Corporate Investment in a Large International Project - Assignment Example

Corporate Investment in a Large International Project Introduction According to the Invest (2010), the French pharmaceutical industry is still in good health, and has continued to attract foreign labs to the third largest pharmaceutical market in the world. In September 2010, the second largest pharmaceutical company, GlaxoSmithKline (GSK), made a €51 million investment in France. The amount is to be used for the new François Hyafil research center (Ile-de-France). Considering GSK invests up to $6.5 billion annually on research and development, its financial base easily accommodates their budget for investing in countries like France. Similarly, as a MNC, GSK does not necessarily have to source for external credit, but instead take advantage of intercompany loans, thus increasing the leverage of affiliates in high-tax countries. The final decision to invest is reached after considerable series of vetting of potentially viable investment destinations. In line with GSK’s desire to conduct a multi-million R & D investment, France has continually become a favourite for medical research and manufacturing. The investigation conducted on the “attractiveness and competitiveness of France” by the French pharmaceutical companies association, established that due to its size, France attracts most multinational companies out of the 20 that were polled. As the third largest market in the world and Europe’s leading manufacturer of medications for 15 years, France is one of the two major European markets (Teece 1993, p. 163). Roles of Multinational Corporations Multinational investment has played a vital role in the shaping of the global economy by creating employment and generating output. In relation to globalization, the growth of MNCs has increased FDI flows to parent countries, which have been motivated to undertake more cross-border investments. Further, MNCs have been associated with multinational intergration of goods and service markets, hence the global village. On the contrary, criticisms have been levelled against the contribution of MNCs in the extinction of domestic players. The reasons for the blame include MNCs control of large world market share; patented superior technology; economies of scale, brand names; and marketing and management skills that are too sophisticated for the domestic players to base their competition. Additionally, MNCs have been accused of repatriating funds in form of profits during periods of economic crunch. Taking actions that seem to counter the host country’s national independence and controlling their economic policies, have been reasons for criticisms against the MNCs’ operations (Hymer 1976,). Factors of FDIs However, the decision of MNCs to engage in foreign direct investment is based on a number of factors. First, MNC enter into a foreign market acquire control of natural resources. In this case, the MNC considers accessing natural resources directly, is cost-effective compared to access via an intermediary. For instance the American Anaconda has large investments in Chile for mining copper meant for production in the United States. Firms specialized in the manufacture using natural resources, largely fall in this category. Secondly, MNCs choose to enter into foreign countries to gain direct access to foreign markets. Investments by auto manufacturers fall into this category because they seek to take advantage of the readily available market. For instance production facilities in the U.S. by German’s Toyota, Mercedes, Honda, Nissan and BMW sought to counter export quotas to the American economy (Casson 1990). Third, MNCs in foreign countries seek to improve the efficiency of their operations, through exploiting economies of specializations and rationalizing production. This category of multinationals includes manufacturing companies capable of setting elements production processes in different countries. In addition to MNCs in the auto, electronics, and computer industries, research-oriented MNCs also fit into this category. In the technical fields, the more labor-intensive assembly stages of production are reserved for developing countries while the physical and human capital-intensive stages are performed in the industrialized countries. Therefore, GSKs €51 million investment in France for a new research center was aimed at improving their efficiency in the production of medications, by tapping into the rich French research-oriented pharmaceutical industry. The attracting force behind the entry of GSK and other multinational pharmaceuticals into French’s pharmaceutical industry in due to the billions of Euros invested and as Europe leader of producing medications for 15 years. In the last fifty years, the international economy has been numerously affected by the growth of MNCs. Researchers have established that the operations of MNCs has been the backbone behind the increased integration the global economy. Because MNCs contributes largely to the contemporary international economic, certain political and economic consequences have been identified (Teece 1993, p. 182). Effects of MNCs activities Although MNCs are motivated to enter into cross-border investments in pursuit profitability, very little has been done concerning the likely consequences impacting the host countries. Specifically, Teece (1993, p. 165) criticisms levelled toward the activities of MNCs, revolve around the effect of FDI on the host country. While others belive FDI are beneficial to the host country, others argue that FDI negatively impacts the host country. According to Moran’s (1999) benign model, MNCs positively contributes to the economic development of the host country. He further argues that savings in the industrialized economies are transferred through FDI to the economy of the developing country; hence increasing the limited capital for physical investments. Consequently, fixed investments created by MNCs which allow for foreign capital flow, free from problems of financial capital flows. This is because unlike financial capital flows, fixed investment is characterized by less volatility. In this case GSK would benefit both UK and France, as both are industrialized countries. The benign model acknowledges the role of MNCS in the transfer of technology to the host developing countries. Through ownership and control of proprietary assets and specialized technological knowhow in the host country, will transfer knowledge to the local firms. Successful transfer of technology and knowhow will result into positive externalities that will favor the host country’s development. Apart from economic development and technology transfer, the benign model suggests the transfer of managerial expertise by the MNCs. The expertise in managing large corporations allows MNC personnel to easily oversee processes and coordinate the operations of smaller enterprises effectively. Through the interactions between the MNC personnel and host country employees, transfer of skills ensures efficiency. Lastly the benign model points to the creation of marketing networks for host country producers. The interaction through transfers of FDI between the MNC local affiliates and the domestic firms providing the MNC affiliate forms a global marketing chain. In turn, viable export opportunities are created, that would not have otherwise been created. For instance, the UK marketplace would provide an ideal marketing opportunity for the local French medication producers (Gupta 1978). On the other hand, the malign model unlike the benign model focuses on the negative impacts of the above aspects of FDI on the host country’s economic development. Concerning the transfer of savings, the malign model considers the move as lowering the domestic savings. The impact can either be by offering credit facilities by the host country, or through MNCs earning rents on their products and repatriating the earnings. Instead of the earnings being used as a source of savings and credit to the host country, the repatriation reduces the funds available for financing local projects. In the GSK case, earnings generated in France are transferred to UK, thereby lowering the amount of domestic savings that would be used to finance local projects (Dunning 1996, p. 73). Similarly, the malign model argues that instead of allowing free transfer, the MNCs impose tighter control on the managerial skills and technology, thus not benefiting the host country. In an effort to ensure complete control over their proprietary assets, an established MNC fixed investment under the management of MNC personnel rarely employs host-country residents to managerial positions. This discriminatory move to cut of the transfer of managerial skills and technology to the host-country employees counteracts the initial benefit of the transfer under the benign model. Lastly, the malign model postulates that domestic producers can be eliminated by MNCs. According to Stopford (1996, p. 255), this can either be through cut-throat competition for businesses in the same sector; or by the MNCs desire to use imported components for the assembly their finished goods. First, the use of advanced management practises and state of the art knowhow, MNCs can out-compete local firms through price discrimination. Secondly, once domestic producers that receive supplies have been exited from business, the domestic input producers as well as suppliers face the threat of going out of business. Evidently, the French input producers and suppliers will be threatened of exiting business, by the UK desire to use imported components in their assembly. Therefore, whether the benign or malign model is correct, depends on one’s point of view. In short, FDI is beneficial as well as detrimental the host countries. From 2 studies conducted on 88 and 50 MNCs concluded that two-thirds of the 88 and more than half of the 50, reported beneficial impacts on the host countries. As such, benefits as well as costs are felt by host countries of FDI (Dunning 1996, p. 101). Unfortunately, there is no conclusive formula can be used to determine whether an investment will be detrimental or beneficial to the host country. Though, a clear understanding of certain considerations pertaining to the MNC country - host country agreement, on which the investment venture is based, will likely point in the likely direction. Primarily, the type of investment determines the level of bias on the host country. For instance, natural resource and market oriented investments are associated with biases that curtail on the cumulative economic development to the host countries. The reasons being, one, conditions of limited competition prevails for both investments; and two both can negatively impact the producers of host countries. Limited competition through monopoly control of natural resource deposits protects foreign affiliates in the extractive industries, against external competition through high tariffs. Similarly, both market oriented and resource oriented investments do not offer channel for local producers to link with international networks. Neither of the two investments discussed represented the UK-France GSK investment (Moran 1985). Unlike the two types of investments, efficiency –oriented investments carries less bias, and instead offers higher probability that the MNC activity will positively impact the host countries. Because of highly competitive international industries, the efficiency-oriented investments strive to reduce costs and rents levels, on a lower scale. Instead, the investments in an effort to promote local firm growth, would establish backward linkages to network with domestic input producers. Rather than “crowd-out” investments by domestic firms, efficiency-oriented investments “crowd-in” investments. For instance, GSKs adoption of imaging cellular and tissue-related pharmaceutical and medicine technologies from the France’s innovation clusters would help crowd-in investments. Lastly, international orientation of MNCs eventually creates room for host-country firms to build links and global marketing networks. Despite, the biases of both resource-oriented and market oriented investments pitied against those of efficiency-oriented investments, host countries still deserve to benefit greatly. This is reflective of the UK-France 51 million Euros investment (Stopford 1996, p. 279). Therefore, MNC might at one time be beneficial to the host country economic situation, while at some other time be detrimental. Depending on the type of investment adopted, the host country, is least expected to benefit through a resource-oriented investment, but receive substantial benefits from an efficiency-oriented investment. On the other hand, the market-oriented investment will both be beneficial and detrimental to the economic development of the host country. But it is fundamentally important to understand aspects of the agreement between the government of host country and the firm, as it will determine the extent of impact of any particular investment. Essentially, the agreement can convert a resource-oriented investment, that would otherwise be detrimental to the host country, into a highly beneficial investment; or a highly beneficial preposition such as efficient-oriented investment into a detrimental investment. Conclusion The decision for GSK to invest in France elaborates the extent to which globalization has impacted businesses worldwide. Although such a move would be faced with numerous oppositions a few decades ago, the benefits associated with FDI have forced countries to be receptive of such ventures. Although the investing country might be motivated by profitability, the accruing benefits equally benefit the host country. It is the responsibility of the host government to stipulate the binding terms of the agreement in order for the MNC to benefit the host country, in the long run. However, other MNCs commonly associated with certain bias gains access into the host country with the aim of exploitation. Such MNCs are commonly in the resource-oriented or market-oriented investments. References Casson, M 1990, Multinational corporations, E. Elgar Publishers. Dunning, JH 1996, “Re-evaluating the Benefits of Foreign Direct Investment,” in Companies without Borders: Transnational Corporations in the 1990s, edited by UNCTAD. (London: International Thomson Business Press), pp. 73-101. Graham, EM 1996, Global Corporations and National Governments. Washington, D.C.: Institute for International Economics. Gupta, NS 1978, Multinational corporations: a study of socio-economic implications on the countries of Third World, Pragati Prakashan, India. Hymer, S 1976, The international operations of national firms: a study of direct foreign investment. Cambridge: MIT Press. Invest 2010, France Agency “The French pharmaceutical industry continues to attract foreign labs”, Viewed 19 November 2010, < http://blogs.afii.fr/en/2010/10/the-french-pharmaceutical-industry-continues-to-attract-foreign-labs> Moran, TH 1985, Multinational corporations: the political economy of foreign direct investment, Lexington Books. Moran, TH 1999, Foreign Direct Investment and Development: The New Policy Agenda for Developing Countries and Economies in Transition. Washington, D.C.: Institute for International Economics. Stopford, JM 1996, “The Growing Interdependence Between Transnational Corporations and Governments,” in Companies without Borders: Transnational Corporations in the 1990s, edited by UNCTAD. (London: International Thomson Business Press), pp. 255-79. Teece, DJ 1993, “The Multinational Enterprise: Market Failure and Market Power Considerations,” in The Theory of Transnational Corporations, John Dunning, editor. New York: Routledge, pp. 163-182. Read More