Multinational firms

In this part of the economics course on globalization, in this case a sheet devoted to multinational firms, you will find the correction to the following three questions:

  1. What is a multinational firm?
  2. What are the three degrees of assessing the size of a multinational firm?
  3. Where are multinational firms located?

A. Criteria for Multinational Firms

A multinational firm is an enterprise that has at least one subsidiary abroad and produces outside its home territory with the help of these subsidiaries.

Foreign Direct Investment is one of the vectors of action of multinational firms in their international strategies.

FDI occurs when a company buys at least 10% of the share capital of an existing foreign company or when it creates a production unit abroad that did not exist before.

The multinationalization of firms has resulted in the development of intra-firm trade, which is trading between firms that belong to the same group but are located in different countries.

This trade is the consequence of the international decomposition of productive processes (DIPP).

B. Measuring a multinational firm

The degree of multinationalization

The degree of multinationalization (UNCTAD) is the average of 3 ratios:

  1. Foreign assets/total assets
  2. Foreign sales/total sales
  3. Foreign employment/total employment

For the top 100 multinational firms, the ratio is over 54%.

The degree of internationalization

The degree of internationalization of subsidiaries is the share of foreign subsidiaries in the total subsidiaries of each company (average degree 69% in 2006).

The degree of geographical dispersion

Degree of geographical dispersion of subsidiaries:
—The number of countries in which a company has subsidiaries out of the total number of potential host countries
—The average level: 39 host countries (RD Shell has subsidiaries in 96 countries)

In 2006 there were 78,000 multinational companies and 780,000 foreign subsidiaries. A number multiplied by 2 in 15 years and by 10 in 30 years.

This represents 2/3 of the world trade (MNF) of which 1/3 represents the intra-branch trade.

Multinational firms are strongly present in 7 sectors:

  1. automobile
  2. oil
  3. electrical and electronic equipment
  4. pharmaceuticals
  5. telecom
  6. electricity/gas
  7. water

C. Geographical distribution of multinational firms

They are also particularly present in developed countries: 84% of the top 100. Thus 72% of the top 100 multinational firms come from one of the following 5 countries: the USA, the UK, France, Germany or Japan.

The emergence of multinational firms from developing countries is reflected in the growth of some of these multinational firms: Gazprom, Russia; Hutchison Whampoa Ltd. China, China Mobil.

The various determinants of the international location of firms are related to international competition and the logic of competitiveness.

Competitiveness is the ability of a firm to maintain or increase its market share on the domestic market (internal competitiveness) or on external markets (external competitiveness).

It can take 2 main forms:

  1. Price competitiveness (homogeneous products, differentiation variable: price)
  2. Non-price or product competitiveness (structural), which depends on product characteristics,

In developed economies, the demand for consumer goods is increasingly individualized quality, brand image and product originality are more important than price. Product differentiation has become an important source of competitiveness.

International competition also requires the search for:

  • Low production costs: low salaries, low social charges, low taxation.
  • Adapted technology.
  • Skilled labor.
  • Market access: getting closer to consumers. Bypassing protectionist barriers. Take advantage of agglomeration effects.

Summary of the Economics Course on Globalization:

  • I. Globalization: presentation and phases
  • II. The waves of globalization
  • III. The geography of globalization exchanges
  • IV. Multinational firms
  • V. Protectionism