The Foreign Direct Investment Theory - Coursework Example

College Multi-national enterprises also referred to as multi-national cooperation are financial entities or companies that control the supply of services or goods in more than one country or state. They are also referred to as stateless cooperation, transnational cooperation’s, or international cooperation’s (Buckley, 2002). They are usually large in size and are usually registered in more than one country. They usually take different forms and engage in various fields across the economic domain. These include; heavy or significant investment in foreign countries, exporting as well as importing of goods, starting up fully functional manufacturing plants in other countries, selling and buying licenses, and permitting local manufacturers to manufacture some of their goods in those particular countries (Wettstein, 2009). A majority of these cooperation start off as small companies mostly located within a single country, but with time grow and expand in terms of capacity and market control prompting them to spread to other countries where they continue providing the same services or producing similar goods. This essay is divided into 2 sections i.e. section A and B. Section A is a clear description of whether multinational cooperation (MNEs) are truly universal and this shall be done by critically analyzing the factors that contribute to the degree of globalization of a cooperation, company, or financial entity (Wettstein, 2009). Additionally, the section shall critically analyze and bring out a clear discussion as to whether emerging multinational enterprises (EMNEs) are less globalized as compared to developed multinational enterprises (DMNEs). On the other hand, section B shall examine five emerging multinational enterprises and 5 developed multinational enterprises and use the findings of that examination to evaluate the findings in section A (Adeyeye, 2012). Section A Internationalization has been described by a lot of scholars in various ways, according to, Jones (2009), internationalization is the process through which firms slowly and gradually increase or expand in their international activities and involvement. Entrepreneurs interested in this field need to have or possess the capability to think globally and this can be attributed by the need to have an understanding of global or international cultures. By understanding and appreciating various cultures and beliefs, businesses can effectively venture into regions or countries that have a different culture from theirs with ease enabling them to internationalize effectively which is one of the factors that influence globalization of forms or companies (Jones, 2009). There are various theories that try to explain why companies or firms engage in international activities, below are discussed a few. The foreign direct investment theory The foreign direct investment theory (FDI) is a theory that focuses on internalization by looking at how companies from foreign countriesmake investments in another country or countries either by building plants or factories in that country or either by partnering with already existing companies in that country, hence, allowing them to create their goods or provide their services (Wettstein, 2009). The theory looks as internationalization as investments made by any company or firm in the globe with the intention of achieving or acquiring long term enterprise interests outside their economy (Top of Form Andersson & Holm, 2010). According to the theory, there is a parent and a foreign enterprise, which come together to form a multinational enterprise (MNE). For the relationship between the two enterprises to qualify as an FDI, it’s appropriate that the foreign affiliate must be under control of the parent enterprise (John & Allen, 1998). According to the international monetary fund (IMF), the parent enterprise should have more than 10% ownership in shares than the foreign affiliate. Location theory This theory is mainly concerned with where an economic activity is located geographically. The theory has become an integral part of spatial economics, regional science, and economic geography (Buckley, 2002). It addresses the issues of what economic activities are located where and why and how this influences internationalization. Just like the microeconomic theory, the theory rests on the fact that firms has the ability to choose on geographical locations that will influence the maximization of profits even if it means moving to foreign countries. Uppsala theory This theory gives a clear description of how firms increase their activities in the foreign markets gradually. According to this theory, firms or companies first acquire experience from their own domestic economy before venturing into a foreign economy or market. Here, firms start internationalization by moving to countries that are closer to their country then moving to countries that are further away (Jones, 2009). Additionally, firms that apply to this theory start off as traditional exporters and later graduate to more demanding and intensive modes of operation. According to the Johanson and Wiedersheim the key advocates of the theory, internationalization as a process takes place in 4 stages based on the notion of the degree of involvement by the firm or company in the foreign market (Welch, Benito & Petersen, 2007). They include; export activities are not done on a regular basis, if export is done it’s done under independent agents or bodies, manufacturing or production and sales subsidiary. Firms that venture into foreign countries, also referred to as foreignness reduce their liability through learning more about the foreign market they are venturing in. They also start off by exporting their products to neighboring countries that are similar regarding their business practices, and are well known to them (Jones, 2009). Advocates of this theory also strongly believe that firms start selling their products abroad through independent agents or representatives, this helps reduce costs and the commitment of resources as well as establishing and commissioning new sales subsidiaries. Firms contemplating or making plans to venture into foreign markets usually make decisions that are usually more inclined to the firms perfect functionality in not only its market of origin but also to other markets (Buckley, 2002). These decisions include; which markets to enter, what is the scale of entry into these markets, when to enter into these markets, and what method of entry will be employed. Firms have to critically examine and determine which market among the foreign markets available is viable for entry and shows potential for financial gain. Additionally, the firms need to identify the perfect time in which they can enter into the market, for example, when resources like land or labor are cheap in that country (John & Allen, 1998). When an MNE is making a country selection, various factors dictate the choice to be made. These factors constitute market screening. Market screening is a process where the MNE has to critically analyze the market in that particular country (Wettstein, 2009). Its divided into four major steps, the first step includes the checking of a suitable climate, bans whether temporal or absolute, labor, financing and access to raw materials (Wettstein, 2009). The second stage involves assessing the national business environment of the country. Here the firm or MNE looks at language, politics, government regulations, religious beliefs and political instability (Fobete, 2005). The third stage critically analyzes the market potential indicators, for example, current sales, infrastructure, income elasticity, quality of the available work force and infrastructure, the fourth stage involves the employment of competitors analysis, and as physical experience of the new market by making field trips (Jones, 2009). When an international operation increase, an MNE usually makes the necessary steps it needs to tackle this, one of the necessary moves taken by MNEs and characterizes multinational enterprises whether emerging or developed is the formation of an export department structure (Körner, 2007). This department is created to oversee export activities by creating positions that will coordinate and relay information between production, marketing, finance, and personnel to the chief executive officer (Fobete, 2005). Additionally, the MNE groups all of its international activities and commissions a special task force referred to as the international division to oversee them (Adeyeye, 2012). With this, production might shift to international markets, this usually takes place in two forms; the first involves replication, where MNEs with functional structures back in their mother country replicate these functional structures in the foreign countries of choice or MNEs with a divisional structure would replicate the functions of divisional structure into the foreign countries (Buckley, 2002). However, it’s important to note that in both of the above cases there might problems or complications in coordination between domestic and foreign operations. As emerging multinational enterprises expand to become developed multinational enterprises, they move to world wide area structures (Welch, Benito & Petersen, 2007). This usually favors MNEs that have a very low degree of diversification in function, as well as a functional based domestic structure. This structure usually divides the world geographical areas autonomously; it facilitates local responsiveness, decentralizes authority in operations, and is usually in consistence with the localization strategy (Fobete, 2005). Examples of world wide areas include; North America Area, Middle East/ Africa area, European area and many more, these specify regions with many countries but not individual countries. Additionally, as emerging multinational enterprises expand to become developed multinational enterprises, the move more to adopting the worldwide product division structure. This option mainly applies to MNEs that are that are diversified in nature (Wettstein, 2009). Adopting the worldwide product division structure allows for coordination of activities for each and every product division located worldwide, it helps realize, monitor and interpret location and experience curve economies, but does not give room for local responsiveness (Adeyeye, 2012). A majority of MNEs have adopted the matrix organizational structure. This structure tries to minimize the limitations that the worldwide product division structure may have as well as the worldwide area structure (Welch, Benito & Petersen, 2007). This structure is helpful for MNEs in that it creates a clear distinction for differentiation between the two dimensions i.e. geographical area and product division, the combination of knowledge from both of the two facilitates dual decision making, this is because both geographical area and product division have their own share of influence in decision making (Jones, 2009). However, despite the above pros associated with, the matrix structure has a few disadvantages, for example, decision making can be slow, and this is because it’s too bureaucratic, it can result to conflicts between the divisions, and divisions can blame each other incase anything goes wrong, a scenario referred to as finger pointing (John & Allen, 1998). For the MNEs that haven’t adopted the matrix structure due to its demerits, the hybrid structure acts as a good substitute for it, the hybrid structure is also referred to as the mixed structure, it’s a structure that combines the structural arrangements of an MNE in the best ways possible so as to meet the requirements of the multinational enterprise or MNE (Heinecke, 2011). Born global MNEs usually have a global vision from the beginning of their start, however, new international ventures have regional focus, this MNE first base themselves regionally and go global slowly and over time (Welch, Benito & Petersen, 2007). The Born global firms are rapidly internationalizing enterprises, these companies usually engage in international business transactions at the near stages of their development, this means that this companies or firms are internationalized soon after the startup phase (Jones, 2009).They are usually found in technological related industries, for example, the electronic industry. On the other hand, international new ventures usually base themselves in the domestic market first, the firms here do not need prior experience in internationalization and this is usually acquired slowly after establishing control in the local market, once such firms begin expanding their operations internationally they only do so serially unlike the born global firms that venture into many international markets simultaneously and the pace of internationalization for such firms is usually slow while that of born global firms is rapid (Fobete, 2005). The drivers of internationalization process for both born global and international new ventures include the following; advanced technology in production, communication, and transportation. Advances in the telecommunication sector most especially in the internet gives firms the ability to access new worldwide suppliers, customers, distributors and network partners. Other drives include the increase in global homogeneity, international markets, and liberalization of trade (John & Allen, 1998). Modes of entry into international markets used by various firms vary and are usually divided into four broad sectors i.e. exporting either done directly or indirectly, contract based entry modes, investment or equity modes, and strategic alliances (Körner, 2007). Exporting is the process through which firms manufacture in commodities in their domestic markets and exports these commodities to external markets. It usually involves the movement of goods and commodities across borders (Adeyeye, 2012). It’s important to note that this is not limited only to goods and commodities but services can also be exported, for example, insurance services, banking services, and marketing (Wettstein, 2009). Exporting as a mode of entry and control into international markets has a number of advantages as well as disadvantages. The advantages include the following; it creates a scenario where the firm gradually enters the international market, it gives the firm ample time to acquire enough knowledge about the market, and requires relatively low financial exposure (Welch, Benito & Petersen, 2007). The disadvantages include the following; there is always possibility of potential conflicts with competitors, high competition and risk of losing the market to competitors and logical complications may arise (Heinecke, 2011). Entry modes into the international market based on contracts are divided into 4 and these include franchising, licensing, turnkey contracts and management contracts. Licensing usually involves two parties, a licensor and a licensee. A licensor leases rights to the licensee to use his or her intellectual property and in turn earns revenues with relatively little investment. On other hand, the licensee uses the intellectual property given to him or her to create or manufacture commodities for sale in the local market, makes sales and in return pays a certain amount as royalty to the licensor (Jones, 2009). In this kind of contract based entry mode into the market by MNEs the boundaries of agreement have to be clearly drawn, the compensations have to be established, the duration of the agreement has to be agreed upon, and the rights, privileges, and constraints of both parties have to be agreed upon. In franchising, the franchiser usually sells a franchisee intellectual property as well as providing operational assistance for the operations of the new agreement on a continuous basis, for example, through training and sales promotions (John & Allen, 1998). This mode of entry into foreign markets allows franchisee to sell commodities or products using a very publicized and branded name. However, it’s important to note that the franchisee is at times tasked to conduct the business activities in manners prescribed by the franchiser or in a plan set by the both of them. Foreign direct investment involves the acquisition of foreign assets with the sole purpose of controlling them, this mode of entry ensures that the MNE maintains control over the operations, experiences high profits for whatever is generated is not shared with any other firm, and the MNE has full capacity to acquire knowledge about the new market, analyze, and interpret the knowledge in its own way for its own gain (Wettstein, 2009). Equity joint ventures are modes of entry into foreign markets by firms where they come together and allocate ownership, financial risks, operational responsibilities, and the rewards each one of them will get while still retaining and preserving their identities. When there are more than two firms participating in the joint venture the venture into the new market is at times referred to as a consortium (Welch, Benito & Petersen, 2007). From all the above information, we can clearly draw conclusions that emerging economy MNEs are less globalized as compared to developed economy MNEs (Fobete, 2005). It is clearly brought out that there is a variety of factors that facilitated the internationalization of firms and these include advancement of technology especially in the productions, communications, and transport sector and they contribute a lot to the entry modes a company choses when venturing into a foreign market (Jones, 2009). MNEs from developed economies tend to be more born global. A majority of them are initiated with a properly planned structure of how their operations will incorporate both local and foreign market demands (Buckley, 2002). This can greatly be attributed to the particular favorable factors that developed economies have, for example, infrastructure, political stability and many others that greatly influence the stability of the mother branches of the MNEs that originate from this country. On the other hand, MNEs from developing economies rarely enjoy the comfort and cushion of such factors. A majority of these MNEs begin locally and gradually expand their operations to neighboring countriesand with success and over the years they further expand to other foreign markets. Hence, their rate of globalization might be slower compared to that of MNEs from already developed economies (Jones, 2009). There are exceptional cases, where MNEs from developed economies also venture into foreign markets gradually by first establishing based at the mother country or market, this may occur due to personal interests to move slow or out of a mere luck of enough capital to enable the venturing into foreign markets (Körner, 2007). There are also MNEs that have the full capability of being born global, and initiate both local and foreign operations at the word go. Hence, MNEs from developed economies have the potential to become more widely spread across the globe than MNEs from emerging economies. Section B 5 MNES from emerging economies 1. Gold fields industry This is a South African based Gold mining firm andit’s listed as one of the largest in the world. The firm was formed in the year 1998 from the merging of Gencor limited and gold assets of gold fields of South Africa. The company has its headquarters in Johannesburg South Africa but has spread mining activities in Australia, Ghana, Peru, and not forgetting within the emerging economy itself i.e. South Africa (Welch, Benito & Petersen, 2007). The company started off with mining activities locally within South Africa which later spread as the company expanded its international operations. 2. LG electronics LG electronics is a South Korean multinational consumer electronics enterprise. The company has its headquarters located in Yeouido-dong and is currently employing more than 80,000 people situated in over 100 different geographical regions across the globe. The company was created after the Korean War as a means of re-building the country (Jones, 2009). In the international sphere, LG ventured as first as an exporter and earned 100 dollars in revenues. From then the company has expanded its operations gradually and has 4 business units that is the home entertainment unit, mobile communication unit, home appliances unit, and the vehicle component and air solutions unit. 3. Tata Motors Tata motors limited is a multinational vehicle manufacturing company. It has its headquarters situated in Mumbai India. It manufactures various products which include cars, vans, trucks, buses, construction equipment and military vehicles. It is ranked as the 17th largest vehicle manufacturing company in the world and has operations Argentina, the United Kingdom, South Africa, and Thailand (Jones, 2009). The company was launched in the year 1945, releasing its first competitive motor vehicle in the year 1954, and over the years it has grown to reach and satisfy foreign demands. 4. Lenovo Group LTD Lenovo is a Chinese based multinational enterprise with its headquarters based in Beijing. The company is focused on the design and manufacture of various gadgets which include; personal computers, work stations, smartphones, tablets, smart televisions and IT management software (Wettstein, 2009). The company has operations in over 60 countries and distributes its commodities for sale in over 160 countries. It has plants in Singapore, Beijing, and Morrisville. To venture into the Japanese market, the company got into a joint venture with NEC (Heinecke, 2011). This joint venture referred to as Lenovo NEC Holdings, and with it produce personal computers for the Japanese market. 5. Hyundai Motors Hyundai motors limited is a South Korean vehicle manufacturing company. It has its headquarters based in Seoul South Korea. The company was founded in the year 1967 and part of its internationalization it formed subsidiaries Kia motors, it forms comprises the Hyundai (Welch, Benito & Petersen, 2007). Motor Group that is ranked as the 5th largest vehicle manufacturer in the world. Hyundai motors runs the world’s largest vehicle manufacturing plant in the world with a yearly production estimate of 1.6 million vehicles. The company has operations in more than 190 countries and employs over 70,000 people worldwide. 5MNEs from Developed economies 1. The Coca Cola Company The Coca Cola Company is an American multinational beverage enterprise. It has its headquarters in Atlanta Georgia in the United States of America (USA) and is involved in the manufacture, retailing and marketing of soft drinks or non-alcoholic drinks. It has various brands of non-alcoholic drinks and these include sprite, coca cola, and Fanta. It is one of the widely known companies in the world and has operations in almost every country in the world (Welch, Benito & Petersen, 2007). The company begun as a local company in the United States of America but now serves the entire world market. 2. Google Inc. Google is an American multinational company. It is based on technological advances, especially in the internet. These include software, online advertising technologies, cloud computing, and its famous Google search engine (Fobete, 2005). The company generates most of its revenues and profits from a service referred to as Ad words. This is an online advertising service that works by placing company advertisements near search results in their search engine. The company was started in the year 1998 by Larry and Sergey with a mission to organize the world’s information and make it readily accessible to everyone in the world via the internet (Wettstein, 2009). The company has experienced rapid growth over the years, and this has triggered the development of a number of Google products, for example, Google mail, famously referred to as Gmail, Google applications like Google play store used by android phones to receive various applications. The company is the world’s leading manufacturer of android operating systems that are used to run the today’s android powered smart phones. 3. Microsoft Cooperation It’s an American multinational technology enterprise with its headquarters based in Washington. The company is involved in the manufacture, distribution, and licensing of consumer electronics, computer software, and personal computers. It is best known globally for the production of Microsoft windows, one of the most widely used computer operating systems in the world alongside other lines of application software such Microsoft package that incorporates word, excel, PowerPoint etc. and the internet explorer web browser (Heinecke, 2011). So far it’s the world’s largest software manufacturing company, leading in the production of both applications software and operating software’s for computers. It’s the world’s most valuable company (Fobete, 2005). The company was born global, it already had an international plan and part of its internationalization strategy has been done by acquiring other companies, for example, the acquisition of Danger Inc. and now the acquisition of Nokia Mobile. 4. Volkswagen Group Volkswagen is a German based vehicle manufacturing multinational enterprise. It is the largest vehicle manufacturer in Europe and was established in the year 1937. The company has its headquarters located in Wolfsburg Germany. It is the only car manufacturing company that has the highest number of older vehicle models being manufactured to date due to high customer demands. Over the years the company has expanded, with the creation of new vehicle brands. The company is in charge of a large number of truck and car brands, this include Audi, Lamborghini, Bentley, Bugatti and many more. It has operations in many parts of the world, and this includes Russia, Brazil, Portugal, Bosnia, Malaysia, South Africa, and a new factory being set up in Indonesia. 5. Hewlett Packard Company Hewlett Packard is an American multinational information technology enterprise whose headquarters are based in California in the United States of America (USA). The company provides software and hardware services to all over the world. The company has over the years specialized in the development of data storage, computing, and networking software and hardware . The most famous commodities that are widely bought are the HP laptops, used for various computing activities across the globe, additionally; the desktops and printers are widely used by a whole diverse of people in the world. Currently it is the world’s leading Pc manufacturing company, followed by Lenovo an EMNE from Korea which is an emerging economy (Jones, 2009). From the information gathered in section B, it is clear that both MNEs from emerging economies and developed economies have equal potential of being global. However, those from developed economies always have a stronger beginning and most of them are born global, for example Google Inc.They possess the ability rapidly increase their international operations as compared to MNEs from emerging economies. Looking at Tata Motors, it first started off as a local vehicle manufacturing plant and slowly increased its international operations. The Hypothesis gotten in section A shows that there are MNEs that belong in emerging economies that rapidly go global because they have the full capability of doing so while at the same time there are MNEs from developed economies that go global with time and begin expanding to neighboring countries gradually and with time to countries further away. References Top of Form Adeyeye, A. (2012). Corporate social responsibility of multinational corporations in developing countries: Perspectives on anti-corruption. Cambridge: Cambridge University Press. Top of Form Andersson, U., & Holm, U. (2010). Managing the Contemporary Multinational: The Role of Headquarters. Cheltenham: Edward Elgar Pub. Bottom of Form Bottom of Form Buckley, P. J. (2002). The Internationalization of the Firm. London: Thomson. Heinecke, P. (2011). 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G., & Petersen, B. (2007). Foreign operation methods: Theory, analysis, strategy. Cheltenham, UK: Edward Elgar. Read More