Dynamics of Multinational Enterprises - Coursework Example

DYNAMICS OF MULTINATIONAL ENTERPRISES Dynamics of Multinational Enterprises Introduction With increased globalization, the global regulatory regime and global governenance have achieved new rigour. A lot of discussion has been done regarding the impact of global regulatory regime and global governance on states, Intergovernmental organizations (IGOs), NGOs etc. However, only very little research has been done on the role played by these two on Multinational Enterprises (MNEs).In this context, this essay critically evaluates the role played by the global regulatory regime and global governance on the location and impact of MNEs. This essay is organized as follows. Section 2 examines the arguments which suggest positive impact of regulatory regime and global governance on MNEs. Section 3 discusses the critical perspectives in this regard. Section 4 concludes the essay. 2. Supportive Arguments The main actors involved in the globalization process include states, Inter Governmental Organizations(IGOs),Non Governmental Organizations(NGOs), experts ,global policy networks, Multinational Enterprises and private authorities(Karns and Mingst,2004,p16). . Examples of IGOs are WTO, North American Free Trade Agreement (NAFTA), OPEC, World Bank, IMF, UNO etc (Hart, 2008).States create IGOs and are the main actors in the decision making process. Now the main power among the states is the USA. USA, Europe and Japan called the triad economies have been traditionally dominating the global business and the decision making process in the IGOs (Accenture, 2007). Three main arguments have been put forward regarding the MNEs in relation to global governance (Moon and Lado, 2000). One is the significant rise in the power of MNEs to shape outcomes compared to the governments and other actors called the decline of the Westphalian hypothesis. According to the Westphalian hypothesis, states need to have a protected autonomy and independence, have a gate keeping power and there should be no outside interference in the domestic constitutional arrangements of the state (Jervis, 2002).Based on this hypothesis, states are something which needs to be sovereign and supreme. Other is the shift in the regulatory authority from the national governments towards the supranational institutions called the decline of the regulatory state hypothesis. The third argument is the lowering of regulatory regimes facilitated by the supranational regimes across different jurisdictions called the race to bottom hypothesis. As a consequence of the development of the IGOs especially WTO, there has been significant increase in the flow of trade and capital flows through the integration of nations. Moreover, the immediate expansion of MNEs and the consequent rise in Foreign Direct Investment have been two major consequences of these developments. There has been a rise in European and Japanese MNCs and USA became a host country for FDI rather than home country as a consequence of this (Hagedoorn and Shakenraad,). The opening of markets in developing nations has also resulted in the relocation of MNEs to developing nations to a great extent. The transportation and communication costs have also got reduced as a result of reforms. The rise in liberalization and deregulation and the rapidly declining transportation and communication costs as well as the reduction in barriers to good and services have resulted in a high rise in the trade, FDI and transfer of technical knowledge through MNEs (Frankel, 2000). The rise in FDI has outweighed the rise in exports all over the world (UNCTAD, 2000). One main global regulation now controlling the MNES include transfer pricing. Transfer pricing means the profit allocation for taxes and other purposes between different segments of an MNC (ICC,2008). Through this the different parts of MNEs in various nations are under a common control. At the same time it exposes the MNEs to double taxation also. The globalization process has changed the traditional home country determinants of FDI. The traditional aims of FDI include resource-seeking, market-seeking and efficiency-seeking objectives. It is shown in studies that globalization has changed these objectives (UNCTAD, 1998: Dunning 1999). These studies have shown that globalization has resulted in offering MNE s many options for serving international markets. Moreover, it has resulted in getting access to many resources, which could not be accessed earlier, which in turn results in enhancing efficiency. Thus, there has been a shift to efficiency-seeking FDI in developing nations (Dunning, 1999). However, natural resources accession and national or regional markets are obtained as the main targets of FDI in developing nations. Hence, these studies show that the earlier studies can no longer explain the motives of FDI with rising globalized context. The regulatory environment for FDI has also changed with the rise in bilateral investment treaties and trade and economic integration agreements .Minimum of five WTO agreements are there in this regard namely the GATS, the TRIMs, the TRIPs, the GPA and the ASCM (OECD, 2004). In addition to these, the other investment instruments include the bilateral treaties, OECD instruments, NAFTA etc (UNCTAD, 2009). The policy reforms under these ranges from opening of closed sectors to FDI to removing or relaxing sectoral caps to foreign investment (UNCTAD, 2009). Most of the international agreements and the treaties include non-discriminatory treatment, obligations related to assets, dispute settlement procedures, guarantees against expropriation and nationalization without compensation etc (OECD, 2004). The reorganization and relocation of the production of goods and services as a part of the globalization process has also resulted in increasing global value chains and associated production networks. This has resulted in fragmented and specialized production of goods and services by firms all over the world (UNESCAP, 2007). 3. Critical Perspectives The three main arguments i.e. the decline of the Westphalian hypothesis, the decline of the regulatory state hypothesis and the race to bottom hypothesis regarding MNEs have been critically examined by Levy and Prakash (2003).Their analysis do not support MNEs seeking the extension of supranational regimes to lower the regulatory standards always while they seek the extension of domestic governments capabilities to set up tight regulations. The analysis also showed a degree of indeterminacy to regime formation process due to the complex nature of regime process, and the strategic behaviour of actors involved in the global governance process including the MNEs. Moreover, the study obtained the goals and interests of MNEs varying across different sectors and hence found a uniform treatment for all the sectors as inadequate. Studies have shown that the different investment treaties contain many variations in their clauses regarding the non-discriminatory treatment, dispute settlement procedures etc and in their legal contents (OECD, 2004; Brunner and Folly, 2007). Studies show that at present nearly 2300 bilateral investment treaties, 150 international agreements and 60 under negotiation process are there with significant variations in the clauses and contents regarding all important international investment matters (Brunner and Folly, 2007). This fragmented nature of these treaties has resulted in a rise in transaction costs of MNEs, which in turn reduce the total amount of FDI, create distortions like concentrations of power, and rent seeking activities, which reflect the interests of vested groups as shown by studies (Brunner and Folly, 2007). The significant rise in cross border investments and the international trade has resulted in ethical issues involved in the decision-making in the cross-country settings. Hence, all standardized products have established global markets and the firms have to adopt for main business entry strategies, which are different from the domestic business entry strategies (Yiicel etal, 2009). These are an international strategy, a multi-domestic strategy, a global strategy, and a transnational strategy (Bartlett and Ghoshal, 1989; Yiicel etal, 2009). The ethical issues involved in the cross-cultural settings of the global businesses include bribery, unfair pricing, illegal activities, tax evasion practices, cultural differences, political influences etc (Yiicel et al, 2009). Hence, studies demand the need for international norms and business ethics to be created by the IGOs like the WTO, IMF, World Bank etc in this regard to solve the ethical problems (Yiicel et al, 2009). 4. Conclusion The discussion shows that global governance process and global regulatory regime has resulted in removing the restrictions and barriers on international trade and has promoted the rise in FDI. It has also resulted in reducing the communication costs for MNEs. The differences associated with the large number of multilateral investment treaties made it very difficult to manage the governance process. The differences have resulted in increased transaction costs for MNEs, which have several adverse implications. Moreover, though the organizations like WTO are meant to spread the idea of a common world based on international cooperation, the treatment by them to powerful developed nations and developing nations are not similar in many cases. The ethical issues associated with cross border investments through MNEs need to be solved through global business ethics and norms as shown in this study. The discussion also shows the uniform treatment to all MNEs as inadequate regarding the governance process and regulatory regime since the goals and activities of MNEs vary across different sectors and also the MNEs are very fragmented and varied across different sectors. References Accenture(2007): “The Rise of the Multi polar World”, http://www.accenture.com/NR/rdonlyres/FDE9A8E7-6839-472B-8C9E-957DD6DF1B76/0/MultiPolar_World_final.pdf, Accessed April 16 2010. Bartlett C. A. and S. 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