Multinational Firms Are the Force for Progress - Essay Example

? International business - draw on theory and evidence assess the extend which multinational firms are a 'force for progress Contents Introduction 3 Body 4 Conclusion 12 Reference 13 Introduction In the process of globalization, multinationals have been the compelling point. Multinationals have played a tremendous role in the technology, information and resources from one part of the globe to another. Globalization has been defined as the process of increasing economic integration. Economic integration can be linked through three distinctive channels, international trade, international capital movements and international diffusion of technology, knowledge and information (Kleinert, 2004, p.1). Changes in the policies and economic system in the developing countries have lead to a shift the way governments had perceived their interest. Hence there has been a wide range of attitudes of government towards the multinationals. Economic globalization has lead to the widening and extent of international transactions. One of the consequences of globalization is the growing convergence of the level of income, consumption pattern and also institutional structure among the industrialized countries and developing countries. To most important determinants of globalization includes fast and extensive implementation of new technologies mainly computer technologies and information, organizational cost and also cross border communications and secondly, liberalization of domestic and also of international markets. But it can also be said that globalization has not affected all the countries and also regions in some way or the other. It has resulted in widening the assets and also income gaps between the developing countries and industrialized countries (Dunning & Narula, 2004, p.39). The globalization has emerged as one of the going concern and has forced the multinationals to excel in its respective industry by way of expansion and creating a brand name all over the globe. Body Growth of Multinationals Post war period has witnessed the unprecedented and sustained growth in the multinational corporations. There has been a growth of international business which has been financed by the foreign direct investment (FDI) which further has been accompanied by variety in its source of geographical distribution (Tolentino & Tolentino, 2004, p.1). The subject that has raised maximum interest in relation to the promising economies is the rise of multinationals. The framework which is designed to explain the growth of multinationals are hence not adequate enough to understand the growth of emerging multinationals as in today’s date (Dolfsma, et.al, 2009, p.146). With the expansion of world economy it promoted a recovery in the rate of FDI in the global scenario. By the year 1960, the global stock of FDI has reached about $60 billion and by 1980 it stood at about $500billion. It was during these decades that the term multinational were invented and the economic theorist has turned their attention in explaining the existence of international firms. During 1960’s US have accounted nearly 85% of all new FDIs flows. By 1980 it held about 40% of the stock in total. Today the German have managed to surpass Netherland. In 1980 there was no multinational investment made in neither China nor India and Japan accounted for only 1% of the FDI stock. 1980 was the phase when globalization got intensified. Japan share of manufacturing increased from merely 55 to about 20% thirty years later the inception of globalization. The most striking changes took place with the emerging countries. Multinationals were seen as a means to develop new products, technologies and also skills. Chain adopted the market oriented policy is an example of starting point of new global economy. Deregulation and also privatization has further opened up new opportunities with respect to globalization and includes services such as tourism, transport, telecommunications and other services. Multinational faces risk of expropriation but the rules of international property were not resorted. In countries such as China, Europe the multinational faced uncertainties with respect to the enforcement of contracts and legal rights. But the government supported the multinationals to invest and did not withdraw from the market. With the introduction of tariff reduction all around the globe made possible growth rate in trade and economic integration. With respect to trade policies, in the year 2002, 12 members of the European Union abolished the national currency and have adopted the new Euro currency. Canada, US and Mexico had formed the NAFTA, North American Free Trade Agreement in 1994. The cost and also the risk of managing services through distance were compact by changes made in the communication and transport technologies. The development of information technology revolutionized communications and with rise o internet, countries were able to make its presence in the globalization era. Multinationals have become the leading driver in the global economy. It can be said from the evidence that during 1980s the FDI rate was 14% per year and by 2000, the growth of FDI increased to 40% per year. This was due to a huge investment made in cross border mergers and acquisition. In addition these were driven by new opportunities such as internet related technological change. The total stock of FDI reached $6.8trillion in 2001 before stagnating for two years as the share price fell. The stocks of multinational remained largely with North America and Europe but there was a rise in China too. China became the second largest recipient of FDI after US. Since service sector represented quarter of total world stock and accounted for one half of the FDI by 2000. Organizational forms evolved with the integration of international production as the multinationals proceeded. In Industries Corporation were created mainly by merger and acquisition. Large organization spends heavily on its R&D for successful innovations. The new global economy was regarded as complex and large organization spend more on innovation and also on market power. The economy is thus regarded as worldwide web of inter firm connections. However it remained less obvious that the global market had spawned a mass of global firms. Flow of trade remained more regional than global. Only few multinationals operated on global basis. The firms generated high revenue from their home regions. A study which was conducted in 500 largest companies revealed that about 380 of the sales came from home regions. Rugman and D’Cruz managed to find only nine firms which acted globally and these comprised of organization which belonged to the telecom, computer and other high tech sectors such as Sony, IBM, Intel and others. With a rise in the global competition, local and geography remained central to the corporate strategy (Jones, 2005, p. 13-17). Rationales for Growth Growth encapsulates a relative measure of organizational size which includes expansion in employees, assets and size. Theories have attributed in the growth of organization with respect to managers and administrators who makes decision on policies in the organization. Technical Efficiency Force The multinational theories have concentrated on the relation in between the performance and growth of multinationals. Mangers of firms should pursue growth as efficiency in technology enhances performance, where growth can increase sales, profits and market power and also reduce costs. As with the growth of multinationals, firms can also specialise in order to exploit factor efficiencies and also economies of scale. Secondly as profits usually provides managers means to reward and also influence the stakeholders, therefore desire for high performance indirectly fuel the growth of multinationals. Stakeholders are often influence with remuneration and rewards which includes wages, dividends, fringe benefits and also commissions. But growth of multinationals does not necessarily means profits. The components of cost, revenue and profits may sum up together and form a reason for growth of multinationals. Managers believe that as firms tends to grow the cost decreases through efficiencies, economies of scale and specialisation and thus the reduction in cost may induce growth. Lastly managers pursue growth in order to increase the market power (Haley, 2001, p.75). Ideological Factors: Multinationals growth has a strong ideological justification as the stakeholder’s associate growth with that of vibrant values. Stakeholders value growth as a symbol of achievement. As the organisations experiences stress and forces from the external environment which hinders the growth of the organisation, both the organisation and the society often tend to confer admiration and prestige on people who bring about it. Secondly, with increase in the size of the organisation it may constitute of organisation goals and benchmarking progress. Most of the multinationals uses rates on assets (ROAs) and also growth rates. However performance measure does not mean that stakeholders tend to value the growth of multinationals (Haley, 2001, p. 76). Political Forces Multinational growth maintains dominant coalitions, helps to fulfil the stakeholder’s goal and also enhances managerial benefits. With growth, job security is provided to the dominant coalitions. In a big multinational, jobs seek permanence and the relation with its suppliers and customers tends to enjoy more durability, it contributes to managerial security and restrains transfer of manager within the multinationals. Secondly, growth also tends to facilitate to achieve what is called as quasi resolution of conflict. The managers in the growing multinationals find the demand of the stakeholders easier to satisfy if only the growth do not incur at diminishing return. Managerial desires for more benefits as multinationals result in growth. According to Gordon (1945) managerial power which includes prestige, salary and job security tends to improve the working condition and help the firm to grow. Apart from the above factors, executive salaries are also correlated with the growth of the organisation. Simon (1957) argued that managerial salaries are often associated with greater span of control (Haley, 2001, p. 76). Trends in Global Economic Activity The economic growth is bound not to run in a smooth manner, it’s often termed as roller coaster where the ride is sometimes gentle and sometimes stomach wrenching. One of the major characteristic of the growth of the global economy is its inherent volatility and secondly is the increasing interconnectedness with the global economy. Such interconnection with the global economy has three major dimensions, which are trade grows faster than the output, FDI growth is faster than trade and structural imbalances in the world economy. Every since 1960, trade has grown at a faster rate than output. In the second half of the 20th century the world merchandise trade increased almost by twenty fold while the world merchandise trade had increased just six fold. As a result more production is being traded across the national boundaries. Countries have grown to be more interconnected with the help of trade flows which is usually reflected in the ratio between trade and GDP thus higher the rate the higher the rte of dependency on external trade. There has been observed a huge tendency for countries to trade mostly with its neighbouring countries. Europe has been regarded as the world’s major trading region. About 7% of the export goes to North America and another 7% to Asia. Asia is regarded as the second most trade region, where only one half on the trade is conducted internally. One fifth of the external trade goes to North America and about 18% to Europe. North America also conducts about 50% of trade operation internally which includes Asia, Europe and Mexico where each of the region accounts for nearly 20% of North America external trade and 8% in Latin America. The second dimension of interconnection through trade flows in that the FDI has managed to grow faster than trade. Direct investment is termed as an investment made by one firm in another with an intention to gain control over the operation of the firm. Thus FDI is direct investment which is made across national boundaries in order to buy a controlling investment in the domestic firm. FDI grew at a high rate during the 20th century. The divergence in the trends of growth between trade and FDI was extremely significant. It suggested that the interconnection within the global economy has primarily shifted from trade to foreign direct investment. The trends in the growth of FDI and trade are thus not independent of each other. One of the common elements in the connection between trade and FDI is transactional corporation. The number of transactional corporation has grown over the past decades. According to UNCTAD there was about 82000 parent organisation and TNC controlled about 810000 foreign affiliates. TNC is said to account for nearly two third of the export on the global basis of goods and services. Unlike the international trade theory, intra firm trade does not primarily take place at an arm’s length. Intra firm trade are subject to internal decision of the TNC and not external market prices. Such type of trade has gained importance as the production network of TMC has become more complex. Apart from the intra trade, another measure for the global integration is the importance of inward and outward FDI to country economy which is measured in terms of GDP. The importance of FDI with respect to the national economies has increased virtually across borders which is a clear indication of increased connectivity with the global economy. But in case of trade the importance of FDI towards economies is highly variable. Hence it can be said that inward FDI has increased to a great extent in terms of importance. The extension of transaction costs theory into the international firm is mainly due to Buckley and Casson (1976), McManus (1972) and other major contributors. McManus aims to develop theory on international firm by way of identifying the conditions in different countries which will earn a higher total income if the control is internationally centralised. McManus analysis was further supported by Peter Buckley and Casson (1976) in “A long run theory of the MNE”. The started with some hypothesis such as firms tends to maximise profits in imperfect markets; Internalization of markets mainly cross border generates MNE. But the main factors responsible for the decision of internationalisation are region specific factors, industry specific, nation specific and firm specific factors. Apart from the above the two main areas of internationalisation are market for knowledge and market for products. Thus it can be concluded that the theory of internationalisation has proved to be a success for the multinationals and has further lead to the spread of internalization and externalization (Gillies, 2012, p.100). However the international theory was highly criticised by Cantwell. The criticism can be summarised as the international theory is not based on production but on exchange; the managers play a passive role, they tend to react to the market condition; the theory of internationalisation considers advantages of ownership as unnecessary with regards to the explanation of the international activities (Gillies, 2012, p.102). The multinationals have established as tangible actors and enactors of works which are less visible. With the growing importance for the multinationals on the international grounds is a reflection of dynamic structure for the global system. The size importance and number in the global environment have constantly grown larger. In the current stage of global economic process, the MNC have positioned themselves as truly global player. The multinationals existence has been characterized by strategic moves which were mainly designed to face the global competition. Companies have been forced into the international strategic alliances as no one company could claim the technology capacity in areas concerning knowledge in order to guarantee the market edge. With the help of alliances it has been able to produce global marketing partnership. Some of the examples include the case of Boeing and Mc Donald’s, Siemens, Toshiba and IBM. From the economist’s point of view, the multinationals do accordingly to their wants. One of the most asked queries is how did enterprises managed to become multinationals and also global players. According to Chandler, the decisions are made by the management. The managers of the enterprise should invest in the management personnel with production and also distribution if the enterprises and mangers are interested in taking advantage of cost and new technologies of production which means expansions. The expansion in terms of companies results in both intrinsic and extrinsic nature. Hence the enterprise should respond to the changing technologies with the market demands in innovations and develop new way of marketing. However it can be observed that all enterprises have not expanded to become global players may be because they did not feel the need of expansion. The expansions have forced the multinationals to adopt o new changes and alter the structure in order to meet the requirements of the demand created by the customers (Kachiga, 2008, p.43). Conclusion The growth of the multinationals along with the production of firms across the boundaries has added to a new dimension to various different branches of economic thoughts, international theory, theory of trade and bargaining theory. Factors are insignificant in order to analyse the consequences of the behaviour of international trading which tends to take on a new meaning within the multinationals. The most important is the intra price across the boundaries surrounding the national economy. Interactions between the domestic economy and the multinationals usually give rise to new and emerging tensions. This takes place because the growth f the MNC has coincided with the development made in communication, technology, and intervention of the government in the economic affairs. The government have tries to control the multinationals so that the MNC behave in a way which is consistent to the policies and also mechanism. Thus it can be said that the multinationals are forced to progress in terms of their expansion, economy rate and global expansion. Multinationals have evolved over the years and has proved out to be successful. Bu with pressure from the country, economy and competitors the multinationals are made to succeed in every condition and are believed to fair well in the worst situation also. There have been many barriers in the success of the MNC but they have managed to set back and stand still with flying colours ruling almost every part of the globe. Reference Dolfsma, W. Duysters, G. and Costa, I., 2009. Multinationals and Emerging Economies: The Quest for Innovation and Sustainability. USA: Edward Elgar Publishing. Dunning, J. H. & Narula, R., 2004. Multinationals and Industrial Competitiveness: A New Agenda. USA: Edward Elgar Publishing. Gillies, G. I., 2012. Transnational Corporations and International Production: Concepts, Theories and Effects. USA: Edward Elgar Publishing. Haley, U. C. V., 2001. Multinational Corporations in Political Environments: Ethics, Values and Strategies. World Scientific. Jones, G., 2005. Multinationals and Global Capitalism, From the Nineteenth to the Twenty First Century. Oxford University Press. Kachiga, J., 2008. Global Liberalism and Its Casualties. UK: University Press of America. Kleinert, J., 2004. The Role of Multinational Enterprises in Globalization. New York: Springer. Tolentino, P. E. & Tolentino, P. E., 2004. Technological Innovation and Third World Multinationals. Routledge. Read More