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  7. Multinationals and European Institutions (HBA24C)

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Summary Multinationals (2021/2022)
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  • Course
  • Multinationals and European Institutions (HBA24C)
  • Institution
  • Katholieke Universiteit Leuven (KU Leuven)

Complete summary of the part "Multinationals" of the course Multinationals and European Institutions. This course was taught by professor A. Pauwels and A. Slangen in 2021/2022. (BBA KU Leuven)

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Document information

  • August 1, 2022
  • 28
  • 2021/2022
  • Summary

Subjects

  • multinationals
  • bba
  • kul
  • 20212022

Written for

  • Katholieke Universiteit Leuven (KU Leuven)
  • Business Administration
  • Multinationals and European Institutions (HBA24C)
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Multinationals
Chapter 1: Globalization and introduction to IB

Terminology: what is IB?
 International business (= IB)
= Firms that engage in international or cross-border economic activities

 Global business
= Business around the globe ( Domestic + international business)

 Multinational enterprise (= MNE)
= Firms that engage in foreign direct investment

 Foreign direct investment (= FDI)
= Investment in controlling and managing value-added activities in other countries

Economic terms
 Gross national product (= GNP)
= Sum of value added by resident firms, households, and the government in an economy

 Gross domestic product (= GDP)
= Total market value of all final goods/services produced within a country

 Gross national income (= GNI)
= GDP + income from non-resident sources abroad

 Purchasing power parity (= PPP)
= Adjustments made to GDP to reflect differences in cost of living between countries

Core perspectives
 What determines the success/failure of firms around the globe?
- 2 perspectives/frameworks (to answer this question)
- Institution-based view
- Resource-based view
- These views are often complementary

 Institution-based view
- Companies are successful abroad if they possess good knowledge about the formal and
informal rules of the game
- Formal rules  National legislation and local political/economical system
- Informal rules  Local culture, values & norms, local customs, …

 Resource-based view
- Focus on internal resources and capabilities of a firm ( Firm-specific resources)
- Domestic companies don’t suffer from the liability of outsidership
- Liability of outsidership  Distant origin and lack of local/nearby experience
- Primary weapon of foreign firms  Overwhelming resources and capabilities

,What is globalization?
 Different definitions of globalization ( Both positive & negative)
- Accelerated spread of communication and transportation technology
- Rising power of MNE’s (+ increased inequality in the world)
- Increased competition for jobs ( Especially for low skilled workers)
- Elimination of differences among national cultures and identities
- A process leading to greater interdependence and mutual awareness

 3 different views on globalization
1) The world is flat  Globalization is advanced and inevitable (Friedman, 2005)
2) The world is spiky  Globalization is concentrated and stable (Florida, 2005)
3) Semi-globalization  Globalization is partial and limited (Ghemawat, 2007)

 How to measure?
- Compute/compare the transnationality index of MNE’s
- Transnationality index (= TNE)  Mean of 3 different ratios
- Ratio of foreign assets over total assets
- Ratio of foreign sales over total sales
- Ratio of foreign employment over total employment

De-globalization and political pressure of protectionism
 De-globalization is happening (at the same time) due to
- Protectionism
- Trade wars
- Political polarization
- Fragmentation of society
- Conflicts
-…

 2 major views
- Liberalism  Reversal of globalization is result of domestic political pressure
- Realism  Reversal of globalization is result of end of US hegemony + rise of China

 Globalization evolves in waves
- Major peak in late 19th and early 20th century
- Recent wave of globalization  Rising powers of emerging economies ( Volatile)

 Examples
- Brexit  Protectionism within the EU
- Chinese investment in Europe and North America is decreasing significantly
- Global FDI inflows are expected to decrease the following years

, Chapter 2: Formal institutions

Institution-base view
- Success/failure of firms is enabled/constrained by institutions
- Sufficient knowledge about formal/informal rules of the game is required

 Institutional framework
- Formal/informal institutions governing individual and firm behavior
- Institutional framework is different for each country
- Firms need to possess good knowledge about this framework to succeed

 Transaction costs
- The costs of doing business
- Different costs associated with economic transactions
- Transaction costs are the result of uncertainty
- Transaction costs increase if institutions do not function properly

 Opportunism
- Act of actively seeking self-interest
- People act generally will act in their own self-interest

 Formal institutions ( Regulatory pillar)
- Generally governmental institutions
- Laws
- Regulations
- Rules

 Informal institutions ( Normative + cognitive pillar)
- Concerns behavior that is morally right/wrong + what is important to society
- Norms ( Values, beliefs & actions)
- Ethics
- Culture

 Problem?  Institutional transactions
= Fundamental changes to formal/informal institutions that affect firms

 3 pillars
- Regulatory Pillar  Coercive power of governments (+ governmental sanctioning)
- Normative Pillar  External norms that influence individual + firm behavior
- Cognitive Pillar  Internalized values & beliefs that guide behavior (+ awareness of norms)

 Key role of an institution is to reduce uncertainty
- Uncertainty increases transaction costs + reduces willingness for LT-investment
- Institutional frameworks reduce opportunistic behavior by establishing rules
- Institutions change/evolve over time ( Especially in emerging economies)
- Institutional transition  Changes to formal/informal institutions that affect firms
 2 core propositions of institution-based view

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