Global Financial Crisis and Its Influence on the Effectiveness of MNE Operations - Essay Example

Current Global Financial Crisis and Its Influence on the Effectiveness of MNE Operations Table of Contents Introduction 3 Global Financial Crisis 3 Influence on the MNC operations 7 Conclusion 9 References 10 Introduction ‘Global Financial Crisis’ is found to be one of the most widely discussed terms in the world over the past three years. The recent financial crisis has not been limited to any particular country or economy; rather it has affected almost all the major economies throughout the world. Several factors that act as causes of such a massive massacre are already identified. Large number of organizations and individuals around the world are badly affected by this financial turmoil. In order to reduce the effects of it important steps have been taken by various governments and regulatory bodies. Significant changes have already been made in the financial policies. Organizations have also changed their strategies in order to cope up with the losses that are made due to this turmoil. This paper helps to have a clear understanding regarding the recent global financial crisis and its nature. Moreover it also gives a fair idea about the way in which the financial crisis has influenced the effectiveness of the operations of multinational corporations. Global Financial Crisis In the later half of 2008, the biggest financial crisis since Great Depression started off its journey. Over the next few months billions of investments that were related to mortgage went bad. Mighty investment banks which used to dominate the financial market were either collapsed or were reinvented as commercial banks. The place of origin of this crisis was US and it is the most affected country by this financial turmoil so far. US government seized the country’s largest insurance company (AIG) and the largest lending company (Washington Mutual). Huge amount of money was pumped into the system by the Federal Reserve. A 700 billion dollars bailout plan was passed by Congress. Such actions prevented a full-scale meltdown. The crisis, however spread throughout the globe, causing the collapse of banks around Europe and forcing countries from Pakistan to Iceland to seek emergency financial support from International Monitory Fund. A ferocious circle of reduced demand, rapid job cut and tightening credit was formed and the global economy got into recession (The New York Times, 2010). In 2009 most of the countries took steps for stimulating their economies. In US a stimulus package of $787 billion was passed. China also undertook a $500 million stimulus plan. Central banks of various countries cut interest rates. Federal Reserve however took an extraordinary step by purchasing mortgage-backed securities worth more than $1 trillion. Automobile giants like Chrysler and General Motors were forced by the government to declare bankruptcy. Over $60 billion was invested for saving these two companies. Situations were significantly under control by the end of summer 2009. Big banks were found to be reporting major increase in profits. Most of them either repaid or were in the process of repaying the bailout money to the government. However credit was found to be still significantly tight for small businesses. Unemployment rate was at the highest level in the last fourteen years (Congressional Oversight Panel, n.d.) and anger over the system and crisis was on the rise (The New York Times, 2010). It is found that the total value that was lost till the mid of 2009 was almost $14.5 trillion. According to a report of Bloomberg, US tax payers were expected to spend around $9.7 trillion in terms of bailout plans and packages (Shah, 2009). The picture will be clearer from the following table. [Source: Global Issues, 2009] In 2010, again the markets across the Europe are shaken up when the actual size of Greece’s debt is revealed. A new government in the country has identified that the amount of deficit is actually three times higher than the amount that has been acknowledged so far by the previous government. This crisis has also disclosed the significant divisions among the Euro zones. At the one hand rich northern countries are given more importance and on the other hand countries like Greece, Spain, Portugal and Italy are still suffering from credit bubble bursting. These countries are found to be unable to bring down the value of their currencies. The markets were getting more and more nervous. Finally in May I.M.F. and European Union promised to make close to 2 trillion dollar available to those nations that are in need (The New York Times, 2010). Three main causes that have resulted to this financial crisis are identified. These are cheap money that resulted out of low interest rate, lack of regulations and extreme borrowing by three major sectors which are consumers, government and corporations (Gandevani, 2009). There is a unique nature of the recent financial crisis. It can be seen as a combination of a credit crunch, a burst of ‘housing price bubble’ and equity price bust. It is different from any other financial crisis that the world has seen in the past. There were several such occurrences of busts in equity and house prices and there were many such incidents of credit crunches before. In fact according to the research work of Stijn Claessens, M. Ayhan Kose and Marco E. Terrones, prior to this crisis the world economy experienced 28 credit crunches, 58 busts in equity price, 28 house price busts and above all 122 recessions during the period of 1960-2007 (Claessens, Kose, & Terrones, 2008). Despite of so many episodes of crisis, still it can be said that this crisis is a unique one which is entirely different from all those that have happened in the past. This is unique because perhaps this is the first time when a broader economy is so badly affected by a financial crisis. In fact initially it was very difficult for the experts to assess the impact of it on the real economy. It is truly a global financial crisis. Moreover the roots of this crisis are found to be in the financial systems of the developed countries. Furthermore the current financial crisis has changed the attitudes of individuals and organizations towards the process of taking risks. As a result the financing process of innovation activities and R&D might get hampered and this in turn might affect those areas of activity that are potentially dynamic and require reallocation of resources. According to a report that was published by European Union, due to its global nature the present crisis is expected to have significant negative impact on the potential output and there is possibility that the growth will take place at a slow rate for a prolonged period (European Commission, 2009). Moreover this global nature limits the possibilities of engineering a strong recovery through the transfer of resources from non-tradable goods segment to the export sector (European Commission, 2009). Influence on the MNC operations Generally multinational corporations are those businesses that operate in several countries rather than in only one country. From farming to producing computers, multinational corporations are found to be present in almost all the sectors. Most of the MNCs are found in the manufacturing sector. MNCs get different advantages in different countries. They are renowned for creating huge number jobs throughout the world and spreading technologies and skills in different corners of the world. Large wealthy multinational corporations often help poor governments for improving the standard of living of common people’s life and making better plan for development (Algarra, 2002). As far as this financial crisis is concerned it has badly affected the multinational corporations throughout the world. From General Motors to AIG, all the MNCs that were considered as the pride of their country, are desperately trying to stay afloat with the help of government aid. Prior to the period of financial crisis markets were dominated by the MNCs. They were reporting huge profits, their executives were getting huge compensations and they were making huge investments throughout the world. Apparently it was seemed that their operating models were effective and efficient enough to keep them on the growth track for a long time. However, after the arrival of the crisis everything was started to look like a bubble that was about to burst. Most of the companies discovered that they cannot to survive in this period of crisis with their present operational models. However there was not enough time to make significant change in the operational model and improve the performance as the situation was getting more and more critical. In order to manage the initial losses the companies started to close down their units, reduce workforce and seek financial help from the government. It was time for reduction in salaries and bonuses and minimizing investments. FDI inflows were significantly down in all the developed parts in the world. However, the situation was little better in case of the developing regions (UNCTAD, 2009). The situation will be clearer from the following table- [Source: UNCTAD, 2009] The period of financial crisis was also the time for selling off under performing units and for merger and acquisitions. However it is still very difficult to understand the behavior of some of the MNCs as they were found to be reluctant to change their operational model. For instance, AIG was found to be giving bonuses of almost $165 million, although the company was able to survive simply because of a financial package of $180 billion which was actually the taxpayers’ money (Hopkins, 2009). General Motors, however realized the importance of the situations. The company even decided to sell off its European unit, Opel, although later on it changed its decision. The company reduced its workforce and tried to improve the operational effectiveness and efficiency. A new structure of the company was emerged after it came out of the bankruptcy protection. According to this new structure the company is supposed to be led by single executive committee. The number of decision makers who were sitting at the top management was cut down to half of its previous size. All these steps were taken in order to improve the efficiency and effectiveness of the company’s operation. Another important fact that came out of this crisis is that systems and markets in the developing countries in the world are more solid than that of in developed countries. MNCs have also identified this fact and they are found to be showing more interest regarding the emerging markets like India and China. It can be expected that in the near future MNCs will be focusing more on these markets. So overall it can be said that the current financial crisis has significantly influenced the effectiveness of the MNCs’ operational models. Conclusion The global economy has seen one of its toughest periods during the recent financial crisis. It’s been more than two years and the world economy is yet to completely recover from this turmoil. Unlike some of the previous crisis this one is more global in nature and as a result of that effects of it are more significant. It has greatly impacted the operational models of the multinational corporations. In fact MNCs have been forced to change their operational models in order to survive in this critical period. References Algarra, B. 2002. Activate!.: Enquiries into global citizenship, Volume 3, Nelson Thornes Congressional Oversight Panel, No Date. Overview, About The Financial Crisis, Retrieved May 16, 2010 from http://cop.senate.gov/thecrisis/ Claessens, S. Kose, M. A. & Terrones, M. E. 2008. Global financial crisis: How long? How deep?, Vox, Retrieved May 16, 2010 from http://www.voxeu.org/index.php?q=node/2083 European Commission, 2009. Impact of the current economic and financial crisis on potential output, European Economy, Retrieved May 16, 2010 from http://ec.europa.eu/economy_finance/publications/publication15479_en.pdf Gandevani, N. 2009. Winning Edge Trading: Successful and Profitable Short and Long-Term Systems and Strategies, John Wiley and Sons Hopkins, A. 2009. Recession-weary Americans outraged by AIG bonuses, Reuters, Retrieved May 16, 2010 from http://www.reuters.com/article/idUSTRE52G5L420090317 Shah, A. 2009. Global Financial Crisis, Global Issues, Retrieved May 16, 2010 from http://www.globalissues.org/article/768/global-financial-crisis The New York Times, 2010. Overview, Credit Crisis — The Essentials, Retrieved May 16, 2010 from http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_crisis/index.html UNCTAD, 2009. Assessing the impact of the current financial and economic crisis on global FDI flows, Retrieved May 16, 2010 from http://www.unctad.org/en/docs/webdiaeia20091_en.pdf Read More... Read More