EC 5/442: ECONOMICS OF MULTINATIONAL ENTERPRISE (MWF: , NH 462)

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1 PORTLAND STATE UNIVERSITY FALL TERM 2015 EC 5/442: ECONOMICS OF MULTINATIONAL ENTERPRISE (MWF: , NH 462) This course focuses on multinational enterprises (MNEs; also known as transnational corporations, or TNCs; or by some similar name). They are distinguished from non- MNEs by the fact that they engage in production in more than one country. Although this productive activity can range from manufacturing to services such as banking, the crucial feature is that a substantial proportion of the labor force employed, and the facilities in and with which they work, are located i.e. resident - in one or more foreign countries. The home country, often identified as the MNEs headquarters, is distinguished primarily by where it pays tax on its income (although this can sometimes by legally difficult to identify). This is in contrast to non-mnes, whose method of operation is to ship goods that have been made to, and/or perform services for, foreign customers and clients with the work being done in the home country. In fact, it is typically the case that MNEs have evolved from this earlier stage of international business. Generally, we think of MNEs as being the result of foreign direct investment (FDI) by companies that were originally non-mnes. This means that the company makes in effect a greenfield investment, starting from scratch and constructing a duplicate or at least very similar operation, including employees, buildings, factories and capital equipment - abroad. However, alternatives exist such as mergers with or acquisitions of pre-existing foreign companies ( indirect foreign investment); or licensing arrangements with foreign partners who may or may not be previously operating in the foreign country (Often involving so-called technology transfer ). These are quite common and require a different framework of analysis than the standard FDI model. We can also classify MNEs into two types: those whose principal aim is to cater to the foreign market (so-called horizontal foreign investment); and those whose principal aim is to establish production of one or more stages of a total production process in a foreign country with little or no regard to that country s own market, but rather on the home country s market. This is called vertical foreign investment, or alternatively, vertical disintegration, or outsourcing, and as might be expected, it is cost-oriented as opposed to the revenue orientation of horizontal FDI.

2 Although particular examples have existed in some cases for centuries, MNEs began to appear more widely in the late-19 th century, and have experienced rapid expansion in the late 20 th into the early 21 st centuries, becoming a dominant form of modern business activity. We will look at this phenomenon in terms of trying to answer the following questions: 1) As opposed to simply engaging in increased trade, what are the principal factors that cause a business to become an MNE (i.e., setting up production facilities/premises in a foreign country)? a) What determines the form that this expansion takes; i.e. FDI or some other strategy? b) How does this decision differ if we are looking at a horizontal FDI in which production is basically duplicated in each country, as compared to vertical FDI in which different stages of production occur in different countries? 2) What effects do MNEs have on the economies of the host countries in which they operate? 3) What effects do MNEs have on their home countries where they are based? and 4) What implications do the foregoing have for policy at both national and international levels? In answering these questions, we will need to review two specific areas of economic theory (apart from a basic understanding of micro- and macro-economics): modern trade theory, which can give us a basis for comparison with the default option of remaining a non- MNE domestic company; and models of imperfect, or oligopolistic competition, which is the typical structure of MNE markets, as opposed to the extremes of pure monopoly or perfect competition. In addition, we will need to introduce two quintessential aspects of MNE operations: (1) a survey of basic elements of international finance (e.g., spot and future exchange rates, options, and swaps) - which is often simply called multinational finance because of their dominant involvement - and (2) the analysis of risk and diversification, presented within a present-value analytical framework.

3 The main reading source for this course, especially in developing our basic models of horizontal and vertical FDI (HFDI and VFDI), will be selected readings from Navaretti and Venables (N&V), Multinational Firms in the World Economy (2004, now out of print). In addition, there will be selected readings from one or more texts on international trade and finance, and possibly other sources as well. Rather than a textbook, we will rely upon handouts to cover this otherwise massive and wide-ranging material. Apart from midterm and final exams (see below) each student is required to produce a research paper on a selected relevant topic by the end of the term. Almost all students choose a particular MNE for this (you can Google a list of the 500 largest MNEs in the world), but a comparison of MNE s in a specific sector, or MNEs based in a particular country, are usually OK as well. Whichever you choose, I will pass around a topics sheet early in the term, and a finalized sheet no later than the middle of the term so that I can see if there are duplicated topics not necessarily a problem or any remaining issues to clarify. In the last two-to-three weeks of the term I will be designating students with interesting topics to do minute presentations on their topic (that typically means no more than three per session often only two over six sessions, with the very last class meeting being a summary discussion and review.) Your research does not need to be completed by this point, merely advanced enough to highlight and talk about some aspects of the topic. The finished paper will be due by the last day of exam week, and will count for one-third of your grade. On average, I would expect at least 5 or 6 double-spaced printed pages excluding tables, graphs or diagrams (7 or 8 for graduate students). It should be fairly easy to get the basics: where are the MNE s headquarters, what does it do, where does it have its foreign operations, what are its sales, profits, and employment? More complex, but of crucial interest is to try to trace the history of the company it might have changed names for example and when did it multinationalize; and why is it an MNE, what companies are its main competitors, and how has it affected the places where it operates? As for class topics: Week/dates: topic(s) 1: 9/28-10/2 Course introduction; review of basic trade theory 2: 10/5-10 Modern trade theory and implications (NO CLASS ON FRI, 10/9)

4 3: 10/12-16 Perfect competition in comparison to forms of imperfect competition: developing a basic model of horizontal multinationalization (HFDI) 4: 10/19-23 Conclusions of the HFDI model; developing a basic model of vertical multinationalization (VFDI, or outsourcing ) 5: 10/26-30 The VFDI model continued: conclusions of the VFDI model as compared to the HFDI model; Complicating issues of international taxation and subsidization: a growing problem of harmonization and global trade relations. (TAKE-HOME MIDTERM GIVEN OUT, FRI OCT 30, DUE ON FRI NOV 13) 6: 11/2-6 Multinational financial operations: introduction to spot and forward exchange rates; options; swaps 7: 11/9-13 NO CLASSES ON NOV 9 (take-home exam) AND NOV 11 (VETERANS DAY); treatment of multinationalization in terms of present value (PV) and risk evaluation. 8: 11/16-20 Effects of MNEs on host and home countries; presentations 9: 11/23-27 Presentations; (NO CLASSES ON NOV 25 and NOV 27) 10: 11/30-12/4 Presentations; summarization and HANDOUT OF FINAL EXAM 11: 12/7-11 EXAM WEEK: FINAL EXAM AND PAPER DUE THUR DEC 10 (1130) All assessments - midterm exam, final exam, and research paper will each count for 1/3 of the overall grade. Dr. Charles Grant, CH 241S, MWF or by arrangement (503-72) grantc@pdx.edu

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