Multinational Corporations (MNC) and their Effect On Foreign Direct Investments (Essay Sample)

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Multinational Corporations and their Effect On Foreign Direct Investments
Globalization, decentralization, synergy, and offshoring of corporate entities continues to fuel the proliferation of border-striding organizations known as multinational corporations (MNCs). The 21st century has seen multinational corporations emerge as the principal players in the global economy. Nowadays, the top 200 multinational corporations account for about 30% of the World’s total gross domestic product (Anderson and Cavanagh n.p). Consequently, the argument that multinational corporations shape the course of the global economy is no longer a postulation but a fact. As a result of this growing financial power, MNCs now affects foreign direct investments (FDIs) in a couple of ways.
Multinational corporations acquire new plants, patents, and assets in different countries through an international monetary flow process known as foreign direct investment. From an economic point of view, FDIs can be classified into two major groups, that is, horizontal FDI, and vertical FDI. In the case of the former, the concerned multinational corporation capitalizes in the identical industry overseas in which it runs locally while the latter involves investing in purveyor industries overseas (Franzini and Pizzuti 209). Both of these FDI categories give rise to succinct but significant factors with a direct effect on the host countries’ economies of scale.
Pursuant to Cohen, multinational corporations affect foreign direct investments holistically (289). The foreign direct investments in most countries around the globe continue to post a sustained growth all thanks to multinational corporations. The new capital injection spurs the growth of multifaceted course and effect processes such as the multiplier effect. This, in turn, translates into a significant increase in FDI stocks. Consequently, the host nation’s GDP receives a positive boost primarily through retained profits and investments channeled into it by multinational corporations.
Not so long ago, developing economies in third world nations relied cripplingly on the economies of developed states for their own existence. Nevertheless, globalization and technical convergence, achieved through the relaxation of stringent trade patents and the adoption of a near laissez-faire attitude towards the capital markets, has made it possible for developing economies to become part and parcel of world trade. To a large extent, multinational corporations can be considered as the major effectors of this radical shift. The immediate effect of this scenario is the birth of foreign direct investments in the economies of countries which previously had none.
Inward investment is also a principal effect of multinational corporations on foreign direct investments. When MNCs decides to invest in their subsidiaries, the investments usually amount to billions of dollars (Billet 18). While the reasons for making such sizeable investments may vary from mergers, acquisitions, diversifications, to the adoption of new product lines, the end results bear salient similarities. In essence, these capital injections raise the overall efficacy of the production likelihood frontier of the receiving country. The effect of this on FDI include, but are not limited to, job creation, substantial economic growth, and a noticeable increase in income per capita with relation to the wage bill.
The effects of multinational corporations on foreign direct investments can also be negative. For instance, in the course of the great recession, the subsidiary members of mos...