RESOURCE-SEEKING INVESTMENTS
RESOURCE-SEEKING INVESTMENTS
There is a cartoon showing Santa Claus speaking to his elves. The caption reads, "I'm sorry to report that after the first, I'll be moving operations to Taiwan."21 This cartoon is consistent with the popular image of direct investments motivated by cheap foreign labor used to make imported products. While this does take place, the explanation overlooks some of the costs of producing abroad. For example, Lionel Trains moved from the United States to Mexico but had so many problems with training and communications that it moved back home after a few years. Furthermore, there are cost advantages from direct investment that are not fully encompassed in the popular labor-oriented image.
Vertical integration
Vertical integration involves the control of different stages as a product moves from raw materials through production to its final distribution. As products and their marketing become more complicated, there is a greater need to combine resources located in more than one country. If one country has the iron, a second has the coal, a third has the technology and capital for making steel and steel products, and a fourth has the demand for the steel products, there is a great interdependence among the four and a strong need to establish tight relationships in order to ensure the continuance of the production and marketing flow. One way of adding assurance to this flow is by gaining a voice in the management of one of the foreign operations by investing in it. Most of the world's direct investment in petroleum may be explained by this concept of interdependence. Since much of the petroleum supply is located in countries other than those with a heavy petroleum demand, the oil industry has become integrated vertically on an international basis.
Certain economies also may be gained through vertical integration too. The greater assurance of supply and/or markets may allow a firm to carry smaller inventories and spend less on promotion. It may also permit consid
erably greater flexibility in shifting funds, taxes, and profits from one country to another.
Advantages of vertical integration may accrue to a firm by either market-oriented or supply-oriented investments in other countries. There are examples of both: Of the two, however, there have been more examples in recent years of supply-oriented investments designed to obtain raw materials in other countries than vice versa. This is because of the growing dependence on LDCs for raw materials and the lack of resources by LDC firms to invest substantially abroad. This movement of capital and technology to LDCs is consistent with a theory that holds that factor mobility is most efficient when the more mobile factors, such as capital, move so as to be combined with the less mobile ones, such as natural resources. Without the capital movement the natural resources otherwise might not be exploited efficiently.22
Rationalized Production
Companies increasingly produce different components or different portions of their product line in different parts of the world—rationalized produc tion—to take advantage of the varying costs of labor, capital, and raw ma- terials. An example of rationalized production is the more than 1800 plants in Mexico, known as maquiladoras, which are integrated with operations in
the United States. Semifinished goods can be exported to Mexico duty free, as long as they will be reexported from Mexico. Once the labor-intensive portion of the production is accomplished in Mexico—such as sewing car seats for General Motors or building television cabinets for Panasonic—duties in the United States are charged only on the amount of value added in MexiCO.
lakes place iCO."
• Higher risk of work Many companies shrug off the possibility of rationalized production of
• Recordkeeping Parts because of the risks of work stoppages in many countries because of
strikes or a change in import regulations in just one country. An alternative to parts rationalization is the production of a complete product in a given country, but only part of the product range within that country.24 A U.S. subsidiary in France, for example, may produce only product A, another subsidiary in Brazil only product B, and the home plant in the United States only product C. Each plant sells worldwide so that each can gain scale economies and take advantage of differences in input costs that may affect total production cost differences. Each may get concessions to import because of demonstrating that jobs and incomes are developed locally.
A possible different advantage of this type of rationalization is smoother earnings when exchange rates fluctuate. Take the value of the Japanese yen relative to the U.S. dollar. Honda produces some of its line in Japan, which is then exported to the United States. Honda also produces some of its line in the United States, which is then exported to Japan. If the yen strengthens, Honda may have to cut its profit margin to stay competitive with exports to the United States. But this cut may be offset with a higher profit margin on the exports to Japan.
Access to Production Factors
The concept of seeking abroad some input not easily or inexpensively avail-able in the home country closely resembles vertical integration. Many foreign firms have offices in New York in order to gain better access to what is hap-pening within the U.S. capital market or at least to what is happening within
that market that can affect other worldwide capital occurrences. The search for knowledge may take other forms as well. It may be a U.S. pharmaceutical firm in Peru conducting research not allowed in the United States. It may be C.F.P. (French), which bought a share in Leonard Petroleum to learn U.S. marketing in order to compete better with other U.S. oil firms outside the United States. It may be McGraw-Hill, which has an office in Europe to uncover European technical developments.
The Product Life Cycle Theory
The product life cycle (PLC) theory in relation
to trade and production location.26 This theory shows how, for market and cost reasons, production of many products moves from one country to another as a product moves through its life cycle. During the introductory stage production occurs in only one (usually industrial) country. During the growth stage production moves next to other industrial countries, and the original
producer may decide to invest in the foreign facilities to earn profits there. In the mature stage, when production shifts largely to developing countries, the same firm may decide to control those operations as well.
Governmental Investment Incentives
In addition to placing restrictions on imports, countries frequently encourage direct investment inflows by offering tax concessions or a wide variety of other subsidies. Such incentives are offered by many central governments.
Direct-assistance incentives include tax holidays, accelerated depreciation, low-interest loans, loan guarantees, subsidized energy or transport, and the construction of rail spurs and roads to serve the plant facility.27 These incentives affect the comparative cost of production among countries, enticing companies to invest there to serve national or international markets.
Political Motives
Governments take owner- Sometimes trade is undertaken to serve political motives. During the mercan-
ship in or give incentives tilist period, for example, European powers sought colonies in order to con-
nect investors to troj coionies' foreign trade and extend their own sphere of influence. With
the passing of colonialism, some have sought to accomplish many of the old
Develop spheres of in- colonial aims by establishing company control of vital sectors in the econo-
nue,KC mies of LDCs.28 For instance, if a U.S. firm controls the production of a vital
raw material in an LDC, it can effectively prevent unfriendly countries from
gaining access to the production. It may also be able to hold down prices to the home country, prevent local processing, and dictate its own operating terms. Observers have pointed out, for example, that Great Britain, France, Italy, and Japan established national oil companies with governmental participation (B.P., C.F.P., E.N.I., and J.P.D.C., respectively) in order to lessen their reliance on U.S. multinational petroleum firms, which might give preference to the United States in the allocation of supplies.29 In the process of gaining control of resources, much political control is transferred to the industrial nations.
Governmental encouragement of MNE expansion to other developed countries may be aimed toward gaining greater control over vital resources. Japan, for example, is highly dependent on foreign sources for certain foodstuffs, lumber, and raw materials; therefore, Japanese governmental agencies have assisted national companies that undertake foreign investments in these sectors in order to protect supplies in Japan.30
The control of resources is not necessarily the political aim for encouraging direct investors. During the early 1980s, for example, the U.S. government instituted various incentives designed to increase the profitability of U.S. investment in Caribbean countries unfriendly to Cuba's Castro regime. The reasoning was that the incentives would lure more investment to the area, causing the economies of the friendly nations to strengthen. This would in turn make it difficult for unfriendly leftist governments to gain control.
Where there is governmental ownership and control of companies, not all of these governmental enterprises have become multinational. There are simply too many objectives for government ownership other than control over foreign economies. Even if the governmental enterprise has foreign facilities, it does not necessarily mean that political motives just described prompted the investment." The firm may simply be acting in terms of any of the rational economic motives discussed earlier in the chapter.
There is a cartoon showing Santa Claus speaking to his elves. The caption reads, "I'm sorry to report that after the first, I'll be moving operations to Taiwan."21 This cartoon is consistent with the popular image of direct investments motivated by cheap foreign labor used to make imported products. While this does take place, the explanation overlooks some of the costs of producing abroad. For example, Lionel Trains moved from the United States to Mexico but had so many problems with training and communications that it moved back home after a few years. Furthermore, there are cost advantages from direct investment that are not fully encompassed in the popular labor-oriented image.
Vertical integration
Vertical integration involves the control of different stages as a product moves from raw materials through production to its final distribution. As products and their marketing become more complicated, there is a greater need to combine resources located in more than one country. If one country has the iron, a second has the coal, a third has the technology and capital for making steel and steel products, and a fourth has the demand for the steel products, there is a great interdependence among the four and a strong need to establish tight relationships in order to ensure the continuance of the production and marketing flow. One way of adding assurance to this flow is by gaining a voice in the management of one of the foreign operations by investing in it. Most of the world's direct investment in petroleum may be explained by this concept of interdependence. Since much of the petroleum supply is located in countries other than those with a heavy petroleum demand, the oil industry has become integrated vertically on an international basis.
Certain economies also may be gained through vertical integration too. The greater assurance of supply and/or markets may allow a firm to carry smaller inventories and spend less on promotion. It may also permit consid
erably greater flexibility in shifting funds, taxes, and profits from one country to another.
Advantages of vertical integration may accrue to a firm by either market-oriented or supply-oriented investments in other countries. There are examples of both: Of the two, however, there have been more examples in recent years of supply-oriented investments designed to obtain raw materials in other countries than vice versa. This is because of the growing dependence on LDCs for raw materials and the lack of resources by LDC firms to invest substantially abroad. This movement of capital and technology to LDCs is consistent with a theory that holds that factor mobility is most efficient when the more mobile factors, such as capital, move so as to be combined with the less mobile ones, such as natural resources. Without the capital movement the natural resources otherwise might not be exploited efficiently.22
Rationalized Production
Companies increasingly produce different components or different portions of their product line in different parts of the world—rationalized produc tion—to take advantage of the varying costs of labor, capital, and raw ma- terials. An example of rationalized production is the more than 1800 plants in Mexico, known as maquiladoras, which are integrated with operations in
the United States. Semifinished goods can be exported to Mexico duty free, as long as they will be reexported from Mexico. Once the labor-intensive portion of the production is accomplished in Mexico—such as sewing car seats for General Motors or building television cabinets for Panasonic—duties in the United States are charged only on the amount of value added in MexiCO.
lakes place iCO."
• Higher risk of work Many companies shrug off the possibility of rationalized production of
• Recordkeeping Parts because of the risks of work stoppages in many countries because of
strikes or a change in import regulations in just one country. An alternative to parts rationalization is the production of a complete product in a given country, but only part of the product range within that country.24 A U.S. subsidiary in France, for example, may produce only product A, another subsidiary in Brazil only product B, and the home plant in the United States only product C. Each plant sells worldwide so that each can gain scale economies and take advantage of differences in input costs that may affect total production cost differences. Each may get concessions to import because of demonstrating that jobs and incomes are developed locally.
A possible different advantage of this type of rationalization is smoother earnings when exchange rates fluctuate. Take the value of the Japanese yen relative to the U.S. dollar. Honda produces some of its line in Japan, which is then exported to the United States. Honda also produces some of its line in the United States, which is then exported to Japan. If the yen strengthens, Honda may have to cut its profit margin to stay competitive with exports to the United States. But this cut may be offset with a higher profit margin on the exports to Japan.
Access to Production Factors
The concept of seeking abroad some input not easily or inexpensively avail-able in the home country closely resembles vertical integration. Many foreign firms have offices in New York in order to gain better access to what is hap-pening within the U.S. capital market or at least to what is happening within
that market that can affect other worldwide capital occurrences. The search for knowledge may take other forms as well. It may be a U.S. pharmaceutical firm in Peru conducting research not allowed in the United States. It may be C.F.P. (French), which bought a share in Leonard Petroleum to learn U.S. marketing in order to compete better with other U.S. oil firms outside the United States. It may be McGraw-Hill, which has an office in Europe to uncover European technical developments.
The Product Life Cycle Theory
The product life cycle (PLC) theory in relation
to trade and production location.26 This theory shows how, for market and cost reasons, production of many products moves from one country to another as a product moves through its life cycle. During the introductory stage production occurs in only one (usually industrial) country. During the growth stage production moves next to other industrial countries, and the original
producer may decide to invest in the foreign facilities to earn profits there. In the mature stage, when production shifts largely to developing countries, the same firm may decide to control those operations as well.
Governmental Investment Incentives
In addition to placing restrictions on imports, countries frequently encourage direct investment inflows by offering tax concessions or a wide variety of other subsidies. Such incentives are offered by many central governments.
Direct-assistance incentives include tax holidays, accelerated depreciation, low-interest loans, loan guarantees, subsidized energy or transport, and the construction of rail spurs and roads to serve the plant facility.27 These incentives affect the comparative cost of production among countries, enticing companies to invest there to serve national or international markets.
Political Motives
Governments take owner- Sometimes trade is undertaken to serve political motives. During the mercan-
ship in or give incentives tilist period, for example, European powers sought colonies in order to con-
nect investors to troj coionies' foreign trade and extend their own sphere of influence. With
the passing of colonialism, some have sought to accomplish many of the old
Develop spheres of in- colonial aims by establishing company control of vital sectors in the econo-
nue,KC mies of LDCs.28 For instance, if a U.S. firm controls the production of a vital
raw material in an LDC, it can effectively prevent unfriendly countries from
gaining access to the production. It may also be able to hold down prices to the home country, prevent local processing, and dictate its own operating terms. Observers have pointed out, for example, that Great Britain, France, Italy, and Japan established national oil companies with governmental participation (B.P., C.F.P., E.N.I., and J.P.D.C., respectively) in order to lessen their reliance on U.S. multinational petroleum firms, which might give preference to the United States in the allocation of supplies.29 In the process of gaining control of resources, much political control is transferred to the industrial nations.
Governmental encouragement of MNE expansion to other developed countries may be aimed toward gaining greater control over vital resources. Japan, for example, is highly dependent on foreign sources for certain foodstuffs, lumber, and raw materials; therefore, Japanese governmental agencies have assisted national companies that undertake foreign investments in these sectors in order to protect supplies in Japan.30
The control of resources is not necessarily the political aim for encouraging direct investors. During the early 1980s, for example, the U.S. government instituted various incentives designed to increase the profitability of U.S. investment in Caribbean countries unfriendly to Cuba's Castro regime. The reasoning was that the incentives would lure more investment to the area, causing the economies of the friendly nations to strengthen. This would in turn make it difficult for unfriendly leftist governments to gain control.
Where there is governmental ownership and control of companies, not all of these governmental enterprises have become multinational. There are simply too many objectives for government ownership other than control over foreign economies. Even if the governmental enterprise has foreign facilities, it does not necessarily mean that political motives just described prompted the investment." The firm may simply be acting in terms of any of the rational economic motives discussed earlier in the chapter.
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