Dynamics of Multinational Companies - Essay Example

?Dyn?amics of multinatio?nal companies Dyn?amics of multinatio?nal companies Introduction Over the years, foreign direct investment (FDI) has become quite a common means for countries to move capital flows from one country to the other. Foreign direct investment simply refers to a situation where a business entity for a particular country invests in an income-generating asset in another country with a hope of return on the investment. Foreign direct investment has its benefits to the foreign investor, the home country, and to the host country (Froot 1993, 60). However, it should be noted that the benefits that come about as a result of FDI can only be possible if all the three parties follow the right regulations, and the ethical ways of doing business is strictly adhered to. This paper sheds some light on the costs, and benefits of FDIs to the investors, the home country, and the host country. In addition, it will also review how the country, and the firms’ level of development, and growth play a role in determining the costs, and benefits accrued from the FDIs (Weigel, Wagal & Gregory 1997, 56). Benefits and costs for The host country One of the core benefits of global foreign direct investment is that it creates an opportunity for money to freely flow to any business around the world that shows any signs of potential growth in the future. This is in light of the fact that when investors choose to invest their money, the main logic behind this is that they expect some forms of return from the investment. Additionally, the home country’s capital account will benefit from the inward flow from the returns on the investment. There are no standard criteria on who deserves the investment, and who doesn’t. This ensures that all the businesses get equal competitive advantage, and no particular business is favored over the others. Subsequently, economists observed that the best money will be invested in the best business anywhere in the world despite the race or color or culture. This in turn means that the goods, and services will reach the market just in time as compared to an instance when unrestricted FDI wouldn’t have been available. Benefits and costs for home country The foreign direct investment has an advantage to the investors too. The investors get to receive global benefits. The fact that the investors can freely invest in different countries reduces the risks likely to be suffered from the investment. Diversification brings about reduction in the risks likely to be incurred, and an increase in the returns that will be enjoyed from the investment (Stephan 2013, 43). Secondly, the other benefit to the home country that comes with FDIs is that the investors can learn new valued skills that may come in handy from the foreign markets. Thereupon, these skills are then transferred to the home country leader to even further growth, and development for the country’s economy. Moreover, the businesses also get to benefit in that when an investor chooses to invest in a particular business, it is often expected that the investor will ensure that the staff is competent enough to give the investment a return. Additionally, the investors will introduce new technology to the business to ensure that it has a competitive edge over its competitors.(Chung 1997, 40) The business will get to be enlightened on ways of doing business they would likely not have been aware of before the investors come into the picture (Jones & Wren 2007,54). As a result, there will be improved general living standards of the employees of the business with all these new incorporation. To add to this, since there are no kinds of favoritism in choosing which business to invest in, it would be expected that the government will have less influence on the business, and that the government isn’t able to put up poor economic policies that will affect the business. The other advantage for the host country is that there is a general improvement on the standards of living for the people in the country. The foreign direct investment comes with new employment opportunities for both the skilled, and unskilled labor. Inevitably, the new employment opportunities will lead to improved standards of living for the employees. The tax revenue from the company that received that received the foreign direct investment also adds to the total government revenue for the host country (Moran 2005, 80). However, there may be instances where the country will opt to reduce or neutralize the overall revenue by offering tax incentives to the foreign investors as a way of attracting more investment. With a lot of foreign direct investors also come some disadvantages. If most of the crucial industries in a country are run by foreign investors, there is a likelihood that the country’s economy is likely to be impaired in an instance where the investors choose to withdraw all its FDIs. For the home country, making investments in a foreign country comes with many risks. One being that when the foreign investors invest in another country, they are forced to employ the workers in the foreign country. The implication of this for the home country is that there is a reduction in the employment opportunities for the people in the home country (Moran 2006, 70). Additionally, there is the risk of the investing country losing its competitive advantage to the host country. This is a case mostly experienced by technologically advanced home countries. When investing in a foreign country, the home country will be forced to share their technological advancements with the foreign country as part of the FDI approach. This means that a lot of vital information about the technology has to be shared with the home country. There arises likelihood that the host country may at one point create an imitation of the technology despite the existence of the intellectual property rights. The IPR may not apply to the developing countries as they may not have the resources to uphold such protection by the several IPR decrees, acts, and regulations. The country and firms level of development and growth as determinants of the costs and benefits The country, and the firm level of development, and growth to some extent can determine the costs, and benefits that result from the FDI. The government probably has some laws, and legislations that govern the businesses from foreign investments. This could be in terms of the tax levied on these companies which will in turn affects the investor’s decision on whether to invest or not. The level of economic development of the country can also have an impact on the costs, and benefits that the host country will experience because of the foreign investment. The government can also encourage or discourage FDIs. It can encourage FDIs by offering incentives to the foreign investors who are seeking to invest in the country. On the other hand, it can discourage inward FDIs putting up ownership restraints, and setting up performance levels for the inward FDIs (Oman 2000, 98). The firm’s growth, and level of development also determine the costs, and benefits that result from the foreign investment. For instance, a fully developed company is most likely to benefit from a foreign direct investment because it would be expected that the company has skilled, and competent workers (Maskus & Webster 1994, 17). This in turn means that the workers in the company, and fully capable of taking advantage of investment towards attaining the companies goals, and objectives and hence a high return on investment. For the underdeveloped company however, there will be even more costs that come with FDI as the investors will be forced to hire new skilled and competent employees or to train the employees in order to improve their level of competence. In conclusion, it is clear that there is a tradeoff between the benefits, and costs related to foreign direct investment. It is therefore means that it would be up to the country’s government to decide which foreign direct investments will fully benefit the country’s economy, and which ones would not. Although it may take a while for foreign direct investment to be fully set up in a country, it will leave a permanent imprint (Moran 2011, 45). Bibliography CHUNG, W. C. (1997). Foreign direct investment's effect on host industry competition and productivity in the U.S.: the influence of initial host industry competition and foreign firm method of entry. Thesis (Ph. D.)--University of Michigan, 1997. FROOT, K. (1993). Foreign direct investment. Chicago, University of Chicago Press. http://site.ebrary.com/id/10229995 JONES, J., & WREN, C. (2007). Foreign direct investment and the regional economy. Aldershot [u.a.], Ashgate MASKUS, K. E., & WEBSTER, A. (1994). Comparative advantage and the location of inward foreign direct investment: evidence from the UK and South Korea. [London], Trade Policy Research Centre. MORAN, T. H. (2005). Does foreign direct investment promote development? Washington, DC, Inst. for Internat. Economics MORAN, T. H. (2006). Harnessing foreign direct investment for development: policies for developed and developing countries. Washington, DC, Brookings Institution Press. MORAN, T. H. (2011). Foreign direct investment and development: launching a second generation of policy research : avoiding the mistakes of the first, reevaluating policies for developed and developing countries. Washington, D.C., Peterson Institute for International Economics OMAN, C. (2000). Policy competition for foreign direct investment a study of competition among governments to attract FDI. Paris, OECD STEPHAN, J. (2013). The technological role of inward foreign direct investment in Central East Europe. [Basingstoke], Palgrave Macmillan. WEIGEL, D. R., WAGLE, D. M., & GREGORY, N. F. (1997). Foreign direct investment. Washington, D.C., International Finance Corporation, Foreign Investment Advisory Service Read More