PSCI460 RAT4

Horizontal integration

A horizontally integrated MNC produces the same product or product line in affiliates in different countries. Firms often engage in horizontal integration to defend or increase their market share. Firms engage in horizontal integration to defend or increase their market share. Although a firm's exports from the home country may initially meet the foreign demand for products and services, the firm may have to set up subsidiary to compete with new local suppliers. The MNC can compete more effectively with local firms through its subsidiaries because they have lower transportation costs and become more aware of the market's special characteristics; and labor costs are lower if a DC firm produces directly in LDC markets. Firms also engage in horizontal integration because of foreign government policies. When a government's tariffs and NTBs limit exports from a firm's home country, it may establish foreign operations to get behind the trade barriers. EX: Honda began to produces automobiles in the United States when the U.S. government imposed voluntary export restraints on Japanese auto imports in the 1980s.

Vertical integration

A vertically integrated MNC controls production of goods and services at different stages of the production process, with some affiliates providing inputs to other affiliates. Firms become vertically integrated to avoid uncertainty, reduce transaction costs, and limit competition. Firms engage in vertical integration to gain the benefits of comparative advantage in the production process. EX: an electronics firm can lower production costs by locating assembly operations in low-wage LDCs, chip production in an NIE such as Singapore, and high-end R&D operations in California. Vertically integrated MNCs can also gain control of uncertain transactions at various stages of the production process by internalizing them within the firm.

Multinational corporations (MNCs)

An MNC is usually defined as a firm that acquires ownership and control of affiliates in at least two countries. MNCs are in many respects the main agents of globalization. They produce and distribute goods and services across national borders; plan their operations on a global scale; spread ideas, tastes, and technology throughout the world. MNCs are firms that own assets and conducts business activities in more than one country. MNC parent firms in home countries acquire foreign assets by investing in affiliate or subsidiary firms in host countries. This is foreign direct investment which involves management rights and control. Portfolio investment is investment without control, it involves the purchase of bonds, money, market instruments, or stocks simply to realize a financial return. The growing importance of FRI testifies to the role of MNCs as agents of globalization.

Investor-state dispute settlement (ISDS)

Give investors access to dispute settlement procedures against a foreign government. The increase of ISDS cases from 326 in 2008 to 608 in 2014 caused conflict between those who favor the right of investors to sue the state for compensation, and those who oppose new restrictions on the regulatory activities of the state.

Sovereign wealth funds (SWFs)

Government investment funds that are managed separately from official currency reserves. They may hold higher risk assets than official reserves. Are government investment funds, funded by foreign currency reserves but managed separately from official currency reserves. The rapid growth of them signifies a partial return to state capitalism after decades of privatization in the West. They have existed at least since the 1950s, but they have grown dramatically in recent years because of financial globalization, imbalances in the global financial system, and the large surpluses of some states due to oil revenues.

In what ways have the major host and home countries for FDI changed over time? Have there been changes in the position of the South vis-a-vis the North in FDI? Is it possible to generalize about "the South"?

Host state policies toward MNCs vary widely, ranging from nationalization to efforts to attract MNCs with concessions and incentives; and many state have an "attraction-aversion dilemma" vis-a-vis FDI. The South imposed very few restrictions on MNCs before WWI. Colonial territories were open to investment from the imperial powers, and independent Latin American LDCs generally accepted the liberal view that foreign investment would further their economic development. Russia's nationalization of its oil industry after 1917 revolution had an impact on LDC attitudes, with some shifting to more nationalist policies during the interwar period. However, the South's adoption of restrictive policies was more notable after WWII. In extreme cases, Communist regimes in Chima, North Korea, North Vietnam, and Cuba nationalized Western assets. In other cases, many newly independent states sought limits on FDI to preserve their national sovereignty. FDI often bred hostility because it involved foreign control over LDC's natural resources and public utilities, and was associated with former colonial powers/ However, LDCs had limited ability to capture a greater share of FRI benefits because they lacked experience in dealing with MNCs and had few sources of external finance. The North: MNC investments have on average focused more on natural resources and lower technology manufacturing in the South, and on higher technology production in the North. MNCs also loom larger in LDC than DC economies, and DCs are more often major home as well as host countries for FDI; thus they are reluctant to restrict incoming FDI. Despite these differences, DC policies have also shifted over time. The U.S., Western Europe, and Canada imposed very few controls on foreign firms during the nineteenth century, largely because of liberal attitudes fostered by British hegemony. Western Europe followed more open policies than the US toward FDI after WWI, but their positions reversed after WWII when the U.S. emerged as the global hegemon. Indeed, the Europeans adopted moree restrictive policies in the 1960s because of concerns about dominance of American MNCs. France in particular screened inward FDI and rejected more FDI proposals than other European states. Canada also began a screening process in the 1970s.

Have NGOs had an impact on the behavior of MNCs? What is corporate social responsibility (CSR), and what are the competing theoretical views regarding the value of the concept?

In the view of the lack of multilateral mechanisms to regulate MNCs, private actors have become involved with promoting CSR. CSR is the contributions a corporation may be expected to make to society. Some analysts see CSR as a legal responsibility of MNCs, while others simply view is as desirable behavior. NGOs representing consumer, environmental, and religious groups have pressured MNCs to engage in socially responsible behavior, and MNCs have been open to some voluntary self-regulation. NGOs and civil society groups may be conformist, reformist, or rejectionist. Conformists largely endorse MNC behavior and do not favor restrictions on their activities, reformists believe that MNCs can and should be reformed with some regulation, and rejectionists argue that MNCs are not reformable. NGO reformists want to promote responsible MNC behavior without engaging in ideological confrontation. Rejectionist NGOs seek to expose and punish irresponsible corporate behavior and are less willing to engage in dialogue (consumer boycotts to publicly expose and punish environmental abuses) Some NGOs employ both reformist and rejectionist strategies. In efforts to avoid negative NGO campaigns and government regulations, many MNCs have developed their own regulatory frameworks and have collaborated with reformist NGOs. The questions arises as to how effective NGOs have been in altering MNC behavior. MNCs have different levels of vulnerability to NGO strategies. NGOs also have limited monitoring capabilities, although they direct their campaigns and protests at certain high-profile companies, they permit other companies to be free riders. Overall, MNCs have not changed significantly as a result on NGO activities, and NGO pressure does not substitute for adequate multilateral regulation.

How would you compare the foreign investment regime with the global trade and monetary regimes? How and why do liberals, neomercantilists, and historical materialists differ in their views of what should be regulated in a foreign investment regime?

In this age of globalization, liberals often view MNCs and private banks as the major weavers of the world economy. Liberals also believe that FDI stimulates innovation, competition, economic growth, and employment, and the MNCs provide countries with capital, technology, managerial skills, and marketing networks. Historical materialists also refer to the growing power of MNCs, but they see corporate managers as a transnational class that maintains and defends the capitalist system. They also view MNCs as predatory monopolists that overcharge for their goods and services, limit the flow of technology, create dependency relationships with LDC host countries, and impose downward pressures on labor and environmental standards. Neomercantilists are more inclined to downgrade the political importance of MNCs; they see MNCs as retaining close ties with their home governments.

Do liberals, neomercantilists, and historical materialists believe that the nationality of an MNC makes a difference? Do you think that the competitiveness of a country is closely tied with the competitiveness of its MNCs?

Neomercantilists argued that a state's MNCs have a major impact on its competitiveness because its standard of living in the long term depends on its ability to attain a high and rising level of productivity in the industries in which its firms compete. Argue that governments should pursue industrial policies to promote their own MNCs in high-technology areas Liberals by contrast argue that MNCs seek profitable opportunities around the world and are becoming disconnected from their home nations. They see U.S. competitiveness as depending more on U.S. workers' education and skills than on U.S. corporate ownership; if Americans have the requisite training, foreign MNCs will employ them.Some liberals go even further and assert that we are entering a borderless world in which a corporation's nationality no longer makes a different. Investentionalist liberals believe that governments should focus on upgrading workers skills so that MNCs of any nationality will want to do business, invest, and pay taxes there.

Obsolescing bargain model

Postulates than an MNC loses some bargaining leverage once it invests in a host state because it commits itself to some immobile resources in the host state. Highlights another factor that can cause changes in a host state's relations with MNCs. A host state has a weak bargaining position before an MNC invests in it because the MNC can pursue other options and the host state must offer incentives to attract the initial investment. The MNC's bargaining power stems from its sophisticated technology, brand-name identification, access to capital, product diversity, and ability to promote exports. After the investment is made, however, the host state has more bargaining leverage because the MNC commits itself to some ommobile resources. The host state can treat these resources as a "hostage" and it gains bargaining, technological, and managerial skills through spin-offs from the foreign investment. Thus, the host state may be able to renegotiate the original bargain and gain more favorable terms from the MNC.

Corporate social responsibility (CSR)

The contributions a corporation may be expected to make to society. Some analysts see it as a legal responsibility of MNCs, while others simply view is as desirable behavior.

Portfolio investment

The purchase of stocks, bonds, and money-market instruments by foreigners to gain a financial return. It does not involve foreign ownership or operating control. It is investment without control, it involves the purchase of bonds, money, market instruments, or stocks simply to realize a financial return

What is the obsolescing bargain model? Does the OBM have more validity in some areas and periods of time than in others?

The obsolescing bargain model postulates than an MNC loses some bargaining leverage once it invests in a host state because it commits itself to some immobile resources in the host state. Three factors -- fixed investments, new technologies, and brand-name identification -- help determine whether an industry will by subject to the OBM. Regarding the first factor, the OBM is more applicable to projects that require large fixed investments. Although such projects initially give foreign investors considerable leverage, later the fixed investments can become hostage to the host state. A second factor is the type of technology used; MNCs using sophisticated technologies that are unavailable to the host state may be less vulnerable to aggressive host state policies at a later date. A third actor is the importance of product differentiation through advertising. When a firm's sales depend on brand identification and consumer loyalty, it is in a stronger position vis-a-vis the host state. MNCs can employ various strategies to offset the risk of the OBm. They can decrease their vulnerability to host state pressures by vertical integration, because each host state will be involved in only part of the production process. MNCs can also decrease their vulnerability

Foreign direct investment (FDI)

involves some ownership and/or operating control. The foreign residents are usually MNCs. Also, involves management rights and control. FDI flows, or the value of FDI in a single year, have generally increased, but sometimes they decline because of international developments. FDI stock refers to the net accumulated value of FDI resulting from past flows.

Brownfield investment

is an investor investing in an existing facility. It is mainly made through mergers and acquisitions. Or the purchase of stocks in existing firms with the purpose of participating in its management. In a cross-border merger, the assets and operations of two firms belonging to different countries are combined to establish a new legal entity. In acquisition, a local firm becomes an affiliate or subsidiary of a foreign firm. During the past decade, most growth in international production has occurred through M&As rather than greenfield investment, and acquisitions are much more common than mergers.

Bilateral investment treaties

protect foreign investment. They uphold the MFN and national treatment principles, prohibits host-country performance requirements, and require compensation in cases of nationalization. European states concluded bilateral investment treaties (BITs) in the 1960s to protect their investments in LDCs. In the 1970s attention shifted to developing international regulations for FDI, and some economists called for the creation of "a General Agreement for the International Corporation" like the GATT for trade.

Greenfield investment

the creation of new facilities and productive assets by foreigners