Key Changes Relating to GlobalForeign Direct Investment - Assignment Example

ASSESSMENT BRIEF will be assessed by a single piece of submitted work. Multinational Enterprises Assessment The assessment is a submission, not exceeding 3750 words, which addresses the following brief: 1. Set out a clear summary of key changes relating to global foreign direct investment and international production in 2012 over the previous year. You should include an accurate description of salient trends in the data (Word-guidance 750). 2. Critically evaluate the following three explanations for the growth of multinational enterprises: the internalization theory, Vernon’s international product-cycle model and Cowling and Sugden oligopolistic rivals approach (Word-guidance 1750). 3. Assess the impact of one transnational corporation on the UK using one of the following criteria: innovation or labour or trade or political sovereignty (Word-guidance 1000). In addition to the 3750 word extended essay, the submission should include a 250 word Reflection on the assessment. It should include a discussion of: I. What you learnt from the assessment? II. What you found most interesting? III. What you found most challenging? IV. How effectively did it assess the learning outcomes of the module? [Name of Module tutor] Statement of Authenticity: “I confirm that this submission is my own work. Any quotations are properly cited using the Harvard referencing method. All errors and omissions are my responsibility alone.” Sign Date 5/5/2014 [Word count: 3398] Introduction The development of firms in the global market has to be carefully designed otherwise the risks involved can be significant. In practice, it has been proved that the use of theoretical frameworks related to the specific activity can help firms to control threats and to develop strategies that will be flexible and clear. In any case, it has been proved that a global strategy cannot be effective unless it is aligned with global market trends. On the other hand, international market is not standardized, meaning that its performance cannot be easily predicted even in the short term. For this reason, before expanding globally, a firm needs to check the changes occurring in key economic frameworks, such as the Foreign Direct Investment and the International Production. In this paper, the challenges that firms face when developing their global strategy are presented and analyzed. Primarily, the most important trends in regard to FDI and international production are explained. Reference is made to 2012, as compared to its previous year, so that assumptions can be also made in regard to future market performance. Moreover, three important theories related to the growth of multinational enterprises are presented. These theories have been employed for showing the factors that can impact business activities at international level. The elements and the implications of these theories are made clear through the case of a popular British firm: GlaxoSmithKline. The above firm is well established in the international market but its practices in regard to innovation have caused concerns in regulators and theorists at local and international level. On the other hand, the firm’s success has been mostly based on its efforts for promoting innovation; this means that employing unique business practices for expanding globally may not be always acceptable, especially if ethical or legal concerns exist. Part 1 Summary of key changes relating to global foreign direct investment and international production in 2012 over the previous year. In 2011 the global foreign direct investment reached a rather satisfactory level, being estimated to $1.5 trillion (United Nations, UN, World Investment Report 2012, p.13). Another important characteristic of global FDI for 2011 has been the following: FDI has been increased in all countries, no matter the structure of their economy. For example, developed markets achieved an increase of their FDI by 21%, while in emerging markets the relevant increase was lower, by 11% (United Nations, UN, World Investment Report 2012, p.13). The highest increase of FDI was reported in the markets that are in a transition phase: these markets achieved an increase of FDI by 25% (United Nations, UN, World Investment Report 2012, p.13). According to the above trends, the prospects of FDI seemed to be positive, meaning that a further growth of FDI could be expected in 2012, compared to 2011, especially in the markets that are in a transition phase. However, the actual performance of FDI in 2012 has been towards a different direction: indeed, in 2012 FDI, at global level, was ‘decreased to $1.35 trillion’ (United Nations, UN, World Investment Report 2012, p.9).1 On the other hand, within 2012 the popularity of countries with weak economies, such as Africa countries, or with economies that face a transition, such as India, has been significantly increased (United Nations, UN, World Investment Report 2012, p.9).2 This fact shows a change in the interest of foreign investors as of the placement of their investments: it seems that foreign investors prefer countries that have many prospects for future growth, either because of their natural resources, such as the case of African countries, or because of their manufacturing/ industrial development, such as the case of India. Figure 1 – Foreign Direct Investment globally (source: United Nations, UN, World Investment Report 2012, p.12) The changes in FDI internationally are made clear through the graph in Figure 1. According to the above graph global FDI has been in a continuous increase from 2009 to 2012, a trend that changed in 2012; however, by 2013 an improvement in FDI is expected, a trend which will be stronger from 2014 onwards, as also highlighted in the above graph. Particular reference should be made to the changes in the sources of FDI in 2012, as compared to 2011: in 2012 the FDI from Asia and Africa significantly increased, compared to 2011 while the FDI from other regions, such as ‘Caribbean countries and Latin American countries’ (United Nations, UN, World Investment Report 2013, p.13) remained at the same levels with 2011. As for the international production3, the relevant figures show a similar trend, i.e. a trend for stable increase, even if at average level (United Nations, UN, World Investment Report 2013, p.23). More specifically, in 2012 sales have been increased at a percentage of ‘7.4% compared to 2011’ (United Nations, UN, World Investment Report 2013, p.23). Moreover, an increase in the ‘employment of foreign affiliates’ (United Nations, UN, World Investment Report 2013, p.23) has been reported; the increase has reached the level of 5.7%, compared to 2011. At the same time, a decrease in the volume of business assets has been reported in 2012, compared to 2011; this decrease referred mostly to firms that are already well-positioned in the global market (United Nations, UN, World Investment Report 2013, p.23), a trend that leads to concerns in regard to the efficiency of markets, meaning especially the markets’ potential to secure the profitability of their firms. In addition, an increase trend has been identified in regard to M&A; also, these agreements tend to be more common in ‘developed countries’ (United Nations, UN, World Investment Report 2013, p.23). Part 2 Critically evaluate the following three explanations for the growth of multinational enterprises: the internalization theory, Vernon’s international product-cycle model and Cowling and Sugden oligopolistic rivals approach. The continuous increase of power of multinational corporations is one of the most important characteristics of the global market. In such conditions, competition tends to be continuously increased and the efforts of firms for imposing oligopolistic practices become a problem for most countries worldwide (Foster et al. 2011, p.8). In fact, oligopolies have become a phenomenon in many markets, a trend that seems to be expanded since it is related to important economic benefits but also to critical political interests. Indeed, firms that govern a market are more powerful in controlling the government of the particular country, compared to firms the profitability of which is at low to average levels (Foster et al. 2011). In any case, because competition in the global market is strong multinationals have to continuously identify new approaches for securing their market position. The strategies employed by such firms in the context of the global market are made clearer through the theories developed in the particular field. A common theory in regard to the operations of multinational firms is the theory of internalization. The internalization theory emphasizes on ‘the differences between the global market and the local markets’ (Cherry 2001, p.9). The theory refers to different methods used by multinational firms for entering a new market. Three are the most popular methods of such kind: ‘exporting, FDI and licensing’ (Rugman 1996, p.109). According to Letto-Gillies (2012) the theory of internalization replies to the question ‘why firm exists’ (Letto-Gillies 2012, p.37). In regard to the particular theory emphasis should be given to the following fact: the theory of internalization does not, necessarily, describe the expansion of a firm worldwide (Letto-Gillies 2012). For example, the above theory can indicate the methods that a firm has employed for expanding its activities at national level or at regional level (Letto-Gillies 2012). If the expansion of a firm in the global market has to be described then the theory of internationalization, or other theory related to the international expansion of firms, should be rather preferred (Letto-Gillies 2012). From a similar point of view Rugman (2002) noted that the internalization theory can be understood by referring to the following example: in an oligopolistic market the firms that hold most shares in various industries may feel uncertain as of their long term stability (Rugman 2002). These firms can seek to FDI not so much for expanding worldwide but rather for securing their domination at national level (Rugman 2002). Such strategy is also known as ‘an oligopolistic reaction’ (Rugman 2002, p.80) and do not reflect the effort of a firm to enter foreign markets but rather its effort to eliminate threats as a dominant force in the local, oligopolistic, market (Rugman 2002). The role of internalization strategy is also explained in the study of Oh (2007). According to the above researcher, a multinational organization often prefers to expand locally, i.e. in its home country, since the costs involved in such strategy are significantly lower compared to the expansion in the global market, at the level that within the same market the differences that a firm has to face from region to region are minor, as for example the cultural or the legal differences (Oh 2007). In regard to the use of internalization theory by multinationals it has been supported that this theory leads MNEs in the following dilemma: when have to develop their activities in a particular market these firms have to decide whether ‘they should use internalization, as described above, or whether they should seek for outsourcing’ (Navaretti 2004, p.99); it is implied that internalization cannot be combined with outsourcing, at least not within the same market (Navaretti 2004). A different aspect of the growth of MNEs is presented through Vernon’s international product-cycle model. The specific model is based on the following idea: it is possible for FDI to be used instead of other forms of internationalization, as for example, exports (Bento 2009). The above theory supports the view that innovation and technology will be highly employed by firms that will attempt such strategy (Bento 2009). The international product-cycle model, as described by Vernon, reflects a specific mode of business activities in international market: at a first level, a MNE uses exports as a strategy for expanding globally. However, soon a supportive strategy is necessary; at this point, FDI is used as an additional strategy for promoting expansion (Fatemi et al. 1976). Through the FDI the firm transfers its knowledge in each overseas units; soon, these units are able to produce products similar to that of the home country but at lower cost (Fatemi et al. 1976). These products are then imported by the country in which the parent company is established (Fatemi et al. 1976). The international product-cycle model of Vernon is based on the ‘product-cycle hypothesis’ (Perez 2003, p.5), as developed by Vernon for showing the characteristics of the production process at local level. According to the product-cycle model, the needs of each phase of the production process in terms of technology are different (Perez 2003). In this context, the inputs required in each part of the production process are differentiated, both as of their volume and as of their content (Perez 2003, p.5). The above model could be also used in the global production process, after appropriate adjustments/ alterations taking into consideration the cultural, economic and political differences of markets worldwide. Another idea promoted by the product-cycle theory, as developed by Vernon, is the following: firms that are highly based on innovation can change their place of overseas operations and focus on markets ‘that are characterized by low costs’ (Solis 2004, p.27). Such decision could be quite possible under the following two terms: that technological standards used in the production process in each industry become obligatory while ‘low production costs become the key criterion of competitiveness’ (Solis 2004, p.27). In addition, the product-cycle theory leads to the following assumption: the ‘transfer of a firm’s resources, such as technology’ (Khan 1994, p.11) to its units internationally is not developed randomly but rather on the basis of the following hierarchy: first, the firm’s units in ‘advanced economies are served’ (Khan 1994, p.11). Then, the resources left are made available to the business units in other, less profitable, markets, such as ‘the markets of developing countries’ (Khan 1994, p.11). In any case, the international product-cycle model is based on the following perception: growth at international level can only achieved through continuous innovation as such activity enhances production, a term that it is required for the global economic development, including trade (Tolentino 2003). The product-cycle model seems to be quite effective but it can have certain implications: since each business strategy has different requirements and risks the results of replacing one internationalization strategy with another cannot be fully predicted in advance, especially in markets that are highly unstable (Bento 2009). Because of the issues related to the theory of Vernon, the following suggestion has been promoted by theorists internationally: the combination of different internationalization strategy can be a solution when the risks expected are high (Bento 2009). The above view is promoted by the so-called ‘new international trade theories’ (Bento 2009, p.34); these theories are based on flexibility rather than on the long term profitability. Another approach used for evaluating the growth of MNEs in the international market is the oligopolistic rival’s approach. The specific approach, as supported by Cowling and Sugden, is based on the following view: firms operating in the global market, which is characterized by strong oligopolies, have, necessarily, to ‘become transnational in order to face their oligopolistic rivals’ (Bailey et al. 2002, p.2). The above view is also known as the ‘monopoly capitalism approach’ (Bailey et al. 2002, p.2). In the context described above rivals can be opposed either directly, i.e. through direct competition, or indirectly, i.e. by developing practices that are more effective than those of rivals (Bailey et al. 2002). It should be noted that the oligopolistic rivals’ approach does not consider competitiveness as a decisive factor when developing global strategy (Roy 1998). Rather, according to this approach, MNEs should focus on the increase of their profits and not on the development of competitive advantage towards their rivals (Roy 1998, p.16). The increase of profits, as related to the oligopolistic rivals’ approach, can result by the establishment by a firm of production units in countries worldwide; in this way, the firm is able to keep its labour costs low, a fact that would enhance its profitability (Ietto-Gillies 2000, p.418). In other words, in the oligopolistic rivals’ approach profit is the priority for MNEs; for securing high profits MNEs have to expand their activities worldwide so that costs are kept low (Ietto-Gillies 2000). A potential problem of the oligopolistic approach is the following: the control over business operations is made more difficult since cultural and economic differences between the parent country and the host countries cannot be avoided (Ietto-Gillies 2000). At this point, the potential benefits of the oligopolistic approach could be reduced, since the costs involved in managing diverse workforce and in developing mechanisms for monitoring international activities could be higher than the costs from operating only locally. Part 3 Assess the impact of one transnational corporation on the UK using one of the following criteria: innovation or labour or trade or political sovereignty. The impact of innovation on the market. The case of GlaxoSmithKline. Multinational corporations are the key players in the international market. Most commonly, these firms have to use a monopolistic approach, at the level that their businesses are expanded globally but there is just one central place of operations, meaning the companies’ headquarters (Foster et al. 2011). Moreover, the highest percentage of multinational corporations is based on countries with quite strong economies, a trend that can be easily explained if considering the needs of each business for continuous funding and for stable market conditions, as such conditions are more common in highly profitable markets (Foster et al. 2011). GlaxoSmithKline is such business. The specific organization is based in UK and is considered as one of the most powerful competitors in the global pharmaceutical industry. GlaxoSmithKline is an organization which highly promotes innovation, meaning especially the development of new drugs of various types. However, this practice of the firm, i.e. securing patents for many new products, has caused issues of competition both locally and internationally. Of course, the area in which the firm operates, i.e. the development of ‘anti-viral products’ (Johnson 2003, p.153) is characterized by oligopolistic trends; for example, there are just few firms focusing on the same products as Glaxo. The potential of GlaxoSmithKline to promote innovation has been one of the most important advantages of the organization. In fact, in 1990s, when the creation of the firm through the merge of Wellcome and Glaxo was set under examination, the following issue appeared: the entry of the firm in the market, as an organization resulted by the merge of two powerful firms, as described above, could create market instability, at least at local/ national level (Harison 2008). Indeed, up today the marketing plans of the organization have been based on different criteria: the ones that are considered as most important today emphasize on the value of monopolistic approach ‘for competing in the global market’ (Haas-Wilson 2009, p.78). Moreover, monopolism is often required for securing competitiveness. Indeed, according to the study of Haas-Wilson monopolism is based on the potential of local market to support innovation, as achieved through production practices that are unique-compared to their value for the organization (Harison 2008). On the other hand, the growth of GlaxoSmithKline has been based on the introduction in the market of unique drugs, in terms of their effects on health. Reference can be made, for example to Zantac, a drug developed by Glaxo in 1981 (Curth 2006). When promoting Zantac the firm emphasized on its core advantages, such as the need for smaller dose for achieving benefits similar to those achieved with other drugs and the existence of ‘fewer side effects’ (Curth 2006, p.162), compared to other drugs of similar characteristics. Through the years, and after acquiring a series of firms, GlaxoSmithKline managed to become one of the most powerful firms in the global pharmaceutical industry (Haas-Wilson 2009, Hannaford 2007). As for innovation, this is promoted by GlaxoSmithKline according to a particular plan: ‘a major drug is produced annually’ (Hannaford 2007, p.58), in order for the product portfolio of the firm to keep its competitiveness. Following this schedule for promoting innovation the firm is able to keep a control over its costs but also over the risks involved. More specifically, when producing new drugs in a condition of emergency it is quite difficult for a firm to secure quality; GlaxoSmithKline has eliminated the chances for quality failures by keeping a rather low rate in promoting innovation; as a result, quality is secured, as possible, while production costs are kept within the limits set by the firm’s managers. Conclusion Operating globally is an activity with various aspects: a) the needs of each firm in terms of resources are different; thus, there can be no unique model for managing resources internationally, even if a basic plan, as included in relevant theories, can be applied; b) the international market is not stable; this means that the conditions in business environment are likely to be changed continuously, a fact that makes the planning of long-term business strategies quite difficult; c) regulations related to business activities tend to vary in countries worldwide. This means that firms that aim to expand globally have to be flexible, so that they can be periodically changed following market trends, both at local and at international level. In any case, the review of the literature related to the growth of MNEs but also of the data related to key global trends, such as FDI and international production, has led to the following assumption: global market is not predictable. Variations and unexpected changes can appear even if in countries with strong economy. The reason is that the interaction between the global market and the national markets is continuous and close. In this context, firms that aim to expand internationally should follow a multi-dimensional approach, meaning that expansion should be attempted not only internationally but also locally, so that risks are mitigated in case of strong market turbulences. GlaxoSmithKline has employed such approach; the firm has based its international expansion not only in common internationalization strategies, such as FDI or exports, but also in internalization strategy, i.e. in the expansion of firm’s units at local level. This approach verifies the value of ‘new international trade theories’ (Bento 2009, p.34) which are based on flexibility, as a key element of a successful business strategy. Bibliography Bailey, D., Harte, G. and Sugden, R. (2002) Making Transnationals Accountable: A Significant Step for Britain. London: Routledge. Bento, J. (2009) Economic Integration, International Trade and the Role of Foreign Direct Investment: The Case of Portuguese Manufacturing. Berlin: LIT Verlag Münster. Cherry, J. (2001) Korean Multinationals in Europe. Richmond: Psychology Press. Curth, L. (2006) From Physick to Pharmacology: Five Hundred Years of British Drug Retailing. Aldershot: Ashgate Publishing, Ltd. Fatemi, N., De Saint-Phalle, T. and Williams, G. (1976) Multinational Corporations. New Jersey: Associated University Presse. GlaxoSmithKline (2014) Organizational website. Available at http://www.gsk.com/ Foster, J., McChesney, R. and Jonna, R. (2011) “The Internationalization of Monopoly Capital.” Monthly Review 63(2): 1-17 Haas-Wilson, D. (2009) Managed Care and Monopoly Power: The Antitrust Challenge. Boston: Harvard University Press. Hannaford, S. (2007) Market Domination!: The Impact of Industry Consolidation on Competition, Innovation, and Consumer Choice. Westport: Greenwood Publishing Group. Harison, E. (2008) Intellectual Property Rights, Innovation and Software Technologies: The Economics of Monopoly Rights and Knowledge Disclosure. Cheltenham: Edward Elgar Publishing. Johnson, P. (2003) Industries in Europe: Competition, Trends and Policy Issues. Cheltenham: Edward Elgar Publishing Ietto-Gillies, G. (2000) “What role for Multinationals in the New Theories of International Trade and Location?” International Review of Applied Economics 14(4): 413-426 Khan, S. (1994) Strategy and Performance of Foreign Companies in Japan. Westport: Greenwood Publishing Group. Letto-Gillies, G. (2012) Transnational Corporations and International Production: Concepts, Theories and Effects. Cheltenham: Edward Elgar Publishing. Navaretti, G. (2004) Multinational Firms in the World Economy. New Jersey: Princeton University Press Oh, C. (2007) Three Essays on Market Penetration by Multinational Enterprises. London: ProQuest Perez, T. (2003) Multinational Enterprises and Technological Spillovers. London: Routledge. Roy, A. (1998) The Impact of Japanese Investment on the New Town of Milton Keynes. Boca Raton: Universal-Publishers. Rugman, A. (1996) The Theory of Multinational Enterprises: The Selected Scientific Papers of Alan M. Rugman. Cheltenham: Edward Elgar Publishing. Rugman, A. (2002) International Business: Theory of the multinational enterprise. Oxon: Taylor & Francis Solis, M. (2004) Banking on Multinationals: Public Credit and the Export of Japanese Sunset Industries. California: Stanford University Press. Tolentino, P. (2003) Technological Innovation and Third World Multinationals. London: Routledge. United Nations, UN. (2012) “World Investment Report 2012.” United Nations Conference on Trade and Development United Nations, UN. (2013) “World Investment Report 2013.” United Nations Conference on Trade and Development Reflection on the assessment Through the specific assessment I had the chance to study the various aspects of internationalization of businesses, especially of MNEs. Moreover, I was able to check the market conditions, as changed from 2008 onwards as a result of the global recession. One of the most important lessons of this paper is the following: the potentials of firms to expand in the international market are high and cannot be easily controlled, or prevented. This means that managers of MNEs have the discretion to choose among various strategies, depending on their firms’ needs but also on the market conditions. The most important lesson of this paper has been the following: businesses do not necessarily have to expand internationally in order to enhance their profitability. They can also expand locally, based on rules similar with those used in the internationalization of businesses. Read More