic example of global capitalist market – buying choice, freedom?? And representing the stupidity and immorality of the market – with people dying of thirst while we spend billions moving water about and marking it up!
A partial repsonse: One Water – broke into the market with a target at a small segment of the market – no shareholders, no dividends, 100% of profit to African water projects. ‘positive brand choice’ – gives consumers personal responsibility for bringing clean water to 10 Africans a day! – ‘play pumps’ (powered by children’s merry-go-rounds). 1.4 million people benefited (with help of major multiples) cashing in on ethical (fair trade etc. markets) on less than £5m turnover, versus £13bn of majors.
Volvic 1 for 10 – for every 1 litre bought, would supply 10 litres for those in need. – 240,000 people helped – but a drop in the ocean. – but enough drops give you an ocean. Volvic planting mangrove trees to offset CO2 footprint.
Market now subject to serious backlash, and sales are dropping, for the first time. So multinationals targeting emerging markets
Nestle (Pure Life, launched in Pakistan – local and locally priced – capitalising on Nestle brand, purity, safe, pure) and Danone – specific brands for specific markets - 60% of volume in high growth economies.
Will history go on repeating itself in the emerging and developing markets. – need for water, purity and convenience?
Its success driven by our demand and choice – consumers voting with their choices.
And see related blog. – one comment: “I would never buy bottled water unless I was in a place where the tap water was unfit to drink. Evian is a reversal of naive, which is what the people who buy it are! It is a shame on the human race that we buy water, transported thousands of miles, in bottles, when we have an adequate supply on tap. The damage done, to the environment (global warming, etc.) is immense. If people have the money to waste, on bottled water, why not use it, instead, to fund a well in some country which does not have an adequate supply of fresh water.”
See, also:– the Open University site on Branding, related to this 3 part series on Foods that made Billions..
Episode 2: Breakfast Cereals - "add value" (really??) to a cheap commodity (corn) and sell it dear (on the back of seriously expensive advertising (which keeps out competitors). Is this really progress? US nutritional backlash puts cereals in the dock of public opinion -> rats better off eating the box than the cereal! -> so fortify the cereal and boast about how much they are fortified.
Then 'counter-culture' of the muslie generation and Jordons rise to greatness on the back of granola - crunchy whole grains -> Alpen (Weetabix) and market began to fragment or diversify.
Then diet concerns -> need for roughage (fibre) and Kellogs come back into the market with All-Bran and Bran Flakes catering for "desire for self-medication through food" - "out of the medicine cabinet and onto the breakfast table.' Advertising critical once again - "a bit of art, a bit of magic, and a bit of alchemy."
Big brands and the supermarkets - own brands/own labels threatening the MNC brands -> response? fight or submit? Weetabix chose to make the 'own-label' products, Kellogs didn't, and chose to fight on quality terms, and trade on brand loyalty. Branded cereals maintained an 80% share of the market, unlike other sectors of the food market, because of 'legacy' effects - long term memories of the early days of advertising and cereal marketing? When will these wear out? Plus the increasing activities of FSA and food regulators on nutritional values of foods, and restrictions on advertsing to children (2007).
MNCs & poverty rates?
At the more local level, Goetz and Swaminathan, 2004, analyse the relationships between Walmart's opening of stores and rural poverty rates (at the county level) in North America. Even in the US, Walmart's size and reputation as an 'energetic' negotiator and 'rigorous' employer has lead to at least one web-sites devoted to monitoring the company's behaviour - Walmartwatch. Goetz and Swaminathan conclude: "After carefully and comprehensively accounting for other local determinants of poverty, we find that Wal-Mart unequivocally raised family poverty rates in US counties during the 1990s. This was true not only as a consequence of existing stores, but it was also an independent outcome of the contemporaneous construction of new stores between 1987 and 1998. This happened even as average poverty rates declined nation-wide. The question whether the cost of higher poverty is offset by the benefits of lower prices and wider choices available to consumers in counties with Wal-Mart stores cannot be answered here."
See, also, Ans Kolka, Rob van Tuldera and and Bart Westdijk, "Poverty alleviation as business strategy? Evaluating commitments of frontrunner Multinational Corporations", World Development, Volume 34, Issue 5, May 2006, Pages 789-801. (doi:10.1016/j.worlddev.2005.10.005). "In the debate on how to combat poverty, the positive role of MNCs is frequently mentioned nowadays, although doubts and criticism remain. Facing this societal debate, MNCs feel the pressure to formulate a position. This paper analyzes MNCs’ policies on their poverty-alleviating potential. “Frontrunner” MNCs turn out not to be very outspoken, especially not on those issues that have the largest potential to help alleviate poverty. Placed in the context of other MNCs’ behavior, a sector-coordinated morality seems important, which means that a meso approach to poverty alleviation needs to complement the current global (macro) and individual company (micro) focus."
References:
Perlmutter - "The tortuous evolution of the MNC, Columbia Journal of World Business, 4, 9-18, 1969
Kogut & Zander (2003). "Knowledge of the firm and the evolutionary theory of the multinational corporation", Journal of International Business Studies, Volume 34, Number 6, November 2003 , pp. 516-529(14)
See also: Rhys Jenkins: (2005) "Globalization, Corporate Social Responsibility and poverty" International Affairs, Volume 81, Issue 3, pages 525–540, May 2005, which concludes that CSR (by MNCs) "is unlikely to play the significant role in poverty reduction in development countries that its proponents claim for it."
Pranab Bardhan: (2006): "Globalisation and Rural Poverty" World Development, Volume 34, Issue 8, August 2006, Pages 1393-1404 (doi:10.1016/j.worlddev.2005.10.010). "an analytical account of the mechanisms through which globalization, in the sense of increased foreign trade and long-term capital flows, affects the lives of the rural poor in developing countries (in their capacity as workers, consumers, recipients of public services, or users of common property resources). Globalization can not only cause many hardships for the rural poor, but it can also open up some opportunities which some countries can utilize and others do not, largely depending on their domestic political and economic institutions, and the net outcome is often quite complex and almost always context dependent, belying the glib pronouncements for or against globalization made in the opposing camps."
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