IBUS90003 Chap.1 Multinationals, FDI and Cross-Country Distance
Multinationals, FDI and Cross-Country Distance
Week 1 sets up the whole subject with one question: if multinational enterprises are so powerful, why do so many of them stumble when they cross a border? The answer the seminar develops is distance.
A firm counts as multinational when it owns or controls assets that generate income in two or more countries, and it becomes one through foreign direct investment, the kind of investment that carries management and control rather than a passive financial stake.
Multinationals are rare, a tiny fraction of all firms, yet they account for a large share of world output, trade and employment, and their foreign subsidiaries are usually bigger, more productive and more export-oriented than domestic firms. Power does not guarantee success, though.
The largest global companies have long earned lower returns on sales abroad than at home, and well-known firms such as Uber, eBay, Tesco and Starbucks have struggled in particular foreign markets.
The chapter introduces Ghemawat's argument that distance still matters and uses it to read two topical pressures: the attraction of emerging markets, where growth is fastest but differences are sharpest, and the political backlash against globalisation, illustrated by Apple's attempt to assemble a computer in Texas.
By the end you should be able to define an MNE and FDI precisely, explain why being multinational is an option rather than an imperative, and use distance to explain why a strong firm can still fail abroad.
What this chapter covers
- 01
Definition of a multinational enterprise and of FDI
- 02
The 10% control threshold and portfolio investment
- 03
How large multinational activity really is
- 04
Why distance still matters in international business
- 05
Emerging markets as the growth frontier
- 06
Anti-globalisation and the limits of reshoring
Worked example · free
Explain a strong retailer's failure in a nearby market
- 2State the principle: distance shapes the firm's strategy and performance, so home dominance does not transfer automatically across a border.
- 2Apply it: similar language and income hide other differences, such as shopping habits, store locations and local competitors, that an unchanged format ignores.
- 2Conclude with the lesson: going abroad is an option with real costs, so the firm needed to study the market and adapt rather than assume closeness meant sameness.
Key terms
- Portfolio Investment
- A financial stake in a foreign company held for return without management control, typically below the 10% voting threshold used to define FDI.
- Cross-Country Distance
- The set of differences between home and host countries that raises the cost and risk of doing business across a border.
- Emerging Market
- A fast-growing economy outside the established OECD markets, such as the BRICS, where opportunity and distance are both high.
- Anti-Globalisation
- Political and social pressure against open trade and investment, driven by the share of the population that loses out from globalisation.
Multinationals, FDI and Cross-Country Distance FAQ
What counts as a multinational enterprise?
A firm is multinational when it owns or controls income-generating assets in at least two countries. Exporting alone does not qualify; it is ownership and control of operations abroad that matters.
Why is 10% used to define foreign direct investment?
A holding of 10% or more of voting power or ordinary shares is the working line at which an investor is treated as having management influence, separating FDI from passive portfolio holdings that are bought only for financial return and carry no say in management.
Do multinationals earn more abroad than at home?
Not on average. The seminar reports that the Fortune Global 500 earned lower average returns on foreign sales than on domestic sales over 1990 to 2023, a reminder that operating abroad carries real costs.
Why did Apple struggle to build a computer in Texas?
The local supply base could not deliver custom parts at the volume and speed Chinese suppliers offered, showing that manufacturing depends on a whole ecosystem rather than one factory.
Exam move
Start by learning the two definitions word for word, because Part 1 questions often hinge on them: an MNE owns or controls income-producing assets in at least two countries, and FDI carries management and control, set at 10% of voting power.
Then build a short list of failure cases from the seminar, such as Uber and eBay in China, Tesco in the United States and Starbucks in Australia, and beside each write the difference that hurt the firm. That list becomes your evidence bank for the case part of the exam. Next, practise explaining why multinationality is an option, not a requirement, using the returns comparison and the costs of distance.
Finally, rehearse a short argument on the Apple case that links reshoring to industrial ecosystems and trade politics; it is a compact example you can adapt whenever a case raises government pressure to bring production home.
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