[MUSIC] This is our course on global strategy and therefore our main protagonist is the multinational corporation. Now we know that not all firms have to become multinationals to succeed in the business world. And in the same token not all multinational corporations are successful firms. In fact, the great majority of firms that engage in global operations do not succeed. So, what we're going to do here is to provide a framework, a very basic framework to understand how to determine whether it make sense for a firm to become a multinational corporation or not. [MUSIC] The type of operation that we focus in this course Is following direct investment we differentiate foreign direct investment from portfolio investment. Portfolio investment is the kind of operation in which you invest in firms operating globally by buying stocks or buying bonds of them. Now this is the kind of thing that you can do very indirectly from your computer and you don't really need to go to another country to conduct this investment. You can buy a firm, you can buy stock in a firm that is invest in, let's say, and get rid of that stock two minutes later. So this is not the type of foreign investment that we focus in this course, we focus on what is known as foreign direct investment. Which is the type of investment in which you invest in a facility outside of your country. Either let's say a factory or a store or something else, and you have a partial or complete ownership of these facilities. So this requires going to the other country and actually engage in operations in that other country. For indirect investment can take two forms. It can be conducted in two ways. The first one is what is known as Greenfield Investments. Add the second one is Mergers and Acquisitions. Greenfield investment is when a firm goes abroad Into another country and builds everything from scratch. Let's say you're going to build a factory and you own the factory and you do everything from building the building and putting all the machinery etc or building the store or whatever you are investing in. And mergers and acquisitions is when a firm invests abroad by buying out somebody who was already operating in that country. The most dominant way of conducting foreign investment in the last couple of decades has been mergers and acquisitions. And the reason of this is the following one. Basically, mergers and acquisitions are faster than Greenfeild investments. There's somebody else already there that knows the market, that has gone through the process of trial and error. Of improving their operations over there and let's say they might have all the connections, not only with suppliers and consumers, but also with political authorities, or regulatory authorities. Greenfield Investments, on the other hand, don't have disadvantages, but they have certain advantages. Anyway, when you conduct a Greenfield investment, you have complete control of the whole operation. And you don't need adaptations. Let's remember cases like DaimlerChrysler, mergers and acquisitions are not easy. I mean you are merging with some other firm with a tradition with with baggage, with different culture that sometimes you cannot integrate into your own firm. And this is something that a firm would avoid through Greenfield Investment. On the other hand a firm interested in a Greenfield Investment might be trying to protect certain secrets or patents or copyrights that they don't want to share with a partner that maybe they don't know very well, or do not trust that much. And something that happens very often is that, well, a firm merges with another firm under the promise that the target firm had a load of qualities that they did actually not have. Actually, some people have compared mergers and acquisitions and the problems or benefits with even with marriages. I mean, sometimes you don't know who you're getting into with and you get to a crisis afterwards. You get knowledge that you get an image in the beginning that is actually not accurate to the image of the actual partnership. Sometimes the partnership does not work in many ways and one partner wants to dominate the other one and these in the long term might face problems. Any way regardless of the advantages or disadvantages of mergers and acquisitions over Greenfield or the other way around. Something that we have to take into consideration is that mergers and acquisitions have dominated in the last decades. But that does not mean, necessarily, that is the best way to operate or to engage into foreign direct investment. It depends on whether there's something that you need to have control over or whether there's a suitable partner to merge or acquire. So it depends on whether there is a suitable partner to merge or acquire or whether there are some secrets or the firm wants to keep certain control over its operations and wants to go just alone. [MUSIC] Before we go to the framework that will help us to determine whether it's a good idea to become a multi-national corporation or not let's remind ourselves the concept of the value chain. We have what is known as global value chains. A global value chain is one in which the different segments of the production process are located in different parts of the world. So let's say, a company conducts its research and development In one country, then produces the product in a second country. And that second country buys the components from a third country, then the assembly process can be done in a fourth country. And the customers can be in a fifth or sixth country. So the global economy created after the 1990s and 2000s and particularly the lowering of tariffs. Occurring all over the world during that period permitted the creation of these global value chains. Which has been exploited by major firms in the world, and explains why so many Western firms outsourced production to other places of the world. Particularly in Asia but we also need to take in account that Asian corporations are also investing in having some parts of their valued chains located in Western countries. Now given these segments of the value chain, we need to take into account two types of foreign direct investment that are related to the concept of the value chain. Some firms can expand globally through vertical integration meaning taking control of the different segments of the value chain. Particularly if these different segments are located in different countries. So this is the kind of thing that we see in firms such as in the oil industry where some firms can have investments where raw materials are and also investment where the production of refining is. And other firms can conduct foreign direct investment in what is known as horizontal investment, horizontal integration. This one is the one in which a firm expands around the world in focusing on just one segment of the value chain. One good example of this is the American firm Walmart. They expand abroad by conducting exactly the same thing. There in the value chain they're located in the marketing and sales segment of the value chain. Walmart does not make anything. They do not research on anything of what they buy, what they sell. They basically buy from different providers, and sell them to their customers. But they expand internationally, by opening more of their mega-stores in different places. And this, basically, does not require any process of vertical integration. As we will see later there are certain reasons why some firms might prefer to integrate vertically globally, while for others this does not make any sense. Another example of horizontal integration global, at the global level could be a firm like Starbucks. They have specialized in opening coffeehouses through franchises all over the world and basically this means, again, staying in the same segment of the same value chain. So the expansion does not mean, let's say, opening plantations of coffee in other places of the world. Now that we have the concept of the value chain, the global value chain, vertical integration, and horizontal integration. We can go to our framework on how to determine whether it makes sense for our firm to become a multi national corporation or not. The framework that we are going to use is a so called oli framework, that stands for ownership, location, and internalization advantages. This framework was developed by British Professor John Dunning, who taught at the University of Redding in the United Kingdom for a long time. And was one of the founding fathers of the field of international business. In the next videos, we will explore these elements of this framework. The ownership, location and internalization advantages. And hopefully we will understand how to determine the advantages of becoming a multi-national corporation or not. [MUSIC]
