LECTURE 2: VIDEOPILLS

VIDEO PILL 1: POLICIES TO ATTRACT FOREIGN INVESTMENT

They can be divided into 3 areas of intervention traditionally set up by governments.

- nancial incentives: traditional tools which government can give to companies to attract them
into a territory.

- scal incentives: they are related to tax credits, lower tax rates and grants

Nowadays state aids are prohibited due to competition issues and distortion to competition.

These incentives are becoming ever less revenant for attracting multinational companies.

Nowadays government uses to attract foreign investment is more than REGULATORY

ENVIRONMENT.

- regulatory environment: good infrastructure, stability of the rule of law, stability of labor law,
stability of tax law, good contract enforcement. In the case of Italy, legal instability is preventing
somehow the attraction of foreign investment even if human capital is quite interesting for
multinational companies

VIDEO PILL 2: INTERNATIONAL TRADE

Both European Union and USA are amounting a sentiment of dissatisfaction with globalization.
It is also re ected in the electoral outcome: the results in the Brexit referendum and in the election
of Donald Trump in the election of the president of USA are the two main manifestations of this
trend.

Reasons:
- economic point of view: globalization increases integration of the economie of di erent
countries so thanks to international trade, goods and services can ow more easily across
borders and the same happens for capital and workers = factor of production

Implication of international trade:

1. Consumers: more variety and normally the price-quality ratio improves

2. Companies and workexrs: globalization implies both opportunities and threats. Opportunities
are related to international trade, growth of business opportunities thanks to the global
market. Threats are related to the increasing competitive pressure. For some companies the
opportunities are more than the threats and viceversa. The result is that many workers have
lost their jobs and they have been facing long reduction in their income. Overall there is the
need to a SUSTAINABLE MODEL OF GLOBALIZATION and not really a return to
protectionism

VIDEO PILL 3: PRIVATIZATION

One feature of the 1980s and 1990s has been a worldwide process of privatization of the formers
state-owned enterprises and a LIBERALIZATION of industries.

Privatization means the partial or total sell out of a company previously under the control of
Government to private investors. This process has been present in:

- the western countries

- former communist countries

- other areas for example India and China

According to the data available, revenue from privatizations undertaken during the last three
decades totalize more than 50 trillion of dollars.
The impact:
One may argue that has been basically neutral, but in reality things went quite di erently. There
are at least 3 areas in which the process of privatization has impacted on international business.

1. Multinationals have been active buses of privatized companies. Sometimes this makes even
more problematic a process which is already controversial, for instance when a former state
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 owned company in an industry perceived as strategic or worse in natural monopoly is sold to
foreigners. For instance this happened in the case of water providers in India or Green which
have been sold to the French.

2. The process of privatization has normally coincided with the liberalization of formerly regulated
industries which has allowed for an investors to enter markets before characterized by
monopolistic situations under the control of the state. The most evident case in the
telecommunication market

3. Outward investments: in some cases companies have not been fully privatized in reality. The
state has in reality kept a control stake in the company together with private investors==>
mixed ownership. These partially State Owned enterprises normally coincide with former
national champions, frequently pure monopolists in protected industries.

While deliberalization process abolished the monopolist position on a domestic base, giant
companies stille under the partial control of the State, called LEVIATHANS, have started a process
of international expansion through direct foreign investments. In some countries, as for instance
China, State owned enterprises have been the drivers of international expansion. Of course, these
dynamics are making the whole issue very much complicated. A company under the control of a
Government is clearly a peculiar phenomenon. A company controlled by the State, which makes
investment abroad, is even more peculiar.

State owned multinationals can play a key role when investing abroad,, within that country, while
still caring about home interests. Of course, seen from the point of view of the host country,
foreign state owned multinational can be also a serious threat. At the end of the day they can be
seen as agents of foreign government buying out relevant portions of the domestic economy.

VIDEO PILL 4: RESHORING

At the end of July 2020 the nancial times published an article in which Macron stressed the
necessity of bringing back to Europe the production of a drug that was extremely demanded
during the Covid crisis that is paracetamol. During the last years was increasingly produced out of
Europe where the cost factor were more competitive.

Reshoring can be de ned as the process of bringing back activities for instance
manufacturing from a country where the activity was previously relocated to the country in
which the company who relocated the production abroad has its seat.
Intuitively the opposite is O shoring: during the last 20 years many european and US companies
relocated their production to di erent countries outside Europe and US basically in China or in
other southeast asian countries mainly, even though not only.

Reshoring and O shoring are in some way linked to outsourcing or insourcing but it is not exactly
the same time. Indeed outsourcing and insourcing indicate when a company for some reasons,
let’s say cost, e ciency ecc., allocates a section of the production process outside the walls of
the company. Insourcing is the contrary, back into the house. Example of outsourcing: automotive
industries in which portions of the vehicles are outsourced to subcontractors.

O shoring and restoring on the other side are outsourcing and insourcing processes with an
emphasis on the geogra ca dimension, and long distances.. They involve international
investments.

With o shoring a company has a clear strategy: locating portion of the production process to a
di erent place generally in a quite distant country.

With reshoring the strategy completely changes: the company decides to bring back the domestic
country or very close to it this production that previously was located in a completely distant area
of production. 

Sometime companies company may decide to reshore not exactly in the country of residence but

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in the country near to the home country: NEARSHORING. This is an important trend in the recent
period.

In the last years restoring is becoming a more and more common practice mainly in the
automotive and transport equipment, in computer and electronics product and chemicals.

US companies mainly withdraw from country as China, Mexico and Japan.

WHY COMPANIES PASS FROM OFFSHORING TO RESHORING:

Of course this happens because some of the conditions that made o shoring convenient are no
longer sustainable or convenient or something new happened in the country of origin. For
instance in a survey prepared basing on interviews of executive there are many reasons or
rankings of motivations among which are very much mentioned:

- the issues of quality control.

- transportation costs + pollution and carbon emission relevant now but not in the past

- presence of geopolitical risk or political risk in general. Example: Taiwan was until recently a
very good location to product semiconductors, a very close ally to USA but now due to the
pressure China is putting on Taiwan the geopolitical risk increased.

- Protecting intellectual property

Conditions can change also in the country of origin of the company that once decided to o shore
production. For instance the most common situation is the presence of incentive that the
government decides to put in order to increase the opportunity for local companies to produce
companies and providing jobs in the domestic economies.

Time to market is very reduced because you go back everything in your country, this is relevant
when you face a uctuation in the internal demand in terms of what the market wants from the
company. You have also to think of the presence of more or less skilled workers.

REASON OF POPULARITY OF RESHORING:

1. Global disruption of the global value chains. If a value chain doesn’t work the incentive to
bring home what is at the moment outside is increasing.

2. Reshoring is a very important political issues for governments

VIDEO PILL 5: LOBBYING

The expression nds its historical roots in the gathering of the member of English Parliament
before parliamentary debates.

Lobbying is the act of attempting to in uence the actions, policies, or even decisions of
parliament members, government o ces and regulatory agency members. Lobbying is a form of
advocacy with the intention of in uencing the decisions of policy makers.

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 ACTORS:
There is no clear answer, as lobbying can be done by many actors such as:

- associations

- advocacy groups

- individuals

ETHICS AND MORALITY OF LOBBYING:

On the one hand lobbying is often spoken about with contempt as if people are trying to corrupt
the law for their own interests. On the other hand lobbying also means making sure that others’
interest are defended and represents before public institutions.

REGULATIONS FOR PROTECTING LOBBYING:

Generally speaking government often consider lobbying regulations aimed at preventing political
corruption and enhancing transparency. We can point out two major models in trying to sum up:

1. THE NORTH AMERICAN ONE: lobbying is considered part of the free speech and it is
protected under the rst amendment of the constitution. Lobbying is seen as an opportunity to
enhance transparency in the decision-making processes

2. THE EUROPEAN ONE: lobbying is often not regulates such as Italy, Spain, Uk, or is regulated
by very weak provision such as in France or Germany. Moreover there are no speci c
constitutional provisions that protect lobbying. Is more a suspicious activity.

VIDEO PILL 6: GLOBAL VALUE CHAIN

Emerging markets: the term was introduced at the end of the 90s, it captures that period of time,
the one of the second global economy. The emerging markets are all of the countries that
basically started to industrialize quite late so after the 98 and generally for this reason they have
low/ middle income and they have hard time in getting out the middle income status. The
de nition included the majority of African countries, Latin America country, Middle East, North
Africa and Asian countries excluding Japan and the so called Tigers ( Singapore, Hong Kong,
South Korea and Taiwan)

What are the main features? They are generally characterized by:

- higher poverty rate and lower incomes

- larger younger population and higher birth rate, the majority is younger than in advanced
economy and this is an advantage because this means that they have higher employable
workforce.

- they are characterized by institutional voids: they are basically the presence of weaker or non
existence of institution. Speci cally there is the presence of weaker intermediaries ( insitituons
that facilitate economic activities and investment: justice system, nancial institutions like
banks and stock exchange and nancial regulatory institutions like the Consob)

- large informal sectors, less transparency

- most of the times they lack physical infrastructure that is important for the economic activities
of the existent infrastructures are located in few locations.

What was these economies doing before emerging? these economies actually have a long
history with relationship with the west economies. They actually were already economic partners
with western economies: the US and Western Europe because they were colonial territories. Since
the 19th century these economies have operated as suppliers of raw materials for industrialized
economies. They were subordinated to industrial economies but integrated in the global
economy: they were part of global production system but they were mostly supplying raw
materials and therefore there was not introduction of technology in their economies. That was not
that much knowledge in order to be competitive in an international contest.

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 By suppling raw material they were integrated in the GLOBAL VALUE CHAINS: global production
network.

Example: natural rubber is a raw material that was vastly used to produce tiers before the
introduction of synthetic rubber and rubber comes from a tree in Brasil. At the end of 19 century
the British were able to create a plantation economy in south east asia to produce rubber and
then rubber form there was transported and manufactured in the US and Uk, generally Europe.
This was one of the rst global value chain.

How did these markets emerge?

These countries were mostly colonial territories and after second world war most of the
developing countries started a process of decolonization and independence. A lot of these closed
their economies, they decide to protect their market and try to develop their own local industries
and industrialize autonomously, reducing trade relationship with the west. They felt that both for
the political and the economical system it was no longer pro table to maintain these relationships.
Most of them remained quite poor. In the 80s we have a shift in the global economic equilibrium
and most of these countries starting with China decided to open up their economy and basically
welcome foreign investment. The relationship didn’t change that much but formally it changed in
the sense that these countries decided to welcome foreign investors. The deal was that for the
western companies they can employ labor in a cheaper way and at the same time they can have
access to the local market, not only in the west. For the local economy this is an advantage
because rst of all people get jobs and the employment rate increase. Moreover the western
companies were able to instruct the people==> knowledge transfer and potentially a technology
transfer. Moreover part of the deal could be that the company invest in physical infrastructure.
( Unilever in Malesia). This is a sort of win-win situation. Before these country were subordinated
politically and economically, this time they are still subordinated economically in the sense that of
course the knowledge comes from outside and also people somehow employed because it’s
cheaper, but on the other hand we see these countries moving a little bit up in the value chain. It
means that before they were just exporting raw materials, this time they were able to export a little
bit higher value added product which could be the soap for example. It makes sense both for the
multinational and to the local economy to cooperate in order to introduce gradually
industrialization in the country. In this way countries from the emerging economy get integrated
into the global economy again and again they get integrated through global value chains which
this time are much more complex and di erent countries contribute di erently to the production
process of one selected product.

To be more clear, let’s de ne a GLOBAL VALUE CHAIN. A global value chain is based on the idea
that one product can be produced sourcing in di erent countries according to their competitive
advantage. Competitive advantage means that each country nds more pro table and more
e cient to specialize in one part of the production process and then the good shifts through
geography and every part of the production process is optimized across geography. The
maximum expression of this system is the IPHONE. In a global economico system that is open
and there’s no or little trade barriers, is probably more pro table or more convenient for countries
to specialize in one part of the production process and just import and export the product and
adding value through each step. In the case of the Iphone for example we will have high
technology and high knowledge parts of the value chain produced in the West, in the US so the
design of the product, the marketing, the planning happen in the US. But then the manufacturing :
the raw materials, the assembling, all happen in di erent geogra ca. FoxComm in China is one of
the main subsidiaries of Apple and so a lot of parts get produced in China and then they get
assembled in Taiwan and the product get shipped all over the world.

Of course the problem with the value chain is that countries tend to specialize at a certain level of
knowledge and technology and it is very di cult for them to get out and so it is really di cult for

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 them to upgrade they system. The result is that they remain stuck in their level of income. That’s
why emerging countries remain stuck in the middle income level.

What are the problems and advantages of global value chain?

ADVANTAGES:

The advantages are in an open system that doesn’t have many trade barriers. This allows
multinationals to optimize costs across geography. Of course this creates a system in which
multinationals become very powerful and it’s very di cult for other countries to become local
champions because this system allows multinationals from abroad to have a predominant
position as market leaders. This is an advantage for the foreign company but also a disadvantage
for the local economy. The value chain system is an advantage for the local economy because it
allows the local countries to industrialize fast but this industrialization is limited.

DISADVANTAGE: Particularly it is geographically limited because most of this industrialization

happens in a very geographically unequal way: it tends to concentrate in speci c regions where
the physical and economic infrastructure is. A large portion of the country remains rural or under
developed. This happens especially in large countries like China where the costal area is very
industrialized but there are large portions of the country that are lag behind in terms of
infrastructure and income level. This creates a great level of inequality and this level of inequality
are very di cult to bridge: the more time passes the more this inequality deepens.

The second disadvantage is that is di cult to upgrade. They welcome investments because they
want to absorb knowledge and absorb technology and use this to create their own industries but
this is hardly happening because technology transfer is very di cult and especially in these
countries that are manufacturing in a labor intensive way there is not that much to absorb after
learning the basis. This doesn’t allow them to upgrade and be able to industrialize further and
grow further. This is not a general rule, the big economies like China and India had strong
institutions and governments and they were able to protect their local market and they were able
to reverse engineer along the processes and so for example in China the foreign investment of
automotive industry always happens through joint ventures and this allowed local partners to
reverse engineer, so learning and creating its own automotive industry. This is really di cult for
smaller countries without strong institutions and because the local market is not that big. In a
large territory the market is very complex so it is di cult for multinationals to become dominant
and only local actors are able to navigate e ectively.

VIDEO PILL 7: ORGANIZATION

Some companies have developed strategic posture in organizational capability that can allow
them to be very sensitive and responsive to di erences in national environments. In contrast other
companies have developed international operations driven by the need for global e ciency are
much more centralized in strategic and operation decisions. Barlett in an article observes some
very di erent organization models:

1. Multinational organizational model:

• it can be described as a decentralized federation

• decentralized and nationally self su ciency

• decisions decentralized, informal HQ-subsidiary relationship

• sensing and exploring local opportunities and strategies

2. International organizational model

• it can be described as a coordinated federation

• overseas operations seems as dependent on a central domestico corporation

• formal management and control system allow a tighter HQ-subsidiary linkage

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 3. Global organizational model

• it can be described as a centralized hub

• overaseas operations treated as delivery pipeline to a uni ed global market

• role of subsidiaries limited to sales and service

• tight central control of decisions, resources and information

4. Transnational organizational model

• it can be described as a network con guration

• network con guration

• assets and capabilities are dispersed, interdependent and specialized

• di erentiated contribution by national units to integrated worldwide operations

VIDEO PILL 8: TRANSACTION COSTS

The concept of transaction costs has been worth two nobel prices in economics:

- 1991 by Ronal Coase

- 2009 by Oliver Williamson

They explain why some economic transactions take plane within the boundaries or managed
across rms in the market place.

A transaction occurs when a good or service is transferred across a technologically separable

interface.

It can be governed:

- hierarchy, uni eld organizations

- hybrid, contractual relationships+

Transaction costs economy gives us the theoretical tools to decide which governance mode is the
most e ective and e cient. From a practical point of view it helps us in deciding whether we ave
to make something or buy.

We are all familiar with the idea of production costs. They are the cost one has to sustain in order
to make things. The include raw material, labor and manufacturing.

You have to search for potential suppliers and then selecting the one that is appropriate for you.
Then you have to negotiate a contract and write it. Finally you have to enforce the contract and
monitoring suppliers’ performance. These costs are the transaction cost.

Transaction costs determinants categories:

1. environmental

2. behavioral

The rst determinant is UNCERTAINTY, this is an environmental factor combined with

a human characteristics named BOUNDEN RATIONALITY ( second determinant).
Moreover SMALL NUMBER OF SUPPLIERS imply the risk of remaining stuck with a
particular supplier. This market factor would not be a big problem if everybody s
trustworthy and honest. Is more prudent to think that OPPORTUNISM is a
characteristic in people’s behavior.

The choice between market and contracts and internalization of transactions

( hierarchy) depends on the presence or not of these determinants.

VIDEO PILL 9.1 : MARKET ADAPATION : No matter the product or services companies
frequently nd that new national markets require some adaptations. Today adaption by
multinational can be seen in every eld. Disney’s movie Moana or McDonald’s menu

VIDEO PILL 9.2: MARKET ADAPATION

Management theories say that multinationals go abroad to carry knowledge and intangible and
that they cannot just export products.

How to manage this intangible?

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 - Replication: the idea emerges from the experience of Intel. Intel found that in one plant the
learning curve was moving up and its yield reached the highest point possible. The number of
semiconductor produced reached the highest point possible. When they created a new factory
in another country they planned to adapt elements to the new system but they found that their
performance fell and they had to move up to the learning curve once again. As solution they
REPLICATED every detail of the plant into the new location. The important takeaway is that
anticipatory adaption is not always the best solutions. An other example comes from
Honda: in their home country they were selling small, well-engineered motorcycles but when
they opened up to the USA they tried to anticipate the American trend “ all things large”: This
happened to be quite a di cult and unsuccessful strategy. Meanwhile they were driving in Los
Angeles with their small motorcycle and people stopped them asking: where can i buy this?
==> replication again.

Market adaption should be constant tension between:

a) maximizing advantages in a global scale and in terms of intangible knowledge assets

b) reducing the costs though local markets responsiveness

VIDEO PILL 9.3: MARKET ADAPATION

Some multinationals replicate their core business model in the world and choose to maximize
their traditional advantages. On the other hand there are some local realities that multinationals
actually can’t ignore. The costs and bene ts depend on variety of factors, most importantly
industry setting. For more embedded service industries such as hotels or banking it its
fundamental to be responsive to local demand. On the other hand for more high value and
technology driven industries such as automotive or jet engine it is better to have a standardized
global strategy. Since the trade o s are di cult to manage, companies tend to choose di erent
points in a space of responsiveness in di erent markets.

For example Philips built its multinational network at the time when local responsiveness was
essential. On the other hand Matsushita emerged when trade barriers were falling and there was a
great return to the global scale.

The goal of every multinational is to nd the perfect balance between local responsiveness
adaption and global coordination in scale to maximize its bene ts for unique resources and
business models. To do this managers needs to understand what form of knowledge is the most
valuable for the business model and develop organizational structure to manage this knowledge
most e ectively.

In complex market conditions decision making process should be pushed down to local
subsidiaries. On the other hand when global advantaged dominate, key decision making
processes happen centrally for global markets.

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 LECTURE 3:
WHAT IS GLOBALIZATION?
Globalization relates to the interaction and interdependence of the world’s economies, culture and
populations, brought about by cross-border trade in goods and serviced, technology and ows of
investment, people and information.

HOW DO WE MEASURE GLOBALIZATION?

The rst things that come to mind are:

- foreign investments ( direct investment and nancial investments). In general, ows of foreign
capital.

- international trade: import/export

- correlation between markets

- o shoring and reshoring.

These are all good answers but coming back to the de nition we can see that we can measure
migration ows: ows of people in terms of migration, cultural integration, ows of services.
There is not only the economical side of globalization.

In the past the focus was on:

- quantifying some key feature of globalization ( trade, investments and migration)

- measuring the integration of markets

Attempts to measure globalization using indices is a relatively recent development. On a country-

by-country basis, data on the di erent dimensions of globalization have been combined into a
number of indexes. Today measurement are more sophisticated and there are many indexes.

Example: The KOF index of Globalization. It gives a score to each country which says how much
each country is globalized. The score depends on a number of di erent variables.

The De facto index measure the real trade. The De Iure index measure rules related to trade. You
can observe globalization looking overall, looking the facts and looking what is in the regulations.

WHEN DID GLOBALIZATION BEGIN?

3500 BC: international trade began to develop in the Near East

2000 BC: the rst multinationals appeared in the Old Assyrian Kingdom

1000 AC: Societies increasingly functioned as a result of contacts, communications and even
imitations in di erent parts of the world. The big discussion is if the globalization started in the
16th century or in the 17 century. Indeed:

16 century—> 1500 AC: Geographical discoveries and imperialism

17th century: the creation of state-sponsored trading companies ( British East India Company,
established to carry on long distance trade between Great Britain and its colonies)

Some scholars claim that globalization started in 19th century: driven by new technologies and a
favorable institutional environment, trade and international business boomed together with the
ows of people and the example of trans-regional cultural in uence.

GLOBALIZATION WAVES AND DRIVERS

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 There are two waves of globalization. After the rst waves globalization was reversed by World
War One but even by the crisis of 1929. In that years globalization was challenged. Then, after
WW2 there was another wave of globalization that consolidated in the 80s. Before the spread of
pandemic globalization, starting from 2008 globalization was challenging again starting a new era
of deglobalization.

What are the main drivers of globalization?

• The overall macroeconomic conditions: when the world economy is ourishing we can see
globalization in good shape. When we have economic crisis it this is damaging for globalization

• Technology, which has gone in one direction, the favorable one.

- in the 19th century, railways, steamship, the telegraph and the telephone.

- in the 20th century cars, trucks, airplanes, container, computers, the internet and the
smartphone

• Culture and Politics, which had gone through four phases:

1. to 1914: rst globalization, under empire. Empires make that the same language and the same
institution are spoken and shared in di erent parts of the world. Under empires we had the
rst wave.

2. 1915-45 rst breakdown

3. 1945-2007 second globalization under Pax Americana

4. 2007-? second breakdown

• Public policy and global business

- The degree of openness with regard to foreign rms. Main attitudes: attract, accept/ tolerate,
reject, control

- The strategies of foreign rms towards public policy

(1) THE FIRST GLOBAL ECONOMY:

- The advent of modern economic growth, beginning in 18th century England

- Technology, transports and communication grew

- The political distance between countries decreased: liberal economic policies- trade, ows of
capital, migrations. Government in generale didn’t put many constraints to international ows to
people ( free to move) and capitale the same ( no restrictions).

- Firms drove globalization and took advantage of it

- Main home economies: industrialized countries, the Uk, Germany and the Usa.

- host economies: more or less the rest of the world.

- Multinationals were in every sector

(2) THE DISINTEGRATION OF THE FIRST GLOBAL ECONOMY:

- After World War one the world economy became more unstable ==> THE GREAT DEPRESSION

- Technology continued to evolve

- Politics: trade protectionism spread, the nationality of companies started to be identi ed as an

issue, restriction to migrations and to capital ows

- Multinationals continued to operate. However there were some major shifts in response to the
shock of the era. In some cases they were able to grow.

- Main home economies: Uk, USA

- Main host economies: Latin America, Asia.

(3) THE ORIGINS OF THE SECOND GLOBAL ECONOMY

- Expansion of the world economy between 1950 and 1973

- Tecnology made it easier to move people, knowledge and goods

- Politics:

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 • On the one hand politics try to rebuilt a general cooperation. The General Agreement o Tari s
and Trade ( GATT), the International Monetary Fund.

• On the other hand there were some restrictions: the world was divided into two blocs,
decolonization and reactions, restrictions to capital movements and ows of migrants, tari s
and non tari barriers, whole sectors were closed to foreign companies.

Main home economies: Usa and Uk

Main Host economies: Western Europe

Main sector: manufacturing

THE SECOND GLOBAL ECONOMY:

- di cult to say the date when the second global economy starts. Someone says that it started
when the Berlin Wall fell. Someone uses the date of 1979 which is the year in which China
began the economic reforms.

- Technology: easier communication and transports

- Politics:

• deregulation and privatization, BUT government did not withdraw

• trend toward tari s reduction BUT international trade was often distorted by tari s and
subsidies + growth of regional trade blocs

• restrictions to migrations

From the overwhelming in uence of the US on the world economy to a situation whereby wealth
was distributed more equally. However the bene ts of global capitalism were not spread evenly
between nations and within nations.

WHAT IS THE IMPACT OF GLOBAL FIRMS ON HOST ECONOMIES?

- New jobs and more trained people in the host economy but on the other hand can global rms
exploit resources, contribute to corruption and have terrible consequences for local population
with pollution

- Knowledge and technology transfer. The impact of global rms is overall positive but with two
conditions:

1. it was not the aim of multinational to share knowledge. Transfer of knowledge happens but it
is not the aim of international managers.

2. local institutions should be good enough to allow local people to take advantage of this
knowledge

- They move capital investing it in the host economies, for example in infrastructure, in many
cases in a positive way. But they invest in the sector which is interesting for them, maybe they
build infrastructure that are useful only for them, not for the populations.

- Impact on competition: if a multinational enters a country in that industry the competition is

a ected. In some cases governments are happy maybe because the local companies are not
e cient and the arrival of multinational increase the competitive and challenges to better
performance. In other cases the entrance of the multinational could be the end of competition.
If the local companies are not competitive, competition ends and the multinational becomes the
monopolist.

To sum up:

- knowldege

- capital

- employment

- trade e ects: when multinational enters a country they create some unbalances: in some cases
they increase the exports or on the contrary they can create trouble with imports

- structure of markets

- political in uence and cultural imperialism.

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 HAS COVID-19 KILLED GLOBALIZATION?
Globalization was challenged well before Covid-19. It started to be challenged by the new
equilibrium: Brexit, Donald Trump.

Since 2006-2008 we were in a context of slowbalisation.

Spring 2020:

- a new world economic crisis, driven by a pandemic

- an accelerated technological change

- Politics: the virus and the response to it divided the world. An inward-looking lurch, anarchy of
global governance and geopolitical instability

- Transport: ows of people are restricted.

- The ows of capitale and goods are su ering

- The economic recovery is very uneven.

- A persister technological change

- Politics?. There is still no answer

CONCLUSION: lessons for future international managers

- Globalization a ects di erent countries and companies in diverse ways

- Globalization is not obvious: it can be challenged, it can be reversed, it can be restored

- International companies a ect globalization and are in turn a ected by this phenomenon

- Opportunities and restrictions continuously change in this dynamic context. international

managers should avoid the risk of inertia

- International managers should be properly informed, well-prepared, not super cial, sensitive,
creative and they should be able to strategize even in unexpected and tough circumstances.

LECTURE 4: MULTINATIONAL ENTERPRISES IN THE WORLD ECONOMY

DEFINITION AND FIGURES
In the example we can see companies active in the chemical and gas sector ( Eni, Sol, Zobele). Eni is the national
champion in energy, the largest in terms of dimension and sales. It has around 70 billions turnover and 3300 employees.
It is State controlled at 30%.
Sol Group is based in Monza and it is a specialized producer of industrial gas. Since few years they are making large part
of sales during another thing: gasses for health care. It is ten times smaller than Eni. The third company is Zobele Group
which has been recently sold to an American private equity, it is a medium size company.
These 3 companies have in common the fact that all of them have at least one ( Sol ha 35, Zobele 3, Eni don’t know)
companies abroad, let’s call them subsidiaries. They are company belonging, partially or totally to Eni, Sol or Zobele. So
they are all multinational.

DEFINITION: An Enterprise/Firm/ Company/Economic Agent is considered as “multinational”

when it controls income-generating assets ( subsidiaries) in more than one country/ regional area.
In this de nition implicit is the idea of a direct control over the subsidiary which is exerted to
manipulate the latter’s strategies and the actions and not just for the sake of capital’s
investments.

In o cial statistics the threshold of control is 10% of capital which means that I am a multination
if i am controlling an income generating asset in another country and the control is a real control
with the purpose of in uencing strategies and this control is at least 10%.

A private equity rm can be considered multinationals? They invest, select the management and
reshaping the company. They are multinationals but not in the o cial statistics which leave aside
institutional investors.
• Sometimes less than 10% is enough to control a company but o cials statistics are based on
convention and they register in the register of multinationals only company with at least 10%.

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 Investments which aim at controlling ( directing and in uencing) in a stable way the activity of
the subsidiary are labeled as (foreign) direct investments (FDIs, there is a ow of capital
coming from one company in a country to another company in another country aiming at
controlling the activity) and are di erent from Portfolio Investments whose aim is only capital
gain.

N.B: multinationals are di erent from international or global training companies (commodity
traders) because they (multinationals) not only transfer good across borders but also add value
through their production actives cross-border.

Example: Jardines, a British company founded in the mid 19th century for trading opium, now a
global trader based in Hong Kong. Global training companies doesn’t add value.

Distinctively in its most common meaning a Multinationals coordinates multiple value-added

activities across national boundaries, at the same time internalizing some of the cross border
market products arising from these activities.

De nition: FLOWS AND STOCKS

Inward and outward investments are measured according to two main dimensions:

1. Flows, that is the amount of investments made by one country’s investors abroad ( or by
foreign investors into one country) during a de ned period of time (usually a year, but maybe
less). It is the total amount of the money (investments) that is incoming or outgoing in a
de ned period of time.

2. Stocks that is the total amount of foreign assets owned by domestic companies abroad, or by
foreign investors in one country at a certain moment (usually end of the year). The total
amount that is in one country or is outside at a certain moment, for instance the 31 of
December.

Of course there are many problems in terms of data availability.

FDI trends ( ows and stocks) are extremely relevant for understanding the relationships between
a country’s economy and the global economy as a whole.

• They are a barometer measuring a country’s attractiveness for foreign investments.

• They measure also the vitality of one’s country industrial structure, its competitiveness on a
global scale, as well as its technological capabilities. If you are a developed country foreign
countries will invest in your.

• At the aggregate level, FDIs are also telling much about the global economic, political and
geopolitical trends.

International business scholars have pointed out the strict relationship between the trend in FDIs
and the globalization waves. FDIs are good predictor of globalization processes

The fall after 2000 is due to THE RISE OF GLOBAL TERROR: 9/11. International terrorism became
an international issue that explains the decrease of foreign investments. This fall is so not related
to economic instability.

The fall after 2008 is the global nancial crisis.

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 Apart from the global terror and the global nancial crisis, we can see a trend growing up to 2008
and then becoming at. This is the average annual growth rate, it a small growth from 2008.
Probably after 2018 this trend declined.

You can look at this graph (yellow) like the passage from globalization then to slowbalization and
then to deglobalization.

DEFINITION: Impact on host countries

Multinationals have impact in many areas and directions. Among the most relevant are:

POSITIVE
- Job creation

- Increase in competition

- Creation of infrastructure

- Knowledge transfer

- Improving the locals

WHY, AND HOW, MULTINATIONALS?

Step 1: Stephen Hymer and Charles Kindleberger

Firms do invest abroad, often in markets very similar to their domestic own. In doing this they face
outstanding challenges because they are not domestic companies. This is called LIABILITY OF
FOREIGNNESS.
Question: can you descrive some cases of liability of foreignness? Which are the problems a
company investing abroad can face?

Example: regulation, tax system, language barriers, cultural barriers.

The rst explanation why go abroad is a bit trivial: I accept to go abroad despite the danger
because there are abilities that I have that don’t limit the danger but I will be able to defeat the
competitor, even though i don’t speak Chinese, even though i don’t know anything about the legal
and institutional context in China.

In order to invest abroad a company must have therefore advantages overcoming the liabilities.
These advantages has to be found in speci c, intangibile competences developed by a rm in the
domestic market, which make them stronger than competitors elsewhere and overcome the
liability of foreignness. These advantages derived from the rm’s ownership of speci c
competences in eld as:

- Technology

- Brand, included the country of origin reputation abroad

- Marketing capabilities, for example the brand Avon which sells cosmetics mainly in small
networks of people through representatives.

- Administrative e ciency

- Access to capital markets

KEYWORD: OWNERSHIP ADVANTAGES.

Step 2: Oliver Williamson

In TCT ( transaction cost theory) rms in general are devices for internalizing market transaction in
presence of market imperfections. This is for instance the origin of strategies of vertical integration
( buyer/ seller information asymmetries)

Multinationals internalize imperfect markets across borders into a single entity which e ciently
coordinates transactions thank to intangible competence and knowledge

KEYWORKD: INTERNALIZATION ADVANTAGES.

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 Step 3: John Dunning

Companies go international also because there are advantages in being present in certain
countries, di erent from the one of origins. These are the so called location advantages ( and
disadvantages) linked to the structural characteristics of the host country.

Example: Switzerland

Keyword: LOCATION ADVANTAGES

If you put together ownership, internalization, location advantages you get an intepretative
framework according to which the decision of investing abroad is in the end the outcome of the
simultaneous interaction of:

1. The ownership advantages

2. The presence of location advantages

3. The advantages deriving from the internalization of cross border market transaction.

This is known as the OLI Paradigm or Eclectic Paradigm and is currently the interpretative
framework mainly in use.

Step 4: : Network theory (1990s) a rm becomes multinational because of its willingness to

engage in stable relationships (networks) with other actors (suppliers, customers) inside foreign
markets.

Foreign subsidiaries are a way to keep in touch with business networks in the foreign markets,
and they provide fundamental feedbacks to the HQ. Basically, this adds a further advantage to the
OLI paradigm: the advantage of being in a local network of exclusive relationships [like human
beings, in the end]

Keyword: NETWORK ADVANTAGE

The network approach to multinational activity is a fundamental step to understand today’s
interpretation of a part of the multinational activity. During the last 20 years o shoring or
decentralization of many activities were prevailing. Disintegration has become a popular practice.
Multinationals have been transforming in companies using much more than before market
transactions and have been decentralized in order to bene t of localization advantages and taking
the forms of coordinators.

Today, an increasing body of literature interpret the multinational as a super-coordinator of a set of

independent actors, active in a network of stable relationships (see above) at the international
level. The multinational’s activity is thus similar to that of an orchestra’s director, who harmonizes
the activity of multiple independent players at the global level (Coordinated Global Value Chain). It
is an extreme version of the organizational transformation.

The picture depicts an example of global value chain, one

relevant premise of this strategy is exactly globalization. ICT
enables companies to lower control and transaction costs
with the possibility to coordinate production across borders
without integrating. This system works if globalization
works.

A TAXONOMY OF COMPANIES ACTIVE ABROAD:

A taxonomy of companies active abroad:

• International companies are importers and exporters, they have no investments outside of
their home country.

• Multinational companies have investment in other countries, but do not have coordinated
product o erings in each country. More focused on adapting their products and service to each
individual local market. It is a company that starts from domestic activity and has all the
strategic activities in the country of origin and then in the process of growth starts invest in other

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 countries opening branches that are producing in di erent countries but without keeping
omogeneus, there are adaptations of the product to the local market.

• Global companies have invested and are present in many countries. They market their
products through the use of the same coordinated image/brand in all markets. Generally one
corporate o ce is responsible for global strategy. Emphasis on volume, cost management and
e ciency. Example: Apple

• Transnational companies are much more complex organizations. They have invested in foreign
operations, have a central corporate facility but give decision-making, R&D and marketing
powers to each individual foreign market.

Di erently from purely domestic companies, the operations of international/multinational

companies are subject to at least four levels of risk:

1) Risk at home when operating at home

2) Risk at home when operating abroad

3) Risk in the host when operating in the host

4) Risk in the host due to geopolitical issues

3) And 4) are similar, but NOT the same thing

LECTURE 5: MULTINATIONALS AND RISK ( VIDEO PILLS)

VIDEO 1:
Every company operating in a market economy may incur by de nition in risks. These risks can be
of:

- subjective nature, which means related to the nature of the company itself and to its ability to
confront with the situations that it nds in the market. They can be solved by the company itself

- objective nature, they are not dependent on the capabilities of the company or the strategy,
they are deriving by something which is outside the company itself. They depend on the
external environment.

In the case of domestics companies operating in the internal market one may suppose that
subjective risks are generally low which means that the company is supposed to know the
environment and can predict changes and evolutions in the environment itself.m Objective risks
are a bit more complicated to predict, particularly now, for instance those deriving from sudden
changes in the political and legal framework or in the society. Example: Atlantia is a paradigmatic
case of sudden change in the internal political environment which was before quite friendly and
then suddenly it changed in an hostile political environment which ultimately brought to the
stripping of the main assets of Atlantia in favor of a State Ownership. However, apart from
unpredictable events like earthquakes and pandemic, domestic companies should be able to
manage issue of the domestic market without serious problems and thanks to their own
capabilities and knowledge developed in the past.

When a company does a business abroad the risks are ampli ed, they are even more than
operating on the domestic market. The literature of international investments has de ned this kind
of risks as LIABILITY OF FOREIGNNESS. Also in this case we can speak of objective and
subjective risk.

Subjective risks for multinational are those deriving from internal limits and for instance from
ignorance. These risks can be relevant but can be also easy to manage, for instance language,
knowledge of locals laws and local markets, and consumer habits—> things that can be simply
managed thanks to the help of local consultant and through a process of learning. The source of
the disadvantage is the company itself and of course when there are human beings generating
problems these are normally manageable. On the other hand there are objective risks that are
basically not controllable by companies for instance those deriving from natural disaster.

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 VIDEO 2:
There are objective risks which origin from institutional elements connected to the environment
where the company operates.

There are 4 categories of objective risks:

1. Political: Government of the host country acting against multinational investor or creating
constraint.

2. Social: Social groups in the host country acting against international investors

3. Business: Alterations/issues in the business environment of the host country

4. Financial: Distorsions in the structure and practices of the host country’s nancial system

Traditionally literate has individuated some strategies for risk management, they are normally
divided in 4 categories:

1. AVOIDANCE: once you check the situation of the external environment you may decide to
avoid the investment. It is not easily manageable the risk so the company decides to give up

2. PREVENTION: you, before investing, decide to build up a sort of shelter, something that in
case of risk protects you. Prevention means for instance insurance against the risk. It is in a
broader sense than paying money, it means to build up a reputation to negotiate with the local
institutions some kind of bu er in case of di cult situations.

3. MITIGATIONS: when you invest and something happens you need to nd measures in order
to diminish the damage you get from what happens outside. Apart from insurance is for
instance the fact that you share the risk with other partner, for example: Joint Venture

4. MIRRORING THE AVOIDANCE: once you invested in a risky environment the only thing you
can do is withdrawal. Avoidance means that you didn’t invest, on the mirroring the avoidance
you have invested because convinced of doing pro ts.

VIDEO 3:
To these di erent categories of risks, recently new or not completely new but with a renewed
force critics have popped up. These threads are really dangerous for multinational companies.
One area in which risk is increasing is that multinationals are increasingly not considering to be
agents promoting development and growth. They are considering to be drivers instead of
inequality: they go abroad, they bring jobs abroad, they impoverish the local population. They are
not only exploiting the foreign population but also impoverish the local and domestic population.
This issue nds support in politicians and political movements that are populistic and nationalistic.
This is a sort of new situation with which multinationals have to confront themselves, given the
fact that political risk is increasing.

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 Recently, as noted by The Economist, the world is losing its taste for global companies. No longer
multinationals are considered agents of growth, they are considered global evils with the
consequences that pro ts are decreasing.

Looking only to pro ts is misleading, it’s not only pro ts, the real reason for the retreat of global
companies has to do with the reaction of the domestic society, both at home but also abroad. On
the one hand local government are increasingly supporting domestic companies against
multinationals, particularly in developed countries. They are protected and very often sponsored
or owned by the national governments that want to nurture local rms.

As a consequence global companies and international investments, are now, during the last
decade, su ering a lot and declined the trend of international investments, similar to what
happened after the rst WW and during the Great Depression.

The problem is linked to several cases but there is a problem in globalization. The process is
slowing down and there is another issue that the second part of the Nikkei Article stresses, it is
that increasingly the trend in foreign investment is in uenced by international political situation
and is also changing according to the geopolitical situation which is currently very problematic.
Asia is becoming less attractive.

VIDEO 4:
In 2016 McKinsey published a very important report that is geostrategic risk on the rise in which a
huge number of executive have been interviewed in order to understand which risk is the most
relevant.

GEOSTRATEGIC RISK which is increasingly becoming important can be de ned as the result of
GEOPOLITICAL INSTABILITY AT THE INTERNATIONAL LEVEL + POLITICAL DOMESTIC
INSTABILITY. The report is clearly stressing the fact that among the rst categories of risk which
are considered to be relevant both the internal political risk and the geopolitical or geostrategic
risk are considering to be increasing.

Executives are aware of the rising of geopolitical instability but they also admit that companies are
largely unprepared, they have no instruments to access geopolitical risk.

In order to understand better the framework in which we can put geopolitical and geostrategic
risk we can use a multidimensional matrix.

LECTURE 6: GEOPOLITICS, STRATEGY AND BUSINESS, AN INTRODUCTION

The framework of geopolitical equilibrium that has been characterizing the last years has rapidly
changed. Equilibrium is no longer prevalent, what is prevalent is disequilibrium which means that
for international investors is further more di cult to predict dangerous situation. Investing
internationally is no longer taking into consideration the normal notions of risk ( social,
environmental) but the geopolitical/ political risk.

WHAT IS GEOPOLITICS?
Notwithstanding the variety of its meaning and the changing nature of its content, Geopolitics has
a “constant” aim, that is to study the relationship between “geography” intended as “space”,
both physical and non (*) and its “management” (control), by political agents through many
di erent ”means/instruments” and for a vast number of purposes.
In this perspective, control means power over areas/territories.

(*) geopolitical issues are clustered geographically speaking, especially around Suez Canal, Stretto
di Malacca e un altro che non ho capito.
In contemporary Geopolitics, Political Agents are States, political entities (or “Polities”),
sometimes international organizations or supranational organization (ONU). Political agents
systematically want to manage space, they want to control space, geographical space.

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 To sum up geopolitics is about the relationship between geography and power and studying the
dynamics between geography and power over the space.

Means/instruments do include those of military/physical but also cultural and above all,
economic means (Geoeconomics).

You can think of geopolitics as a branch of political science or a sub eld of international relations.
Geopolitics is more practical, is about real politics and real geography.

CLASSIC APPROACH
The approach to geopolitics of this course is in line with the so-called classic view, very close
to the realist and neo-realist approaches to International Relations (a eld of political science
close, but distinct, from Geopolitics).

According to the classic approach to Geopolitics, polities are in constant competition in order
to achieve the status of big/dominant power and global leadership. In this view is a zero sum
game, the purpose of States is to rise as global powers no matter how, at the expenses of the
existing power. Polities are ready to engage in con icts, conventional or “by other means” in order
to prevail in terms of power, in uence and “reach”.

In this “World” (since a few years very similar to our present World), international cooperation is
not the rst option, contrarily to other visions in the eld of International Relations. The rst
option is confrontation, you can call it Trade War. There are other approaches but in this course
we deal everything under the assumption that this is true.

This approach means competition between states.

NOTA BENE: CRITICAL APPROACH

Another approach to geopolitics (less useful in this course) is the so-called critical approach
(critical geopolitics)
According to this approach, geopolitics analyzes how geographical space is represented by
political agents as a mean to manage, aggrandize and strengthen their power. It means use of
space for political purposes.

Example: the current international tensions in the South China Sea due to Chinese territorial
claims colliding with international norms, are exploited by the Chinese leadership for internal
consensus-building

Sometimes the two approaches coexist: to legitimate themselves ( critical approach) and to
achieve the status of dominant power ( classic view)

BACK TO CLASSIC…
The are three levels of Classic Geopolitics

1. Geostrategy: refers to “tactics” put in place by geopolitical agents in order to achieve their
objectives and goals. For instance, the Chinese claims and actions in the South China Sea. It is
the action in the short-medium run.

2. Geopolitics: refers to “strategy”: a long term objective, a broader concept. For instance, the
Chinese geopolitical strategy is to establish new borders in the South China Sea di erent from
those mentioned in the international treaties. Napoleon has the strategy to conquer Russia,
Napoleon’s tactic is to go to Moscow.
3. Political geography: God’s eye status quo, or stable “World Order”. For instance, China wants
for a number of reasons establish itself as the main power in Southeast Asia, replacing the US, for
the future to come.

Geopolitics is therefore a dynamic discipline, studying the action of States/polities but also the
changes (generally secular) in the World Order (Political Geography), their determinants and
outcomes. These are also known as:

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 “Hegemonic Cycles”, based on a State-hegemon, preeminently powerful in economic, political
and cultural terms.

For instance, during the last 2 centuries at least 6 hegemonic cycles:

1.The British hegemony: 1820-1880

2. The contested British hegemony 1880-1914

3. The failing British hegemony: 1920-1950

4. The US-URSS hegemonic Cold War: 1950-1990

5. The US hegemony 1990-2010. . For 20 years ( 1990-2010) stability and low level of risk
prevailed, after 2007/2010 thing started to change and the risk increase.

6. The failing US hegemony: 2010-present

World Orders have been changing over time, normally they change in the very long one. The
transition from one World “order” to another is normally characterized by changes in geopolitical
and geoeconomic leadership, by a phase of multipolar leadership, uncertainty and increasing risk
(de ned as geopolitical risk).

Each one of the egemonic cycle normally coincide with the fracture and with an acceleration /
increase of risk, this particularly for people operating in the international economy. Risk is
increasing and decreasing and this makes the di erence for people operating internationally. For
20 years ( 1990-2010) stability and low level of risk prevailed with Us hegemony, after 2007/2010
thing started to change and the risk increase.

This introduces the de nition of geopolitical risk which is something that goes up and down.

Some scholars created an index of geopolitical risk from newspapers. This is the result. As you
can see there are evident trends, there is an interesting idea which is that: the end of the second
WW up to 1960s, this is the rst phase of the Cold War and the risk was very risky because
everyone that the risk of war was low, the neutral war was impossibile.

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 This notion has been now incorporated by some companies, international investors and
consultants. Black Rock for instance is running a geopolitical observatory incorporating the
geopolitical risk in the decision of investments.

Geopolitics is becoming increasingly popular, it has been used in books not surprisingly during
the 2WW, then went out of fashion and after the 1990s the interest about geopolitic raised again.

Geopolitical risk have been relevant for

• Governments

• Political parties

• International Organizations

But now this growing instability due to political reasons is making these actors interested in
geopolitics:

• Trade associations

• International investors and Financial Institutions leaders

• Multinationals’ executives

• Global Value Chains and Supply Chain Managers

• Consultants

it was not necessary to have this sensibility up to 15 years ago. The set of international rules was
very clear and you had local con ict but everything was pretty clear and you could easily manage
it. The change in geopolitical equilibrium is not the same thing.

Geopolitical instability is a function of several elements among which

- the number of “competitors”, geopolitical risks increases when the competitors are increasing
in number. Up to ten years ago there was only one power, now many are rising, some of them
are instead trying to remain global powers.

- their relative (to the others) technological, economic and military power and the “cost of war”
(NB: the increasing role and relevance of technological knowledge – e.g. cyberwar). The
geopolitical risk is lower when going to war is expensive. When the cost due to technological
reason is going down, the probability of increase the geopolitical risk is higher. The opportunity
cost is high—> the geopolitical risk is going down.

- the e ectiveness/e ciency/pervasiveness of institutions of international governance. It means

that geopolitical risk is increasing when international institutions that are supposed to govern
are weak or are becoming less and less legitimized.

- the incentives to the appropriation of resources and to break the equilibrium. When a resource
becomes very critical, the incentive of the appropriation of this resource which means territory
becomes very high.

- The degree of interests’ overlap

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THE ARTIC AND GEOPOLITICAL RISK:
Here you have the necessity of resources connected to the facilities of trade. In 2060 this place
will be open for navigation, as a trade route for 6/7/8 months per year. This is putting a number of
serious problems. On one side who will be allowed to use this route? Everyone? There are 7
states ( the Us, Canada, GreenLand, Iceland, Scandinavian State and Russia) that are supposed
to have national waters there. And there is China saying they need this space to be free, to use
this route from China to Europe. There is an international agreement so far which is not stable.

==> the risk is increasing, this is a potential geopolitical hotspot.

INTERNATIONAL COMPANIES AND GEOPOLITICAL RISK:

Companies active in the international economy need to be aware of the three levels of Geopolitics
(at least, of levels #1 and maybe 2#).

Geopolitical Risk is an increasingly relevant variable in strategic decisions.

EXAMPLE:

Rosneft is a Russia Oil company, they started a joint venture

with a Vietnamese State Owned company. They started drilling
in what are supposed to be Vietnamese waters. In this place
which is the Red spot unfortunately is the Vietnamese national
waters according to international agreements but is falling into
the claims of China. There is a level of this situation which is
going at the level of institutions, there is a level which is going
at the level of country relationship. The joint venture has been
blocked because the Vietnamens State Owned country step
back, under pressure from the government which was under
pressure from China.

VIDEO PILLS: GEOPOLITICS AND INTERNATIONAL BUSINESS

VIDEO PILL 1:
In this video we will focus on the relationship between company internationally active,
multinationals, political risk and in particular geopolitical risk and to understand if there are some
possible strategies in order to cope with variable degrees in political and geopolitical risk.

In order to understand what is the exact de nition of geopolitical risk, it’s better to frame
geopolitical risk into the broader of POLITICAL RISK. Economic actors and in particular
multinationals, company active outside their domestic environment, face a vast range of
typologies of POLITICAL RISK, one of them is GEOPOLITICAL RISK.

Political risk is another subcategory of the RISK category, which is something which is connected
with entrepreneurial and corporate actions. When an enterpreneur or a company undertakes a
business, domestically or internationally, automatically faces a huge amount of risk, connected to
economic aspects, political aspects, social aspects, environmental aspect, think of the risk of an
earthquake. When you think of geopolitical risk is important that you think about that as a part of
political risk which is a part of a broad framework.

Multinationals, regarding political risk, not geopolitical one, face by nature a huge level of political
risk. All the companies do that, even domestic companies and even companies in a sort of
perfect political system. Very frequently, in the western, we tend to consider our political system
as perfect because it is a liberal democracy completely keen on respecting the individual’s rights
and companies’ rights. Companies in the western culture has achieved a sort of personal identity
starting from 19th century, at the same level of individual. Even in western supposed to be

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perfect, political system companies face political risk, at home and particularly when they change
the cultural or political system in which they operate.

In order to understand the issues related to political risk and geopolitical risk, there is a taxonomy
which can be improved of course but it is a taxonomy which takes into account two dimensions:

- the domestic dimension

- the dimension of political risk

In this taxonomy there at least 4 broad categories:

1. Domestic political risk that you run in general, if you are a company operating in a country and
also in a country and in another country. It is the risk in the home country generated by
internal political actors, common to both international and domestic companies.

2. Political risk at home, domestic political risk when you operate abroad. When you are running
operations abroad it may be surprising but you can run risk abroad

3. Political risk in the country, from two di erent sources

- Risk in the host country by political actors in the host country

- Risk in the host country due to threats of geopolitical nature, coming from foreign political
actors

4. Risks, more of geopolitical nature, that you run when you are at home. This is very peculiar and
has to be explained.

Source of (Geo)political risk

Domestic Political Domestic Political Foreign Political Actors

Actors Actors

Geoographic Area of Domestic AREA 1 AREA 4

Company’s Operations

Abroad AREA 2 AREA 3B AND AREA 3B,

In the pink ones you can see the GEOPOLITICAL RISK,

area 2: you operate abroad and the source of risk is from domestic political actor

area 3a/3b: you operate abroad and there is impact by foreign political actors

area 4: you are at home and foreign political actors threat you

VIDEO PILL 2:
Area number 1 is particularly relevant even though it is not very much connected to geopolitical
risk. Government in your own home country, may turn obstacle toward your national company for
a number of reasons. Let’s imaging that you are threatening the internal security with your
operations. Recently, the top management of an Italian company has been charged by accusation
because the company was sold to a Chinese State Owned company and the company was
involved into security operations. Another aspect can be when your company is committing some
break of the law, tax evasion for example, or more in general creating damages to the social
security or the one of individuals: polluting for example, ponte Morandi incident. Sometimes
companies are targeted by government for political reasons: to increase and to enhance internal
political consensus. An example is Società Autostrade which has been targeted by the
government, the ve start government where ita was necessary to straighten the consensus in
favor of the government and against something or somebody who is perceived to be a threat.
Another possibility is when the government has to favor, so is in a sort of con ict of interests, and
he’s going to favor State owned companies. Sometimes the government can undertake decisions
that indirectly are hitting domestic companies. Let’s think about an exporter company, for

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example a chinese exporter, which is directly hit by the US, its home country, policies against
China.

Area number 2 is related to the idea that in you country government may turn hostile towards
nation companies undertaking foreign activities for various reasons ( job losses, technological
spillovers in potentially hostile countries, support for antagonist governments, sell of industrial
secrets and new technology). In particular sometimes government at national level turn hostile
towards a national company for political populistic reasons. Trump vs Apple: Apple invested
heavily in China in terms of production, the attempt by Trump administration was to bring back or
to restore investments blaming Apple for being hostile and in favor of China. This turns out to be a
problematic situation for Apple because the US trade sanctions put on China hit clearly Apple in
re-exporting activity in the US.

Area 3a and 3b: they are at the core of this class and the focus are foreign political actors in the
host country that are acting implicitly against the actions of multinationals. Multinationals are in a
very delicate position when they operate abroad, when confronting with national actors. Favorable
condition can suddenly change and sometimes that is not even clear to the management of this
companies. Business history is abundant in terms of example of this, starting from the Soviet
Revolution in which companies operating in Russia were surprised by the sales of power by the
Bolshevik government. The same happened in Cuba with the Cuba revolution where Fidel Castro
suddenly changed his attitude toward American multinationals in the Caribbean island.
Sometimes these attitudes change also for political consensus. There is a recent case of Mittal
Arcelor, it changed the attitude of Italian Government which turned to be hostile not towards in
general to multinationals but particularly in this case.

The important point is that even in stable political contexts, things can turn di cult and this is
even more in unstable political regimes where history matters. For instance in Africa, African
countries have been sometimes quite ambiguous towards multinationals which are perceived to
be necessary but particularly if they are western multinationals belonging to the former
colonizers, this can turn to be a problematic issue. That’s why China is very good in selling itself
as a non colonizer country, as far as the relationship with Africa are concerned.

SOURCES OF CRITICISM FOR FOREIGN COMPANIES OPERATING ABROAD BY THE HOST

GOVERNMENTS IN THE COUNTRY IN WHICH THEY ARE OPERATING, are very well known and
range from:

- the blaming of the international company for making pro t in a country and repatriate them,
without leaving anything in the country,

- stealing natural resource

- exploiting the host country’s labor force and consumer at the expense of domestic companies

- they threaten nation culture, national security and national heritage acquiring symbols of
national identity

- They, particularly if State Owned, are agents of foreign interests

- Being global, they tend to act above the law or to widely use arbitrage ( example: in scal
matters)

This is clearly something that is worrying, especially when political hostility transforms into
institutional actions against foreign multinationals and consequently into a growing political risk.

VIDEO PILL 3:
Political risk is almost always blended with geopolitical risk, which refers to the competition
among States. These hostilities, together with external pressures and constraints, can badly a ect
the nature of competition in a country and change the level of risk. Example: international
sanctions, trade wars (which are the broader category to which sanctions belong), other pressures
deriving from diplomatic issues (a country imposes conditions/requirements to a foreign company
which entered the market=>the political entity puts pressure on it=> Facebook in HK was obliged

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 to disclose info about users by the Chinese government, in order to track them; other tensions
arise when a company arrives in a country which is against its original country0>ex. TikTok in the
US, Burger King in China, WeChat in India=>WeChat and TikTok are considered a threat for
national security of the host country).

The fourth category is absolutely peculiar because it involves those companies which operate in
their home country (=>which theoretically should be protected), but are menaced by external
pressures: sanctions again (ex. Russian companies have been limited in their possibility to export,
after the Ukranian invasion), retaliation (the opposite of sanctions; ex. retaliation by China, who
responded to the American tari s), value chain disruption (ex. Chinese semiconductor companies
which use machines produced by the US have recently been banned to sell in China), implicit
blackmailing (ex. Taiwanese semiconductor companies are required to open facilities in China),
violation of international law (when you are at home, but another country decides not to comply
with international law, for example, about property rights), risk of wars and con icts (ex.
Taiwanese semiconductor companies menaced by a Chinese invasion of the island).

To sum up, one of the main problems managers are required to face is (geo)political risk.
Research about these topics is still ongoing. The present status of research can help us just
marginally. The rst technique to face risk is given by prevention and mitigation: understand the
situation, and act to at least design a roadmap of di erence risk scenarios. A very di cult
situation regards the cases of companies which operate in countries which take unpopular
political decisions, as we can have reputational problems. Some recurring strategies are insurance
policies or risk sharing strategies (you share the risk with a local partner). Then, even exit
strategies are possible (when you see an economic crisis approaching, you are ready to have a
local buyer for your company). In general, what is important to do is to sensibilize managers
towards the consideration of geopolitical risk management as a strategic asset.

As regards governments, we have two make a distinction:

-how do they manage their companies that go abroad in a period of intensi ed geopolitical risk?
They must encourage their companies to establish contacts and diplomatic agreements with
other governments to reduce risk. Ex. China (with its ambiguous behavior as it is the white knight
of globalization, but at the same time it is increasing the level of geopolitical risk in other elds)

-how do they attract international investments? They must prove to be able to contain geopolitical
risk. This must be one of the location advantages they o er to foreigners.

LECTURE 7: THE BELT AND ROAD INITIATIVE AS A GEOPOLITICAL TOOL

WHAT IS:
This is a program about China becoming a big power thanks to the fact that it manages one
essential program for the global economy. The purpose of this lesson is to understand what is
geopolitical in uence.

The belt and road initiative has changed name very times. Now BRI is the o cial name.

Launched in 2013, the OBOR (more recently, BRI) is an ambitious plan (the sum of a large amount
of projects and initiatives – about 2k in total) aiming at creating physical infrastructures
supporting trade (transport and communication) on the Eurasian landmass.
This is an initiative, not a project, a initiative is much more blurring, whereas the projects is very
clearly de ned ( time, steps, budget). An initiative has a very clear purpose but you don’t know
costs, budget and ending time.

The purpose is to create a network of physical connections on the ground supporting trade and
communications. It is transport of goods, people, raw material and communication network on
the Eurasian area. More recently, in the framework of the BRI, other initiatives have been started
both in Africa, South America and Oceania. It means that everyone is included with a big
exception: US. However the largest (by far) portion of the BRI projects are in Eurasia.

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At the moment, the BRI is composed by a “land” (Belt) initiative structured into six “economic
corridors” across the Eurasian landmass.
A “maritime” road initiative is linking the South China Sea to the Indian Ocean through the
Molucca Straits to the Hormuz Strait, the Red Sea and to the Mediterranean through the Suez
Canal ( AZZURRINO CHIARO)

In January 2018 with a White Paper on Arctic Policy China has launched the idea of a Polar Silk
Road connecting the coastal area of China to Europe via the Arctic (North Sea Route, NSR), (BLU
SCURO)

Each one of the “corridors” is composed by several infrastructural projects (railroads,

highways, gas and oil pipelines, ports – both through new construction and renovation).  The
corridors are in their turn interconnected by “minor” links.

Actors involved: countries

Together with China, BRI includes around 140 ”partner” countries (40% global GDP, 63% World’s
population), interested in taking part in the project, hosting and building portions of the corridor –
the number is constantly “evolving” ( because some companies withdraw)

There are di erent levels of involvement.

a) countries which express high interest to be involved. it means a country is not only available to
lease land to the projects, to host projects run by Chinese companies mainly but it is also
participating, nancing part of this project. Pakistan is leasing the port, is hosting project on its
territory, it is also nancially supporting with the national income and money.

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 b) countries that are undertaking projects included in the initiative.

The list includes countries:

•Low, medium and high income

•Very di erent political regimes. You can participating no matter what is the political regime.

•Not necessarily hosting BRI projects (e.g. Italy, 3 years ago Italy signed a memorandum of
understanding)

The other typology of actor involved are FINANCIAL INSTITUTION.

The initiative cost is unknown, if we want to estimate it, people are very much divided, the range
is 10-15 trillion dollars. This sum has to be very much cooperative/ collaborative.

So far the belt and road initiative is supported by two main sources of nance

1. NATIONAL GOVERNMENTS: when you, as a company, invest your own resource into this
project. You may do this in di erent forms: leasing the lend, invest money in the project
through state owned company or state owned institution

2. FINANCIAL INSTITUTIONS: they can be divided in 2 categories.

• One is the nancial institution directly controlled by China. The Chinese involvement runs
through main institution

- Chinese policy bank

- Silk Road Fund: established in 2014 with USD 40 billion of initial total capital. It is a
investing fund using money coming from the government.

• Financiers of projects

- ASIAN INFRASTRUCTURE DEVELOPMENT BANK: it was established in 2015 with

USD 100 billion of initial total capital. Before 2014 in Asia there was one development
bank established in the mid of the 80s called ADB. The purpose was to develop Asian
Countries, the main shareholders are so far the US and Japan. ADB is still existing and
the site is still in Tokyo with many branches around Asia. The need of a new
development bank is justi ed by a political reason: the AIIB has as a main shareholder
China, because it doesn’t want to be depended from Usa and Japan

- NEW DEVELOPMENT BANK: established in 2014 by the BRIC countries ( Brazil,

Russia, India and China)

In general a development bank is bank created by shareholders, each country commits to put part
of the capital and this bank is supposed to nance projects which bene t the global economies
and all the shareholder.

Rationales
1.A “common for trade”: BRI aims at cutting transportation costs by land and sea

- inside China (poorer Western regions vs. richer East Coast)

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- between China and Europe and Africa at the same time securing the connection among South
East Asian regions

- diversifying risk (Malacca dilemma, Indian Ocean, Hormuz, Suez Canal)

China knows perfectly that globalization was necessary, the initiative was not only addressed to
connect China with Europe. But it was necessary to reduce inequality between western regions,
poor, very problematic and very dangerously closed to areas which are problematic in terms on
for instance Islamic terrorism.

With a participation rate in GVCs ( global value chain) of over 70%, China is bounded to control
risk over the whole process, reducing information asymmetries, transaction, information and
security costs in order to keep the bene ts of constant trade within the Eurasian landmass.

Furthermore, the rising labor costs in China compel China to tap poorer developing areas.

2. A “common  for Peace”: BRI aims at simultaneously support the globalization of trade which
is considered to be the main incentive to peaceful international relationships.

D a v o s , J a n u a r y 2 0 1 7 : T h e C h i n e s e P re s i d e n t X i J i n p i n g ’s K e y n o t e S p e e c h :
Jointly Shoulder Responsibility of Our Times, Promote Global Growth.
Main points:

• The World’s present problems are NOT due to globalization

• Globalization brings prosperity and growth

• This is the story of China embracing reforms and connecting with the World

• Globalization means peace

• Globalization needs to be safeguarded

• One step: the creation of “commons” facilitating globalization.

3. Enhancing China’s “structural power”, that is the power deriving from the management of
infrastructures necessary for global interdependence. It is a way to enhance the structural power,
which means that the power comes to you when you control strategic infrastructure.

As a new great power, China is investing in BRI in order to reshape its previous political and
economic centrality. Since 1978 (Deng, Zemin, Jintao, Xi) there was a progressive acceleration of
China’s “grand strategy”. All of them increasingly pushed to a progressive centrality of China as
an economic actor. As Europeans we underestimate one thing which is that during the 19th
century and in part during 20th century, Western Europe has been the colonizer of the worlds
which means we have the mindset of colonizers, not colonized. Whereas China has the mindset
of colonized, as Africa does. The idea of China to go back into the original status of power before
the opium war is still very strong and it is part of the educational system.

When you look at the BRI as a soft-power instrument some clear e ects are evident

•Debt-trap (e.g. Sri Lanka’s Hambantota port)

•African States and recognition of Taiwan. When you trade, the presence of this initiative with a
very simple and e ective diplomatic decision: in stopping recognizing Taiwan as independent
State you are using soft power in order to achieve your objective. ( Non mi è chiaro)

GEOPOLITICAL IMPLICATIONS:
BRI has so far ve relevant geopolitical implications:

1. The New Rise of Asia

2. The challenge to Europe

3. A new role for Africa

4. The Middle East enigma

5. Arctic ambitions

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 THE NEW RISE OF ASIA:
The rst implication is quite evident: the BRI is going to create an Asian pivot. The gravity center
of  the new system is going to be located in East Asia, including China but also a growing number
of former Soviet-Union members which after the fall of the Union remained at the edge of the
globalization process. After the fall of Soviet Union these countries were marginalized, isolated
and excluded by the globalization. The BRI is a huge opportunities for these countries to re-enter
globalization. That’s why the iniziative has huge impact and is normally very well accepted by
these countries. This is creating political problems because these countries used to be satellites
of Soviet Union and now their alternative is China.

The BRI as instrumental for the rise of the multipolar economic globalization and introduces
geoeconomic changes and has geopolitical implications.

BRI can potentially accelerate the overlapping interests in a multipolar World: e.g. the ongoing
clash between India and China (e.g. case of Maldives and Pakistan), as well as the potential one
with Russia.

THE CHALLENGE TO EUROPE:

Europe is one of the mail targets of the initiative.

In political terms, BRI is threatening European sovereignty in Eastern Europe and Turkey, o ering
a viable alternative to the Union’s membership for the Balcanic countries.

One example: 16+1 Cooperation. 16+1 Cooperation (CEEC – www.china-ceec.org). PLUS ONE
MEANS CHINA

It is a trans-regional platform LEAD BY CHINA, that crosses over sixteen CEE countries:

- the three Baltic countries of Estonia, Latvia and Lithuania;

- the four Central European countries of Poland, Hungary, the Czech Republic and Slovakia, also
known as Višegrad countries;

- and the nine Balkans countries, namely Albania, Bosnia and Herzegovina, Macedonia, Croatia,
Montenegro, Bulgaria, Slovenia, Serbia, Romania.

Among this large group, eleven are (some increasingly hostile) Member States of the European
Union, while ve are neighbourhood states (Albania, Bosnia and Herzegovina, Macedonia,
Montenegro and Serbia) that applied for European accession and are currently under the
negotiation process.

The initiative is targeting the poorest of the EU Member States.

A NEW ROLE FOR AFRICA

At the moment the BRI involves Africa largely in relation to the Maritime Silk Road, even if some
infrastructural projects are taking place on the mainland. African ports in the horn of Africa are
mainly targeted, particularly those giving way to the Suez Canal.

For Africa – it is another opportunity of re-entering the globalization process.

A non-irrelevant aspect: China labels itself as a former colony which has been able to reach the
status of a developed economy and geopolitical power. China is dealing with African states and
the message is very clear: China is connected to Africa since the 1960s and the message that
China is sending in a very e cient way is the following: if you want to see a clear example of a
country which freed itself from colonization and successfully rose to the rank of the big power
you have to look at China. We don’t want to be here as colonizers since we su ered the same
problem. This is a strong message

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 A CHANCE FOR CENTRAL ASIA:
Central Asian States: The ex-Soviet Republics were marginalized after the collapse of the Union.
The BRI is a chance for landlocked economies to join the global economy with new infrastructures
non centred on Russia. Being largely autocracies, China’s political neutralism is particularly
appreciated. CAS have an alternative to the Russian dominance.

China: A BRI-connected central Asia is relevant for:

-Continental connections

-Raw materials

-Indirect control over Islamic terrorism

POLAR SILK ROAD

Early 2018 China issued a declaration, or white paper, on  the so called “Polar Silk Road”based
on the North Sear Route (NSR, or NorthEast Passage. (http://english.gov.cn/archive/white_paper/
2018/01/26/content_281476026660336.htm)

This is a further enlargement of the BRI initiative to Russia, connected to the changing geographic
structure of Arctic communications network following the so-called climate change.

Chinese interests are openly targeting ecology, environmental issues, scienti c research and
commerce. China is however openly claiming the status of a “quasi-Arctic” State given the new
relevance of the region.

NB. The Western sanctions against Russia may provide a further incentive to the relationship
between Russia and China along the polar commercial route.

China is pushing to enter the Arctic Council and the members are resisting. ( DA RIVEDERE UN
ATTIMO ANCHE QUESTO)

Criticism/sources of instability
a) The risk of asymmetric relations and unequal relationships. The “new imperialism” critique.

b) Increases geopolitical instability, not reducing it (memo: Suez)

c) Di erently from the standard practice of Western liberal democracies, China does not link
nancial aid and involvement to any guarantee of democratic political freedom and this may
help autocratic regimes.

d) The BRI is up to now a openly Eurasian project and is basically leaving alone the US., unable
to contrast the Chinese pressure now extending to South America as well (http://
www.oboreurope.com/en/latin-america/).

e) The internal opposition

f) The environmental threats

IMPLICATIONS FOR INTERNATIONAL COMPANIES

Threats
a) The spread of Chinese contractors in global infrastructures (mainly SOEs, at the moment
around 50, e.g. China Communications Construction, China State Construction Engineering,
PowerChina, Sinomach China Railway Construction Corporation, China Railway Group,
CNPC, State Grid)

b) The RMB dominance as currency for trade

c) The Chinese control over portions of global GVCs

d) Chinese control of the land surrounding the infrastructures

e) Di erently from their Chinese counterparts, for IB unknown variety of business environments
and political/geopolitical risks

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 Opportunities
a) Partnerships with Chinese SOEs and POEs

b) Technology supply (e.g. GE, ABB, Caterpillar, DHL, Eu and Korean shipbuilders)

c) Bene t of BRI’s infrastructures in more mature and competitive markets (e.g. Gulf, Europe)

d) Lower transit cost and connection with developing markets

LESSON 8/9: ROLE GAMES

LESSON 10: CASE DISCUSSION
The focus of the case is how global value chain behaves in a situation of geopolitical risk.

The case starts with an invented event:

The US targeted Huawei with a retaliatory policy, in the large framework of the US-China tensions
the idea was: let’s hit Huawei in di erent ways. One strategy is that the US government decided
to ban the selling of critical components to Huawei for the production of mobile phones. It
stopped the supply, how? You impose to the suppliers of critical components, in this case
semiconductors, to stop the supply of semiconductors to Huawei: asking for licenses before
selling anything to Huawei. The US government was able to ask compulsory licenses

Every company using a machine based on American technology and software to produce chips,
must ask the government permission to sell to Huawei.

The problem with TMSC was using American technology so they were forced to ask license
before selling to Huawei and in generally to Chinese companies, which represented a big part of
revenues.

The case mixes two elements: international relationships between China and Use using an
unconventional strategy of war which is not military but economic. This was uses a particular
important good.

WHAT IS A SEMICONDUCTOR? Semiconductors are a typical example of a General-Purpose

Technology (GPT), that is a technology which has an extremely broad range of applications.
Various kinds of semiconductors are the basic building blocks of intermediate products as diodes,
transistors, integrated circuits (or “chips”), and memories which are today indispensable
components in manufacturing a vast number of products including: electronic devices of any type
and application, automotive, internet of things, industrial equipment, telecommunication devices
and, military equipment.

In the case is clearly state that this technology is, and has been, both during Covid and in the pre-
Covid, subjected to an explosion of the demand. Here the main consumers of semiconductors
can be seen: communication, consumer electronics, data processing, industrial, automotive.

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 Semiconductor are not all the same, what are the di erence in quality?
What makes the di erence in quality and price is the speed and the dimension. The dimension is
crucial, in particular miniaturization. The miniaturization is measured in nanometers. So among the
main drivers of technological innovation in this industry are chip design and nanometer size, that
is the distance between transistors on a chip. Currently, the most advanced chips are those built
with a 7- nanometer (or nm) process technology. Some chip producers – among which TSMC –
are already mass producing 5nm chips. TSMC announced that it will start to mass produce chips
with a 3nm technology by the end of 2022.

In this eld the MOORE LAW is very relevant: it predicted that the number of transistors on a
chip (a proxy of its performance potential) would double every year. This prediction, however,
nds its limits in the miniaturization process.

Miniaturization is not always crucial: for some industries the e ciency and the minizaturization are
much more relevant than for others. In general for cars is not as crucial as for mobile phones—>
the highest quality ones because in mobile phones there are many personal information.

A second protagonist of the story is THE MARKET: the market is booming and the geographic
distribution is the following:

The most important market for semiconductors is de nitely China. China was not so relevant in
2015 but things has started to change from 2016 when China became the largest market in terms
of size. The market size of integrated circuits ( another type of semiconductor) rapidly grew up
from 2008.

The trade war has prompted a sort of race to the bottom: every producers ( Apple, Samsung)
wanted to store semiconductors in order not to stop their production. Huawei is running short of
semiconductors and it delays the supply of phones.

WHO ARE THE MAIN SUPPLIERS?

In terms of production capacity, instead, the situation is quite the opposite. Today the US
accounts for 45% of the total output, followed by South Korea (24%), Japan and Europe (9%
each), and Taiwan (6%). Despite its voracity, China is very far from being self-su cient, producing
only the 5% of the total semiconductors output, which satis es only 15% of the internal demand.
Moreover they are focused on big semiconductors.

The semiconductor industry is a typical example of a GLOBAL VALUE CHAIN: a single

decomposable product is produced in di erent countries according to the competitive advantage
of each country which is specialized in a part of the process.

Advantages of global value chain:

- specialization of a particular component

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- high quality, low cost, various skills of human capital and location advantage

Global value chain have been working well under a speci c condition: globalization. You can’t
have a global value chain in a system in which there is a trade war for instance The current trade
aims not only at limiting China, but because China is the most interconnected country in the world
in terms of value China ==> trade war aims at hitting China at the very core.

At present, the production of semiconductors runs through ve major stages: 


a) Research & Development: this is a crucial phase as R&D has on average investment rates
between 15-20 percent of sales. Most of research involves “big science” activity and is performed
by consortia or government agencies. There are very few companies able to do that.

b) Design—> European companies 


c) Manufacturing: characterized by high capital and scale intensity, xed costs, and need for
saturating production capacity

d) Assembling/Testing/Packaging

e) Distribution

Two main operating models characterize the industry today.

In the Fabless-Foundry model production is split among companies active across the various
stages of the fabrication process. “Fabless” design companies focus on design and subcontract
manufacturing. “Foundries” produce through contract manufacturing. Other companies perform
assembly, testing, and packaging. This third group is known as outsourced semiconductor
assembly and test companies, or OSATs. IT IS AN EXAMPLE OF GLOBAL VALUE CHAIN

Integrated Devices Manufacturers (IDM) perform in-house all the stages of production, and
account for roughly half of the industry’s total revenues. The Korean Samsung, for instance, leader
in electronic appliances tablets and smartphones, runs an integrated process, producing
semiconductors mainly for internal use. In this model some of the phase are performed by one
company alone, the symbol of this is SAMSUNG. The price to pay is that your semiconductors
are not on the technological frontier: they are not very much updated, not at the level of
specialized companies in the Fabless-Foundry Model.

THE POLITICAL ECONOMY ISSUE:

So far, up to 2010/12 this was a perfect global value chain. Semiconductors were bought in
Taiwan and China. Now things are radically di erent.

What does China do in this situation?

Chinese governments are therefore primarily interested in securing the supply of semiconductors
for domestic use – something so far, however, granted by the presence of an e cient global value
chain.

In 2014, for instance, the Chinese Government issued a “National Integrated Circuits Plan” aiming
at designing a strategy of identi cation of “national champions”, endowed by Government-
controlled funds, together with a policy promoting inward and outward investments in order to
speed up technology transfer. This has been accompanied by aggressive practices of foreign
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 human capital acquisition at nonmarket prices – as well as by an open infringement of IP rights.
The overall aim is to bring China’s semiconductor industry at level with leading international
competitors as soon as possible, and to have Chinese-made chips available to ful ll at least two
thirds of its internal demand. In March 2020 Premier Li Kequiang put semiconductors as the top
priority in the list of industries of the “Made in China 2025” initiative. China openly aims to
become independent from foreign – American above all – technology and from price uctuations
in fundamental components like memories, dominated by a small group of producers such as the
Korean Samsung and SK, the Japanese Toshiba, and the American Micron and Intel. This is
justi ed by obvious security concerns, and by the fact that integrated circuits have been China’s
number one import alongside oil since 2014

The American strategy is openly three-pronged. First, it aims at increasing the quantity of chips
produced on US soil, while today US-headquartered companies tend to produce abroad in order
to enjoy substantial location advantages. A second goal is to preserve and secure the leadership
in one of the most strategic industries. Third, the US intend to leverage on this position of
leadership in order to keep China at bay, while relying on (mainly Western) democracies for the
supply of high- end components.

The building blocks of this strategy are a very strict control over the supply of products and
technology to Chinese companies and their a liates, and a constant pressure on third countries
in order to have them aligned to this restrictive behavior.

Experts of the eld warn however that an excess of export control could be ultimately dangerous
for the US semiconductor industry. First, China is indeed a very relevant market for US companies
rms. Second, trade restrictions would boost the Chinese e orts aiming at strengthening the
domestic industry. Third, restrictions are mainly hitting US-based companies and their a liates,
but leave untouched foreign-based competitors, as, for instance, the Taiwanes

An important point is that we are living under the assumption that globalization will be forever,
whereas the facts shows that global value chain are breaking

LECTURE 2/11:
Many companies in the recent years failed and had to leave the foreign country: the reason is
because they were completely taken by surprise. They came from a world that was relatively
stable, at least in the second part of the 20th centre, while the rst part of the 21th century has
been characterised by a large number of emerging countries but also by a growing geopolitical
instability.

WHY MANY BUSINESSES HAVE A HARD TIME INTERNALISING GLOBAL COMPLEXITY:

Most businesses need to grow, and companies have increasingly been growing in far away places
with which the management team is often not familiar. Management is not adequately trained,
organised or even rewarded for going into depth on geopolitical issues.

WHAT DO YOU LOOK AT BEFORE ENTERING A FOREIGN COUNTRY?

1. Competition

2. Political situation

3. Main geopolitical threats

4. Regulatory environment

5. Political stability

6. State behaviour towards multinationals: threat and incentives

7. Geographical advantages

8. Local culture

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 9. Demographic development

10. Domestic Demand

11. Supply chain

These answers are correct and you need to do so but the ideal framework should consider more
aspects and to have a bigger perspective.

The ideal framework says that if you want to enter with an e ective strategy in a new economic
environment taking into account economical and geopolitical issues you need to consider 3
di erent levels:

1. CURRENT ASPECT: what is happening today or in the last couple of years, which are the
contemporary dynamics. Need to check them daily.

2. SEMI FIXED ASPECTS: it is not current but it can change overtime, usually these aspects
they change in few decades. The result of an election is a process of political transition that
takes more time. Types of people: religion, culture, ethnicity they can change due to
migrations but these changes take a medium long term. Then the international relations and
agreement ( European Union) which usually last decades. Infrastructure and industrial fabric
can change due to investments. Environmental degradation and climate changes as well.

3. FIXED ASPECTS: topography, geographic location, natural resources, history. At the

beginning they are very important.

WHICH WORRIES YOU THE MOST?

EUROPE STUMBLES ALONE:

- In historical terms, the European Union has been a tremendous success. But relations between
Western Europe and Russia, and the Middle East have not reached the same level of maturity

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 - The trans-Atlantic alliance with the United States as a critical element of European security, but
there are tensions over budgets and strategy

- Greece, Brexit and the refugee crisis highlighted Europe’s urgent need of reform

- The medium-term survival of the EU cannot be taken for granted

- Companies in Europe should maintain capability at the national level as a contingency

NORTH AND SOUTH AMERICA: LOCKED IN AN AWKWARD EMBRACE

- The United States plays a critical role in world a airs

- For almost 200 years, the US has considered Latin America to be part of its area of in uence.
The other countries each have their own history and have balanced their relations with the US
with local political issues and concerns

- Regional institutions will continue to evolve

- Although commercial interests have driven public policy in the past, political issues will more
likely a ect business strategy in the future

CHINA’S RE-EMERGENCE AS A GLOBAL POWER

- China has made enormous economic progress over the last 30 years and is poised to become
the world’s largest economy

- While China is still militarily far behind the United States, it is modernizing its military capability
and particularly its navy

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- South East Asia is considered by China to be its own backyard

- China sees the last century as one of humiliation, and demands to be treated as an equal in all
matters

- Competition between China and the West has already spread to Africa and South America

JAPAN, KOREA AND SOUTH EAST ASIA: THE SEARCH FOR AN IDENTITY BETWEEN TWO
GIANTS.
- One of the key economic regions of the world, but it is caught between the geopolitical
maneuvering and economic rivalry between the United States and China

- The countries of the region will attempt to build independent regional institutions such as
ASEAN

- Companies operating in the region should be mindful of the geopolitical risks but also
recognize the opportunities that abound as the region develops

INDIA AT THE CROSSROADS:

- India has already consolidated its role as a major military and economic power in Asia, second
only to China after years of economic growth powered by liberal reforms

- An ongoing con ict with Pakistan, internal insurgencies, and some tension with China

- Violence between Hindu nationalists and Muslim population

- A revolutionary program to complete the reforms led by its charismatic and controversial Prime
Minister Narendra Modi

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 - Doing business in India will require companies to correctly gauge the pace of reforms and
adapt to the changing times while possibly hedging against the risk that the government fails in
its domestic and international agenda

AFRICA RISING: WILL IT BE THE NEW CHINA?

- A tremendously diverse continent with almost unlimited potential (human capital and natural
resources in some countries)

- It was the last part of the world to begin its modernization and was deeply impacted by the rise
of Islam, slavery, colonization, and decolonization

- The di erent regions have their own history and legacy issues to deal with (the ethnic and tribal
composition of their people, their abundance or lack of water, mineral wealth, …)

- It is in the process of building the institutions and regional military capacity

- Doing business in Africa requires a tremendous amount of local knowledge and a deep
understanding of the speci c situation in each country with respect to the region it is in, Africa
as a whole, and the world

THE MIDDLE EAST ON THE BRINK OF WAR AND PEACE

- The Arab-Israeli con ict has been a de ning factor for the region since 1948

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 - The con ict between Iran and Saudi Arabia is far more destructive today and has the potential
to deteriorate into an all-out Shia-Sunni con ict across the region

- Radical groups have mastered the arts of propaganda and social media and will continue to
pose a signi cant threat

- Revenue from oil and gas could be seen as part of the problem

- The long-term prospects in the region are uncertain for international business

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