Foreign Direct Investment by a Multinational Enterprise - Report Example

Foreign Direct Investment by a Multinational Enterprise: The Case of Extreme Apparel Group in Mexico. the the title, the date. The purpose of this paper is to conduct discussion on Multinational Enterprises (MNE’s) and the implications of Foreign Direct Investment (FDI). The format that this paper will utilize is to first create a fictional MNE which manufactures an imaginary product and choose a country in which to conduct FDI and then describe your MNE with a brief business plan. After this point a critical discussion will be conducted on the benefits and costs of FDI to the home and host countries. As a concluding point the paper will hypothesize on the future of the MNE. Fictional MNE For the purpose of this paper the fictional MNE is called Extreme Apparel Group (Extreme for short) which designs, manufactures, markets and distributes athletic apparel for high performance athletes. Although it is the case that most athletic sportswear companies manufacture a wide spectrum of products the focus of Extreme is on high performance base-layer apparel. Much of the market is dominated major athletic players such as Addidas, Under Armour, Nike, Asics etc. the product lines are dominated with garments made of polyester and cotton. The niche that Extreme competes in is the incorporation of the highest quality fabrics and materials such as hydrophobic fabrics (Which would be incapable of absorbing moisture through silica treatment), or anti-microbial fabrics which would be unable to develop smells from perspiration. Extreme has been operating in the market for about ten years and has been public for about five years. Because of the nature of the apparel industry it is the case that Extreme has business operations in a number of nations insofar as the company may purchases fabrics from some countries, and produces garments in other countries (Mainly in South and East Asia). Up until now Extreme has been subcontracting garment production from a number of independent manufacturers in Asian nations however this has left the company vulnerable to disruptions in the supply chain and occasional poor garment quality. Business Plan The flagship product that the company is looking to introduce into the market is the ExtremeX line of baselayer clothing which is worn underneath athletic uniforms (Hockey, football, lacrosse or baseball jerseys etc.) that is used to wick moisture off the body and keep athletes cool and comfortable. The product will be extremely light weight, antimicrobial as well as completely hydrophobic. The company is based Boston, Massachusetts in the United States of America, and the target market for the product lines remains in the United States however Extreme is looking to set up their own manufacturing and production facility in Mexico. Although there is a lower cost of labor in many East Asian nations production in Mexico would significantly reduce the transportation costs, and there exists some favorable government policies that have been instituted to encourage foreign direct investment. The business plan involves purchasing an existing 150,000 square foot manufacturing facility which had previously produced designer jeans for a now defunct apparel company, establish consistent supply chains, recruit a suitable workforce and begin manufacturing the ExtremeX product line. Benefits and Costs of FDI to the Home Country In regards to benefits for Extreme and the United States of America it has been argued by Rodriques (2010) that there are three basic advantages. Firstly there are cost advantages which would give advantages to Extreme become more competitive in the American Market. Secondly, FDI would open the nation to new and emerging markets, insofar as having operations in Mexico the host nation could be an excellent market for ExtremeX baselayer products. A third advantage would be the simple exposure to other nations. The final example that was provided by Rodriques (2010) is that FDI may act as a pillar for stronger international relations, because if economic ties between nations are strong there would theoretically be a reduced likelihood of conflict between the nations. However I postulate that an additional benefit emerges from FDI which is that it creates a demand for skilled professionals in the home nation. In the American example, if Extreme is performing well, then the company is still going to need experienced tax professionals, logistics experts, purchases, IT experts, designers, sales professionals etc. all within the United States. Disadvantages of FDI for the Home Nation Probably the most oft cited example of a disadvantage of FDI for a home nation would be the loss of jobs and the downward pressure it would have on wages of remaining jobs. Using the American/Mexican example it could be argued that garment manufacturing workers that operated in the US would have lost their jobs to Mexicans directly. Those people who did not directly lose their jobs would have to compete against Mexican workers (Who presumably work for much lower wages) and as such would likely face significant pay cuts. It could be argued that there is negative effect resulting from FDI. By Extreme having operations in Mexico instead of the US, America would lose out on tax revenues from the operation and from personal income tax collected from workers. Moreover the home nation would lose out on all the ancillary effects of a major manufacturing facility not operating in the U.S. for example local businesses. If the business operated in American many companies such as maintenance workers, power companies, food providers, suppliers etc. would miss out on many business opportunities. According to Economy watch (2007) it may be that there may be an environmental impact for the home nation because executives may have to frequently fly back and forth frequently over American soil. Advantages of FDI for the Host Nation As highlighted above, many of the disadvantages for the home nation are advantages for the host nation. As it is the case that jobs are leaving the United States, these jobs now exist for Mexican workers who in turn pay income tax to the Mexican government. According a report by the OECD (2007) in an early study for Mexico it appears as though foreign owned plants pay wages that are upwards of 30% higher than domestically owned plants. These increases in wages could theoretically help raise people out of poverty. The trickle-down effect exists because these employees are now buying products and services in Mexico which may generate other jobs. Because of proximity many supplier companies who previously would not have been able to sell to Extreme now have easier access to the operation (Such as fabric or machinery suppliers). Over long periods of time many employees working for Extreme may gain an expertise in their field and as such could hypothetically start their own businesses. Negative effects of FDI for the Host Nation One of the most striking examples that come to mind would be a direct economic exploitation of workers in the host nation. According to the OECD (2007) it is likely that there is a significant wage inequality between home and host nations. There may be a degree of government corruption that leads to serious consequences for the host nations, for example environmental degradation through lax standards. Although there may be some well paid jobs within the organization it is likely that most jobs would be low paid and relatively unskilled positions with little chance for personal or financial advancement. An additional consideration would be physical exploitation of workers in Mexico would be through extended working hours, poor conditions etc. Future of the MNE Although the market for Extreme products may be saturated the differentiation of the product line would be significant enough to make serious headway. Assuming the operations in Mexico can produce enough garments at the desired level of quality than I believe that Extreme only has opportunities to grow. Assuming that this business venture is successful than the product line could be expanded to other products such as accessories (Gym bags, towels etc.), footwear, outerwear etc. However if the FDI is not successful than it may be that the company will have to resume its subcontracting efforts. References Economy Watch (2007) Disadvantages of Foreign Direct Investment. Stanley St Labs. (online) available at http://www.economywatch.com/foreign-direct-investment/disadvantages.html Accessed on May 5th 2011 Peng, M. GLOBAL custom edition (2011) Cengage Learning OECD (2008) ILO Conference on Corporate Social Responsibility. Employment and Industrial Relations: Promoting Responsible Business Conduct in a Globalising Economy. (online) Available at http://www.oecd.org/dataoecd/55/4/40848277.pdf Accessed on May 5th 2011. Rodriques, R. (2010) Benefits of Foreign Direct Investment. Associated Content: Business to Business. (Online) Available at http://www.associatedcontent.com/article/5428746/benefits_of_foreign_direct_investment.html Accessed on May 5th 2011 Read More