Multinational Operation in Finance and Banking - Essay Example

Multinational operation in finance and banking Contents Contents 2 Introduction 3 Discussion 4 China 5 Western Balkan countries 6 Ghana 8 Mexico 9 Brazil 10 India 12 Conclusion 15 References 17 Introduction The growth of Foreign Direct Investments (FDI) has emerged as a striking feature of the global economy in the past decade. Foreign direct Investment is the investment made by multinational corporations or transnational enterprises in foreign locations with the aim to manage production and operation activities and control the assets in these countries. There are many ways in which FDI affects the development of different countries. These may include incomes and employment, market access, capital formation, technology and skills, market structure, fiscal revenues, social, cultural and political aspects. These areas may be affected positively or negatively by FDIs and can be static or dynamic in nature. FDI is considered as one of the most important sources of economic growth and development from the global economic perspective. Virtually, all the countries across the world are focused on increasing the FDI inflows and outflows into their economies. But the success and benefits of FDI depend on a number of determinants specific to the most countries. The developing countries and emerging economies have identified FDI as a major source of income growth, employment growth, modernization and other modes of economic development. The developed and developing countries have liberalized the regimes related to FDI and implemented other relevant policies to attract FDI inflows in the countries. The major factors that determine the impact of Foreign Direct Investment (FDI) are globalization, liberalization of trade, cost factor, market size, cultural factors, political factors and diffusion of technology. The success of FDI also depends on the established level of development in infrastructure, technology, education and health prevailing in the economy. Though FDI as a way to accelerate economic growth in has been immensely successful in major countries, the same level of success has not been noted in the third world economies with respect to FDI in these countries. The imperfections and low level of development in the third world countries often prevent these countries to reap the maximum benefits from FDI activities. Discussion The benefits of FDI are multidimensional for the economic development of a country. FDI may bring a number of benefits including increased production capabilities, capital capacities, employment, income levels, sharing of knowledge and technology, access to more resources and markets and so on. Most countries focus on exploiting the opportunities created by FDI. FDI was considered as a traditional phenomenon applicable in the developed countries because of the supporting FDI determinants present in these countries. The interface of FDI with some determinants of FDI has a strong positive outcome on the economic development and growth of the third world economies. On the other hand, the communication of FDI with inflation and gross domestic product has a negative impact on the third world economies (Ersoy and Kok, 2009, pp.105-123). In the current world, the share of FDIs in developed economies still remain high as compared to the share of FDIs in the developing economies. But the flow of FDI in the third world countries have surpassed the FDI flows in developed countries due to the opening up of the economies and the recognition of the high benefits of FDI by the third world countries. Currently, the developing countries account for almost one third of the total inflow of FDI in the world. But the effects of FDI on the economies of thirds world countries are debatable. One of the perceived advantages of FDI is the increasing effect of FDI on investment (Hausman and Cortes, 2001, pp.117-140). But, in the developing countries, this does not add much to the investments as most of the FDI activities are done through mergers and acquisitions that represent a change in the ownership which affects the investment depending on the utilization of the domestic resources as gained from acquiring of assets by the foreign investors. On the contrary, green field investments are identified as more impactful on the overall investment activities in the country. The Greenfield FDIs often crowd out the domestic investments. So, on one hand, FDI leads to increased productivity and economic growth but on the other hand, it can be argued that FDI creates several negative impacts on the third world countries including the risks of destruction of local capabilities and exploitation of the natural resources which are not adequately compensated by the foreign investor companies. The benefits, challenges and success factors of different economies are studied in the following segment. China The foreign direct investment (FDI) in China comprises of major Greenfield investment activities and has been one of the most prominent examples of the beneficial aspect of FDIs towards the economic growth of a nation. The majority of the foreign direct investment in China has been done by the western multinational companies investing in China due to high market attractiveness and infrastructure prevailing in the country which have acted as positive determinants in supporting the FDI activities (Dayal-Gulati and Husain, 2000, p.18). The most noticeable development caused by FDI in China is the growth of export levels in the country. The FDI flows are concentrated in the export sector in China. This has resulted in boosting the global trade activities sand total factor productivity (TFP) in the country. The foreign enterprises have invested highly in the country, especially in the coastal regions and accelerated the per capita income and growth in these regions which have not been noted in other provinces of China. The policy environment in China has not been encouraging for the foreign direct investment flows in the country. This has deterred many potential investors from investing in the economy. The main reasons for success of FDI in China are the abundance of low cost labour resources, accelerated economic growth since reform, availability of infrastructure, labour laws, expansion of the domestic markets in China and an increased level of integration with the world related to business and trade activities. The inward mobilization of FDI in China has strengthened the institutional capacity of China. China has opened up its economy to facilitate FDI flows in almost all service industries and manufacturing industries in the country. The step by step approach to liberalization and the synchronization of liberalization with the capacity devolvement of institutions have made the economy strong to fight any financial instability in future. The highly decentralized approval and policies related to FDI have boosted the economic conditions of China to a high extent. The major negative impacts of FDI flows in the Chinese economy because the FDI activities directly or indirectly cause derogatory events like causing intra-regional disparities due to uneven distribution of the investments, increasing environmental pollution, transfer pricing and round tripping of the capabilities of the domestic firms in the country. Western Balkan countries The Western Balkan countries are much behind the EU countries with respect to FDI inflows. The FDI inflows in the western Balkan countries like Albania, Herzegovina, Macedonia, Bosnia, Serbia and Montenegro have recorded continuous growth in the FDI inflows. These countries are identified to have several competitive advantages as a locational choice for FDI. The advantages include highly developed financial systems, stability in the macroeconomic environment, geographical closeness to the major markets of the European Union, high economic growth rate, availability of low cost and skilled labour, stabilization of the European Union and different bilateral trade agreements and policies implemented in the recent years (Ramcharran, 2000, pp.14-18). The economic determinants of FDI advantages are also positive in nature which supported FDI inflows into the Western Balkan countries. The protection of the investors, transparency in policy formulation macro environmental stability and development of financial markets has boosted the success of FDI in these countries. The major challenges involved in FDI activities in the Western Balkan countries include the relatively high risks prevailing in these countries, poor infrastructural development, high barriers in administration, low functionality of the government bureaucracy, low per capital income, less number of institutional and structural reforms, high rate of unemployment, lesser share of export and research and development in the total gross domestic product (GDP), high levels of corruption, low implementation of policies and laws and relatively smaller domestic markets with limited capacities. (Source: European Commission. 2012, p.10) Ghana The FDI flows in Ghana show an uneven trend. Ghana was one of the first countries in Africa to have started economic reforms, but the sustainability of the FDI flows in the country has not been adequately maintained. The major influential factors for the success of FDI in Ghana are the new trade factors, locational advantages and the motive of the investors to access and defend the existing market in the country. Also, the aim to penetrate into the African economy through investments in Ghana facilitated a high volume of FDI inflows into the country when it started the economic reforms (Dunning and Lundan, 2008, p.211). The weak determinants of FDI in Ghana like infrastructure, labour, policies and structure caused a decrease in the FDI inflows and constrained the country from maximizing the benefits of foreign direct investment flows. The major challenges identified in the implementation of FDI in Ghana included many macro environmental issues like the weaknesses inherent in the institutions and structure prevailing in the country. There is a high unemployment level in Ghana, but despite that, the availability of labour is not up do the mark due to the low skillsets of the local labours. The lack of flexibility in the legal systems and the non-predictability in the policies formulated by the government are other issued that increased the risk of FDI activities in the country. (Source: Mboweni, 2012, p.180) Mexico The foreign direct investment activities play a crucial role in export oriented countries and globalized economies like Mexico. The FDI levels in Mexico have accounted for more than 5% of the total annual economic production. Mexico has emerged as the 18th economy in terms of being the most preferred destination for FDI. The financial services sector and the manufacturing sector in Mexico have emerged as major attractors of foreign direct investments. The major recipients of foreign investments in the manufacturing sector include the beverages industry, chemicals industry, iron and steel industry and the automotive industry. The FDI activities in Mexico have facilitated acceleration certain sectors whereas the other sectors are not much visible in FDI (Wan, 2010, pp.52-56). Though the level of FDI flows in Mexico has remained same in the last fifteen years, the competitiveness of the country based on determinants of FDI has decreased due to the increasing visibility of other countries. Cheap labour was a positive and unique determinant of FDI in Mexico which has been facing increased competition form the labour availability in other countries due to the popularity of globalization. The FDI flow in Mexico in 2011-2012 is represented in the graph below. (Source: Krifa-Schneider and Matei, 2012, pp.55) Brazil The foreign direct investment in Brazil has boomed after the economic slowdown of 2009. The FDI flows in Brazil has increased from USD 65 billion in 2011 to USD 66 billion 2012. This has compensated the trade deficit existing in the country. Brazil has emerged as the fifth largest recipient economy in FDI inflows and the fourth largest economy in FDI outflows. The country invests highly in Latin America and the emerging countries. The various economic and policy determinants of Brazil has increased the competitiveness of the country in terms of FDI attractiveness. The reasons for the success of FDI activities in Brazil have been facilitated by the positive factors prevailing in the economy. These factors include the high scale of the market, diversification in the economy, high growth of the economy, and availability of raw materials, and strategic geographical position that allows access for many important South American countries. The risks associated with FDI in Brazil are the complicated and heavy tax systems in the country, the stringent labour policies and a cumbersome and slow bureaucratic system. Although Brazil has established an open economy and the government of Brazil encourages FDIs and cross border trade practices, the high administrative barriers restrain the international trade activities of the country. The highly profitable sectors of Brazil have attracted high FDIs from powerful countries like Spain, the United States of America and Belgium. The sectors which attract maximum investment from foreign multinationals are the beverage industry, financial sector, telecommunications and oil and gas sector in Brazil. The highly skilled manpower and the well-developed infrastructure act as major supports for the FDI inflows in the country. The high level of foreign direct investments from major companies has increased the potential of the export and manufacturing sectors in the country. The high growth potential of the domestic market and the low labour cost has attracted many foreign investors. The government of Brazil has taken effective steps to reduce the trade barriers, barriers to entry of foreign investors, privatize the public companies and deregulate many sectors with the aim to improve the FDI flows into the economy. (Source: UNCTAD, 2012, p.4) India The FDI flows in the India have increased highly in the last few years. There have been many significant benefits caused by the FDI flows in the country including the economic development, development of trade, improvement on skills and employment, knowledge transfer, technology diffusion and linkages of domestic firms in the country. The economic sector of India has been largely benefitted by the inflow of foreign direct investments across different industrial units in the country. The FDIs have opened up a wide range of opportunities for India in terms of cross border flow of goods, drives, resources, information and technology. Both the import and export sectors of India have been boosted by the FDI flows. The increased amount of FDI inflows has improved the production capacity and the infrastructure in the Indian economy. FDI flows have also created increased employment opportunities due to the setting up of a number of industrial units across the country. The FDI levels have facilitated knowledge transfer and diffusion of technology by enabling other countries to outsource knowledge from different sectors of India. India has emerged as one of the most preferred destination for outsourcing activities by the developed countries, especially in the domain of Information Technology. Overall, FDI has caused major advancements in technology in the country. Many foreign corporations have entered the Indian market through collaborations and joint ventures with an aim to tap in the huge resources available in the country. A major portion of the profits generated by the operations of these multinationals in India is spent in the country, thereby developing the economy of the country to a high extent (Mallampally and Sauvant, 1999, pp.1-18). The FDI has certain negative impacts on the country as well. These include a high level of competition created in the market due to the entry of the foreign companies. This has affected the growth of the domestic firms as they have to compete with the foreign multinational in terms of skills and resources. The lack of infrastructure in the country has resulted in the failure of FDI in many sectors like in retail. Other negative impacts include the capture of market share and revenue by the foreign companies. (Source: Ernst & Young, 2012, p.1) Therefore, it can be seen that the developing countries have taken effective steps to attract foreign direct investments to capitalize on the high economic and social benefits gained from these investments. The principal determinants of foreign direct investments include the policy framework and the economic factors. The third world countries have started to liberalize their policies with an aim to open up the economy and establish a preferable framework for attracting FDI. The relaxation of the trade barriers and the rules of foreign ownership have improved the functioning of the markets and the entrance of foreign firms in these markets. The economic considerations that are referred to by the potential foreign investors are the availability of raw materials and labour, availability of natural resources, large markets in the host country and location bound assets and resources (Nunnenkamp, 2002, pp.141-144). Therefore, the third world countries have started to combine trade liberalization, technology and FDI flows with privatization and deregulation to improve the economies of these countries. The challenge for third world countries remain in developing a balanced combination of the key determinants for the success of Foreign Direct Investment (FDI) and in mapping these determinants with the strategies of multinational investors. Conclusion The economic theories and empirical evidences suggest that the third world countries have been significantly developed by the foreign direct investment (FDI). Foreign direct investment (FDI) has caused major economic and social developments in eh third world countries. But the positive impacts of FDI on the developed countries are comparatively much more than the effects on the developing economies. This is due to a number of challenges and risks associated with FDI activities in third world countries. The different determinants of FDI available in the third world countries play a crucial role in deciding the impacts of FDI on these economies. The globalization framework has encouraged the flow of FDI in the developing countries but many associated risks have emerged with the activities related with the foreign investments in particular economies. Foreign direct investments which are integrated in the global networks of the multinational investors are known to boost the development of the host countries while the foreign direct investments directed towards domestic markets and which are hampered by regional content requirements are derogatory to the economic development of the countries. The availability of resources, financial support and employment opportunities are the major benefits created by FDI activities in the third world countries. On the other hand, the depletion of natural resources, the crowding of foreign companies in the country, increased competition level for the domestic firms and stripping off the assets and resources in the country are the risks associated with foreign direct investments in the third world countries. Thus, despite the established fact that foreign investments fuel the economic growth of the third world countries and increase their capabilities to compete on a global platform, several negative factors associated with the foreign investments have been identified in the third world countries. References Dayal-Gulati, A. & Husain, A. M. 2000. Centripetal Forces in China’s Economic Take-off. IMF Working Paper. Washington: International Monetary Fund. Dunning, J. H. & Lundan, S. M. 2008. Multinational Enterprises and the Global Economy. Cheltenham: Edward Elgar. Ernst & Young. 2012. Investment climate and foreign trade. [Online]. Available at and http://www.ey.com/IN/en/Services/Tax/Doing-Business-in-India-2012---Investment-climate-and-foreign-trade. [Accessed on 2 April 2014]. Ersoy, B. A. & Kok, R. 2009. Analyses of FDI determinants in developing countries International. Journal of Social Economics. Vol. 36(1), pp.105-123. European Commission. 2012. The Western Balkans in transition. [Pdf]. Available at http://ec.europa.eu/economy_finance/publications/publication1014_en.pdf. [Accessed on 2 April 2014]. Hausmann, R. & Cortes, P. 2001. Will the FDI Boom Bring More Growth? Development Centre Seminars. Vol. 1(1), pp. 117–140. Krifa-Schneider, H. & Matei, I. 2012. Business Climate, Political Risk and FDI in Developing Countries: Evidence from Panel Data. International Journal of Economics and Finance. Vo. 2(5), pp. 54-65. Mallampally, P. & Sauvant, K. P. 1999. Foreign Direct Investment in Developing Countries. Finance and Development. Vol. 36(1), pp.1-8. Mboweni, T. 2012. Globalisation and implications for monetary policy in South Africa. Cape Town: Independent News & Media International Advisory Board. Nunnenkamp, P. 2002. FDI and Economic Growth in developing Countries. Journal of world Investment. Vol. 3(1), pp.141-144. Ramcharran, H. 2000. Foreign Direct Investments in Central and Eastern Europe: An Analysis of Regulatory and Country Risk Factors. American Business Review. Vol.14 (1), pp. 14-18. UNCTAD. 2012. FDI Determinants and TNC Strategies: The Case of Brazil. New York: United Nations. Wan, X. 2010. A Literature Review on the Relationship between Foreign Direct Investment and Economic Growth. International Business Research. Vol. 3(1), pp. 52-56. Read More