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Managing global organizations summary
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Summary of the course managing global organizations from the Aix-Marseille université Received a 19/20 for this course
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Chapter 1 – Business across borders1.1 – Made in the world:
How has the disintegration of the production process become possible?
1) ICT (INFORMATION, COMMUNICATION, TECHNOLOGY)
a. users of internet has grown extremely from ’94-25mil users ’19-4.39bil users
b. Cost of processing & transmitting info has dropped
2) Drop of man-made trade barriers due to expansion EU, accession of China to WTO etc
3) Political developments has increased the share of population participation in globalisation
How do they measure the disintegration?
1 - Johnson and Noguera:
1) Compute a global Input-Output table
2) The VAX-ratio => (Value added / Gross value of exports)
a. The lower this ratio, the larger the value of imported inputs embodied in exports
(there has been # many exports before an good is imported again)
b. Important decrease due to the offshoring of activities
For example: Megatoys – a spinweel, molentje gelijk aant strand
Plastic is made in US
The plastic is send to China where it is cut
Then it is send back to Mexico where it as assembled together with the stick
Then at last, it’s send back to the US to be sold
2- Antras, Chor, Fally and Hillberry
1) Weighted index of the average position in the value chain at which an industry’s output is
used as direct input to other industries
a. The higher this measure, the more removed from final good use is that industries
output; so the more upstream the output is
b. The trend is that exports had become more upstream because the production
process has been more disintegrated
i. Especially in 2002 when China accessioned in the WTO
When designing their global sourcing strategies, companies face 2 key decision:
1) Location of the different stages in the value chain
2) The extent of control that firms exert over these different production stages
a. They may decide to keep the P within firm boundaries = FDI = Foreign Direct
Investment
b. Contract with suppliers or assemblers at arm’s length
The boundaries of the firm in the world economy are thus the result of the optimal decision
of the firms attempting to organize products in the most profitable way possible
o They need to make a cost-benefit analysis
,1.2 International Transactions
= All international transactions between institutional units (firms or households)
These are included in the BoP (Balance of Payments) (IMF)
f.ex:
1) Business transactions
a. Between 2 firms
b. Between 2 subsidiaries of the same legal entity
2) Transfers between families
The BoP residence rule:
The address of a firm is the place where production of the service/goods is really taking place and not
the fiscal residence
There are 3 categories of transactions in the BoP:
1) Trade: export and imports of goods & services
a. Merchandise: goods, objects
b. Services: transportations, advertisement, research etc
c. Goods for processing transactions: Country A exports cotton to Country B to make a
sweater to be sent back to Country A
2) Income transactions
a. Employee compensation (small share of this type of transaction)
b. Interest payments on debt and dividends for shareholders
3) The investment transaction (implies changes in ownership of assets)
a. Portfolio investments in financial assets
i. Represents <10% of the company’s assets
b. Foreign direct investments
i. Represents 10-100% of the company’s assets
1. 10-49% => associates
2. 50-100% => subsidiaries
ii. In this way, you receive an active voice in the company
1.3 – Types of entities
- Uninational Enterprises:
a. Permanent production process = 1 country
b. Owned by domestic residents or foreign residents !So it doesn’t matter!
c. It’s an international business (= import & export)
- Multinational Contractual Networks
a. Buyers and sellers are linked by long-term relationships but without significant cross-
holdings of equity
, b. The B&S are linked by contractual obligations
i. For example: McDo met his franchises, Nike met his Asian firms…
- Multinational entreprises (MNE’s)
a. The investor has acquired at least 10% of the equity of the foreign firm with whom
the investor intends to establish a long run relationship
b. For example: Shell, Total
1.4 – Seven forms of separation
MNE’s has the opportunities to make big benefits but they also have to face many challenges. These
challenges are the 7 forms of separation:
1) Separation in legal systems
International transactions do not benefit from the same safeguards as national transactions do, due
to different legal systems
a. Contracts are incomplete, you cannot anticipate on all difficulties
b. Choice of the law judges & juries from a given country are often reluctant to rule
out in disputes involving a foreign entity bc It is difficult to enforce the verdict
i. There have been coordinated attempts to reduce the degree of
incompetence of the contract by:
1. International conventions
2. “Forum-of-the-law clause” An arbitrator will resolve dispute (ICC)
The degree of contract incompleteness is increased when there are intermediate inputs
a. Long time lag between the date where the contract is signed and the date where the
contract is executed/delivery
b. Relationship specific investment the seller has customize the intermediate input to
the buyers requirements, so if the contract breaks these customized requirements
intermediate inputs are loss
2) Political Separation
Governments try to protect their boundaries against the entry of people, ideas, viruses, goods…
There are regulations on:
a. Immigration services
i. Workers need Visa’s etc
b. Trade barriers faced by exporters (expediteurs)
i. Barriers on which goods can be sold in a country (quota’s) and on how to
produce these goods (regulations)
c. Capital flow
3) Physical Separation
F.ex: mountains, bodies of water
, Empirical evidence has shown that the further 2 countries are, the lower the FDI, trade and
immigration is.
4) Relational Separation
Local communities have social and business networks:
Someone who leads and can provide you with what and who needs what
There are blacklists with partners that are not reliable
Relational separation occurs when buyers and sellers of a given country are strangely linked among
them but have few or no interaction at all with foreign partners
This reflects the fact that in the past there were little interactions with foreign partners
o It may create a reluctance to interact with foreign partners
Relational separation may push out foreign patterns because they do not have access to valuable
information
5) Environmental Separation
Temperature, rainfall, soil, altitude, water availability, mineral resources…
Latitude effects; do they promote or discourage trade? There are 2 contradictory effects:
a. + : Complementarities in Supply side (one has pineapple, other has wheat)
b. - : Demand limitation
6) Developmental Separation
There is a positive correlation between income per capita and other indicators such as education,
health…
a. Richer countries have a stronger legal institution, lower corruption and crime rates
b. Higher levels of income are also associated with higher prices “Penn effect”
The level of development is important for MNE’s because:
c. Poorer countries have a higher chance of civil war, anarchy..
d. Higher chance of corruption higher cost for MNE
e. It is more costly to send expats to developing countries because the MNE will have to
pay higher compensations
f. The higher GDP/capita, the higher the demand for luxury goods; the lower
GDP/capita, the higher the demand for 1st necessity goods
g. One gain is that labour cost Is lower
7) Cultural Separation
Vertical transmission:
a. Traditions, recipes that individuals from one generation inherit from their
ancestors
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