1. Dimensions of Global Marketing Risk
Benefits and Opportunities.
Chapter Coverage
Types of Global Marketing firms.
Multinational Corporations: Conceptual
Frame work of MNCs; MNCs and host
and home country relations; Technology
transfers – importance and types.

2. MNCs and World Trade
Ways of defining an MNC
1. Enterprise that controls and manages production establishments in 2
or more countries.
2. A corporation that owns controls and manages income generating
assets in more than 1 country
3. Enterprise that controls and manages production establishments in
more than 1 countries.
Common points
1. Owns productive assets in more than 1 country
2. Exercises managerial control over affiliate industry. Eg. Royal dutch
co, BAT
Other definitions that overseas activities of a company must be as great
as domestic activities for a company to constitute a MNC.

3. Major growth in MNC after 2nd
world war.
1.International travel
2.communication, postal system, internet
3. peace,
4.multilateral trading system,
5. stable yet adjustable exchange rates,
6.currencies convertibility,
7.Regional trading blocks,
8. WTO,
9.IMF, world Banks: . International economic
institutions

4. US companies played lead role.
1. Dollar was short and European nations were keen to attract U.S. investment
2. US wanted larger markets to ensure adequate expansion and capitalize on
technological lead it acquired.
3. Domestic markets saturated
4. Exports faced steep tariffs and non tariff barriers.
5. Anti- trust laws prevented rapid expansion in domestic market within US
6. Oligopolistic character of market- Companies didn’t risk upsetting competitors.
Main market was West Europe since :
consumer with similar tastes available, Hi per capita, Establishment of EC meant
removal of intra European tariff removal, common external tariff plus non tariff
barriers, transport costs – It was better to produce in Europe than to export for the
US companies.
In 70s Locations for US FDI changed.- US MNCs sought new locations in Latin America
and middle/ Far East. Europe was not that attractive cos of Equalizing wage rates,
employment protection methods, social security, European trade unions who
resented American way of working, fall in value of Dollar against European currencies
, challenging competition from European producers. US products had lost their
novelty value in Europe. Low cost locations looked in favour as base for exporting
back to Europe or US.

5. Europeans sought low cost locations to compete but ironically Europeans set
many MNCs mainly in other European countries even as tariffs were being cut
between them. However continuance of Non tariff barriers and consumer
preferences kept European market fragmented. They now sought distant
locations.
Discovering their ability to challenge US dominance, at one time EU FDI in North
America was 4 times of US in EU then began to decline
Japan traditionally preferred exporting to investing abroad. Now in 80s they
followed the European model. Then invested in SE Asia to overcome rising wage
rates in Japan. Restrictions to outward investments were lowered and investments
were made in NA and west Europe to circumvent trade restriction imposed by
these countries against Japanese products.
Yen appreciated- lowering export from Japan. Japanese FDI increased. Recently
the FDI from Japan in growing proportion went to east and South East Asia.
Reasons: low cost of production + markets.
As exchange controls were lifted S. Korea, Taiwan became net exporters of FDI to
relocate production to lower cost of production and to bypass trade restrictions.
Mainly to SE Asia and China. In west mainly as ‘screwdriver’ companies

6. Majority of MNCs from developed world
MNCs from developing countries growing in percentage.
Majority of foreign affiliates in developing world 45%, china- 17%,Us and
Canada-8%
Trends:
Inward Outward
UK Primary sector Primary sector
Canada Manufacturing Manufacturing
Japan Manufacturing Services
Germany /US Services
Increase in FDI in services because services have to be physically present
in foreign country as they cannot be stored

7. Determinants of FDI
Horizontal
Co. locates same product or
group of products in many
countries.
Reason – Market
imperfections
Vertical
Co. locates different stages in
production or marketing of a single
product or group of related
products in different countries.
Backward: when new subsidiary
produces at an earlier stage in
production or marketing: refinery
takes to extraction.
Forward: when new subsidiary
produces at an later stage in
production or marketing: driller to
set up refinery
Reason : Factor proportions at
various stages differ significantly.
Conglomerate: co. acquires controlling interest in or amalgamates with foreign
co. which produces entirely unrelated product to diversify

8. Vertical disintegration
1. One form may be that MNC sets up subsidiary to perform specific stage in
chain of production and distribution eg offshore assembly.
2. Another that separates production activities from non production or
headquarter activities eg finance, R&D managerial. Maximum use of
difference in in factor proportions required at each stage of production.
Factor prices are different reflecting factor endowmwnts, so cost
advantage is gained. NIDL requires much better division of labor than in
past.
3. Eg: Textile and consumer electronics industry. As per stages:
1. conception and development- Industrialised nations
2. Production of components- capital intensive, specialist plants -Industrialised nations
3. Assembly and testing-: cost of labor: Developing nations
First Japanese pioneered off-shore processing.,
then U.S and then west Europe followed suit

9. Factors that favor vertical disintegration
1. Technological:
1. Products as assemblies of standardized components.
2. With ease subset of components could be varied in many versatile products.
3. Large scale component products allows economy of scale.
2. Transport: containerization made shipping cheaper besides other
factors.
3. Rural –urban migration: As rural worker move to urban areas availability
of cheap labor increases.
4. Lower co-ordination costs: Telecom revolution, management education
spread.
5. Reduced trade barriers: regional and multilateral liberalization through
trade blocks and WTO. Offshore imports of assembled goods using
components from importing country need only pay tariff on the value
added abroad.
6. Low cost sites: created by developing nations: SEZ, EPZ give foreign
investors specially designed infrastructure like port facilities subsidized
electricity. Also allow tax privileges and import of components and parts
without paying import duty.
7. Rising incomes increased demand for finished and intermediate goods

10. Factors favoring Horizontal rationalization
• Same as those of vertical Disintegration plus-
1. Need for long production runs for each differentiated
product that an MNC deals in.
2. Advantages of specialization. Better to make 3 types of
products in 3 different specialized plants in 3 markets
and export ;than to produce all 3 in each plant with
restricting market size.
3. Cost saved by specialization must offset additional
cost incurred in transporting the goods.
4. Harmonization of technical standards and regulations.

11. Net effect
• Both horizontal and vertical rationalization
enhance trade and are nor trade
displacing.

12. Types of Foreign investments
1. FDI – investment to set up new overseas subsidiary or controlling
interest in another overseas co.
2. Portfolio investment: purchase of interest bearing securities by
individuals & companies
3. While Portfolio investment comes in form of dividend nor fixed interest
because of differences in yield of interest; FDI motive is not higher yield
but to establish operations abroad.
4. Portfolio investments exceed FDI – Desire of investors to spread risk
combined with higher returns and quicker financial gains. Also taking
advantage of exchange rate fluctuations or to cover risk thereof.
5. While Portfolio investment entails financial or money transfers FDI is a
package of which financial or money transfers is just a part of the
bundle, others being
Ownership.
Provision of management expertise.
Exercise of control
Possibly technology transfers.

13. FDI
• Flow of direct investment abroad is a measure of new
direct investment activity taking place each year
• Net flow = difference between gross outflows – net
inflows
• Unremitted profits and reinvested profits of an affiliate
are included in Outflow.
• Expansion abroad by raising funds abroad are not
included in measure of flow of investment though it adds
to the stock of investment held abroad.
• FDI growth has been happening in both stock and flow
terms

14. FDI’s reasons
1. Substitute to exporting
2. Efficiency seeking reasons in production of product or a
stage in production.
3. Growth in intra firm trade for opportunities in transfer prices
where MNC choose to use prices for internal sales which
are significantly from market determined prices.
4. Growth in intra industry FDI.
1. To enjoy certain firm specific advantages not possible
by exporting or licensing etc.
2. Transferring to parent firm intangible firm specific asset
like knowledge.
3. Enjoy location specific advantages.
4. Different countries enjoy different firm specific
advantages exploitable in other similar markets.

15. 5. Innovation needs R&D. PLC short so need to maximize
returns on R&D quickly. Even patents are circumventable
so there is incentive to internalize markets.
6. Strategic Advantage: high levels of intra industry FDI will
lead to oligopoly. Uncertainty increases. Firms cartelize
but don’t allow rivals to get any competitive advantage.
• Backward integration ensures that rivals cant cut supplies through
taking over main supplier.
• Early entry to stop rival from first mover advantage.
• Early entrant may also exert pressure on govt to restrict import
thus depriving rivals of access to market.
• Fearful of being pre-empted rivals follow suit.
• counter attack by leading firms of a country when foreign
companies set up subsidiaries in home countries.
• Technological listening points: MNCs set up subsidiaries to keep
abreast of changes in market environments eg: Japanese fuel
efficient cars
FDI’s reasons

16. How FDI is done
• Establish distribution outlets
• Production plants
• FDI may substitute trade so it could be described as
trade displacing.
• Also may seek to integrate activities in different countries
to improve efficiency –then they result in increased
trade.
• Breaking production process in series of different stages,
each of which is located in different countries – vertical
disintegration or NIDL (New international division of
labour). Other being horizontal basis.

17. FDI- modes of doing it
• Greenfield venture: setting up entirely new
subsidiary abroad.
• M&A: acquiring controlling interest in
existing foreign company by buying
shares.

18. Intra Firm Trade
Majority of world trade carried on by MNCs
In this sizeable proportion of Intra firm trade
• Intra-firm – Trade between MNC parent company and it’s
affiliate
• Intra-affiliate- Trade between 2 or more affiliates of same
parent company.
Arms length trade is trade between buyer and
seller who are unrelated in ownership.

19. • Affiliates are defined as companies in which parent
company has 10% or more stake
• Subsidiary is an affiliate company in which parent company
owns majority stake. Also called MOFA (majority owned
foreign affiliate)
• Intra firm trade was higher in manufacturing than semi
manufacturing and Semi Manufacturing intra firm trade was
higher than Raw materials.
• Intra firm was higher for industrialized nations.

20. Intra firm trade was dependent on following factors:
• Technological intensity or degree of product specificity-
direct relationship. Incase of intermediate products
specificity stimulates internalization through vertical
integration.
• Divisibility of production process- direct relationship
• The degree to which the industry is diversified globally
(ratio of foreign to domestic investment): direct
relationship
• Need for after sales: direct relationship
• Pollution sensitive products: direct relationship for
developed countries
• R&D industry: Internalization greater if asset to be
transferred is Knowledge.
• Transfer pricing
Factors affecting Intra Firm trade

21. Transfer pricing
• MNC uses prices on intra firm trade that diverge from
prices used in equivalent arm length transactions. Prices
thus may not be market determined.
• May happen even in case of licensing agreements,
subcontracting etc but the prices may not be as much
manipulated as in wholly or largely owned MNC
• Transfer price may just not be linked to trade transactions.
MNC may divert funds through non trade channels like
payment of fees to parent company, payment of royalties
for licenses covering patents, or interest on loans.

22. Motives for Transfer prices
• Differences in taxes. Developing nations cannot get a fair
share of profits because they cannot maintain a policy of hi
taxation.
• Prevent double taxation: policy of industrialized nations to
deduct taxes paid in host countries from tax payable when
the profits are remitted back to the developed country.
• A built in incentive to retain profits abroad: Any profits
earned abroad but not repatriated are not subject to
reassessment for tax. Eg US. Known as deferral rule it
applies to OECD (organization for economic co-operation
and development.) (Mainly western industrialized nations)

23. Other ways of global presence
• Govt may not allow acquisition by MNC but may be
prepared to allow on joint venture basis.
• Licensing: local firm pays share of profit to foreign firm.
Popular because the MNC does’nt have to risk of making
actual investment in foreign country.
• Pooling efforts to become more competitive may be a
reason rather than access to market. So they can go for
strategic alliance for limited time in agreed areas of
activity.
• Counter trading or barter trading: Due to lack of foreign
currency countries may pay partly for imports and the
rest by supplying other goods or services.

24. Licensing
• Does’nt involve transfer of equity capital.
• Agreement between owner of body of some knowledge (Brand,
Patent, Design, trademark etc.) with a potential user.
• potential user may pay lump sum or Percentage of profit to owner of
body of some knowledge as royalty or fees.
• Means for MNC to earn profits on an asset with incurring risk of
investment.
• potential user may be independent firm or subsidiary of latter
company.
• Where licensee is unrelated licensor may also acquire equity stake
in the licensee to gain higher control over the use of technology
sold.
• Licensing agreements may involve accompanying management
services and provision of technical info ancillary to the technology
involved.

25. Licensing (cont.)
• Clauses are designed so that the proprietor has some control
over use of technology or at least cost of losing control are
minimized.
– Information may not be passed on to another company.
– Restricted to a geographical area.
– Product produced may be of standard quality.
– Requirement to purchase components or further technology from
licensor.
– However home countries may intervene to outlaw some of these
restrictions.
– Licensee may disregard some clauses if penalties are low.
– Where control over technology is important FDI is preferred to Licensing.
– Where knowledge is mature and likely to be shortly obsolete licensing is
preferred.
– Important where host country prevents setting up or acquiring
subsidiaries.
– New entrant not prepared to undertake investment can gain initial
access to foreign market.
– Very common for West European and US companies to gain access to
Japan after Japan imposed tough restrictions on FDI

26. Strategic Alliances.
• Common to buy minor equity stakes in
each others companies but it is not
about capital transfers.
• Form of international collaboration
which links aspects of business.
• Contract for providing some co-
operation for some period of time.

27. Strategic Alliances.
• Technological collaboration – to spread cost of R&D and
development.
• PLC short so advantages must be increased from global
co-operation.
• Joint sourcing of components
• Joint marketing.
• To gain entry into some markets.
• Synergy savings when firms in alliance have strengths in
different areas.
• Cost of setting up and administering an alliance is much
lesser than Joint Venture.
• Less risky and can be terminated at any time.
• To reduce competition as defensive reaction of each rival-
sometimes

28. Counter trade
• Form of trade that involves element of
reciprocity.
• Pure barter is rarely the case.
• Transactions may be separated in time.
• Aims to equalize or partially balance
Foreign exchange expenditures.

29. Forms of Counter Trade
1. Pure Barter:
– Usually less as percentage of counter trade
– Generally between governments
– Involves double co-incidence of wants.
– Both transactions must be exactly of equal value.
1. Counter purchase:
– Reciprocal purchase agreements.
– Also called compensation Trade.
– Import value may not match export value.
– 2 separate contracts.
– Usually within a specified time period.
– Main reason is not lack of convertible currency but to balance
Import and export.

30. Forms of Counter Trade
• Buyback: supplier of capital goods is paid
back by part of resultant output.
– Usually for longer periods- common in
process plants or mining equipment.
– Control over quality of output is a concern.- so
insistence to be allowed to exercise quality
control.

31. Forms of Counter Trade
• Co-production agreements: Developed
country produces sophisticated goods and
developing produces less sophisticated
goods.
• Both gain access to each others’ markets.
• Developed country company takes
advantage of low cost Developing gains
access to hi –technology.

32. Forms of Counter Trade
• Bilateral agreements and clearings:
– Variety of agreements between countries that attempt
to roughly balance exchange od goods and services
over a specified period of time.
– Special account is opened in each country’s central
bank.
– Each country is paid in credits for exports.
– These credits are used for imports.
– Clearing currency is specified for settling the balance.

33. Forms of Counter Trade
• Switch trading: Long term payment
imbalances may accrue.
• Large unused credit balances
accumulated by one country may be
resold to third country for convertible
currency.
• Certain banks and trading houses with
specialist knowledge act as switch agents

34. Importance of counter trading
• Mainly done by developing countries:
– To ensure increased export sales for their products.
– Important for centrally planned economies like
eastern block and China to control Balance of
payments. (State exercises monopoly control of
foreign trade)
– Used as method of trade finance by countries with
lack of foreign exchange.
– Developing and obtaining vital technology:
• 1. Developing country pays for capital goods by products.
• 2. Agrees to buy certain products on receiving development
aid from developed country.