Multinational Enterprises (Essay Sample)

MULTINATIONAL ENTERPRISES
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1.0 PART A: Key Changes in Global FDI & International Production
1.1 Global FDI Flows
The year 2013 recorded a Global FDI flows increase of 9% to a figure of $1.45 trillion as compared to $1.33 trillion of the previous year. This increase came in spite of international investments’ volatility resulting from a shift in the expectations of market towards a former tapering of quantitative easing in the US1. There was an increase in FDI inflows in all principal economic groupings; these are transition, developing, and developed economies. Developed economies’ share of total global FDI inflows was low but an increase is expected in the next three years. There was also a 9% increase of Global inward FDI stock to a figure of $25.5 trillion, a clear reflection of FDI inflows increase alongside stock markets’ outstanding performance in several parts of the globe.
1.1.1 FDI by Region
An analysis of FDI by region takes into account FDI inflows and outflows. The 2013 increase in global FDI inflows (of 9%) is a reflection of a moderate recovery with respect to economic growth alongside a number of large cross-border M&A transactions1. Ideally, the improvement spread across the three groupings of economies. It is, however, worth noting that there were different reasons for the increase in various part of then world.
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1. UNCTAD, 2014. World Investment Report. United Nations Conference on Trade and Development.
There was a 9% increase in FDI inflows to developed countries to a figure of $566 billion; this increase was primarily via improved earnings in EU foreign affiliates thus enhanced FDI to members of the European Union. With respect to the developing economies, there was an increase of FDI inflows to $778 billion which translates to 54% of the total global FDI inflows2. In transition economies, there was also a 28% increase of FDI inflows to a figure of $108 billion which translates to 7% of the total global inflows. There was an increase of inflows to the developing Asia with all sub regions recording an increase apart from West Asia. A 14% increase of FDI inflows was registered in the Caribbean and Latin America following continued stability in the year 20122. Unlike the case in the three previous years Central America became the region’s main driver. There was a 4% increase of FDI inflows to Africa resulting to a figure of $57 billion. Countries in the southern part of the continent particularly South Africa are characteristic of high inflows. Continued social and political tensions were main reasons behind declines of FDI inflows to many North African countries. Lower levels of inflows to Nigeria were a reflection of foreign transitional corporations retreat from the oil industry. Developed countries in Europe recorded a three percent increase of FDI inflows as compared to the previous year. North America recorded a 23% growth of FDI inflows owing to acquisitions by Asian investors. There was a 5% increase in FDI outflows to a figure of $1.41 trillion as investors from transition and developing economies went on with overseas expansion as a response to investment liberalization and economic growth alongside high income streams as a result of high prices of commodities2.
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2. UNCTAD, 2014
1.1.2 FDI by mode of entry
In regard to FDI by mode of entry, there was an alleviation of the downward trend recorded in the year 2012. This was a reflection of an improvement in the general investment outlook. There was a 9% increase of greenfield projects’ value; this was, however, lower than historical levels. On the other hand there was a 5% increase of cross-border M&As value. In the year 2013, FDI M&As and greenfield projects were characteristic of differentiated patterns among economies’ groups. Developed countries were outplayed by transition and developing economies with a 17% increase in announced greenfield projects’ values, alongside a73% increase for cross-border M&As.
1.1.3 FDI by Industry and Sector
With respect to industry and sector, the types of investment exhibited variation. In the primary sector, greenfield and M&A projects’ value recorded 14% and 32% increases respectively thus regaining momentum in the year 2013. This growth, however, had differences on grounds of groups of countries. Extractive industry’s Greenfield activity by transition and developed economies dropped to almost near zero confining business in developing countries. In these countries, there was an approximately 100% increase in value of Greenfield projects2. In addition, cross-border M&As value increased from -$2.5 billion to $25 billion. In the manufacturing industry, the year 2013 exhibited relative stable investment characterized by a limited decrease in Greenfield projects’ value (-4%) alongside 11% increase in cross-border M&As value.
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2. UNCTAD, 2014
With respect to Greenfield projects, the clothing and textile industries recorded an increase in investment with projects totalling over $24 billion. M&A and Greenfield projects were dominated by the services industry.
1.2 International Production
International production also exhibited an immense deal of strength in the year 2013. Foreign affiliate activity’s indicators showed improvement, however, with different rates of growth. The highest growth rate was displayed by sales (9.4%), with consumption and high 8economicm growth in transition and developing countries being the primary drivers. Foreign assets had a 7.9% growth rate which is an indicator of stock markets’ strong performance in line with FDI outward stock growth rate. There was a 5% growth rate for foreign affiliates’ value added and employment (this was almost same as FDI outflows growth rate). A small rate of growth (2.5%) was recorded by foreign affiliates’ exports.
2.0 PART B: Evaluation of reasons behind multinational enterprises’ growth
An immense deal of multinational companies finds significant growth opportunity in emerging markets. There are various fronts via which growth in these markets occurs: foreign investments’ opportunities, development of infrastructure, alongside consumer market expansion fuelled by increased income and emergence of the middle class. Such outsized emerging markets as Brazil, Argentina, China, and India have been identified as drivers of global and regional economic growth characterized by large populations, significant economic reforms, outsized physical sizes, significant political influence within their regions, alongside fast growth rates. Typical emerging markets are characteristic of constant changes representing both considerable risks and exciting opportunities for international enterprises. Businesses in merging markets are faced by the significant challenge of global financial crises. These markets exhibit high susceptibility to financial crises owing to the fact that they depend on external capital. Economists and scholars have made several attempts to explain the growth of international enterprises. To this effect, various theories have been developed in relation to the growth of multinational enterprises alongside other aspects of these enterprises. Outstanding examples of perspectives from which the growth of multinational enterprises can be viewed are the internalization theory and the transnational monopoly capitalism.
2.1 Internalization theory-Casson and Buckley
The internalization theory is a conceptualization of Casson and Buckley. In brief, Casson and Buckley show that multinational enterprises have the culture of organizing several activities internally in order to have the capability of developing and exploiting firm-specific advantages-FSAs. These FSAs’ proprietary ownership has the responsibility of overcoming the externality of knowledge as a public good. With consideration of market failure presence, internalization is a governance mechanism in the development and exploitation of FSAs. Ideally, internalization acts as an external market alternative for the development and exploitation of knowledge. Generally, Casson’s and Buckley’s work is a demonstration of the way market imperfection can have the consequence of pressure for internalization by multinational enterprises3. The work of Casson and Buckley can be referred to as a rare original contribution towards international business thinking. The development of the primary idea arguing that MNE has the capability of replacing the market was entirely independent of the thinking of Oliver Williamson. The relationship between the internalization theory, markets, and Williamson’s hierarchy approach was resolved via a publication by Hennart in the year 1977. Ideally, internalization theory acts as a comparative institutional approach towards MNE behavior analysis. This theory is characteristic of allowing the assessment of the relative effectiveness and efficiency of alternative mechanisms of governance with the objective of managing economic interdependencies. Considering the MNE to be a network having weak and strong ties among subsidiaries and between subsidiaries and parent, the application of the internalization theory is possible for the evaluation of the relative benefits and costs of the management of economic interdependencies. This is an example of a positive explanation of organization and functioning of MNE that is efficiency-based3. This has the implication that there is a possibility of extending thus linking internalization theory to network analysis. It exhibits full compatibility with the explanation of the firms’ boundaries, alongside the distinctions of organization between hierarchy, joint ventures, and markets.
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