The Global Economies - Essay Example

Introduction The global economies have become highly dynamic operating extensive through trade partnerships and unions. Indeed, the notion that cooperation can spell success has become the prime motivator for economies to open their markets. Through this vision, trade agreements were propagated and the barriers that limit international exchange were gradually reduced. Eventually, countries will continue to entice high level of investment coming specifically from foreign enterprises. It is believed that trans-national firms will consider this as potentially beneficial for their operations. Globalisation is also considered as a primary contributor to the methods used to develop foreign direct investments. In addition, the continuous change in technology also pushed for firms penetrating other markets. For most trans-national corporations (TNCs), the schemes associated with maximising foreign direct investment (FDI) are intricate. These processes are developed through time considering the environmental changes and other circumstantial elements. Logically, the methods in which FDI is maximised by TNCs can be attributed to their nature and existence. Holistically, focusing on TNCs in discussing FDI requires the profound understanding of the two concepts. It is imperative to establish relationships and determine useful trends regarding the subjects. In this process, the extraction of empirical evidence is a necessity and has to be manifested with high level of credibility. Moreover, in-depth analysis will be provided to ensure that the desired outcomes will be realised. The Nature of TNCs The most qualifying description of a firm to consider as a trans-national is its operations. Accordingly, corporations that function in two or more countries are defined as TNCs. Moreover, the general view of TNC is divided into three subgroups. First, horizontally integrated TNCs administer production in different locations to manufacture similar products. Second, vertically integrated TNCs use other countries as inputs for their production. Finally, diversified TNCs operate in different firms that manage production in a manner neither explained by the previous two sub-groups. McLean and McMillan (2003) stated that TNCs became popular in the 1890s. Usually, TNCs are based in highly industrialised countries and expand in different economies. It is being contended that TNCs are influential in the policy making of host countries. This is because TNCs have the capacity to boost an economy and move capital from locations to the other. In addition, some firms control the exchange of goods and services to ensure that tax liability and other forms of unwarranted costs are reduced. Furthermore, the marketing arm of TNCs has been critical in affecting cultural fibres and social foundations. Despite of these criticisms, TNCs remained solidly backed by several countries especially developing nations (Wettstein, 2005). It has to be noted that most of these states have difficulties in improving their economies because of the lack of adequate capital. Several countries, in fact, have depended on the manner in which TNCs operate in their respective economies through the employment and income that these corporations provide. The global character of TNCs is already an established notion. Through decades, these institutions have continued to expand and defy state barriers. Bakan (2004) described TNCs as dominant entities in the global setting. Their capacity to influence economic and political policies is proven. This character can be viewed with a negative connotation. TNCs, however, consider this description as a complement and a prime motivation to pursue further expansion. In some countries, TNCs determine the outcome of economic performance instead of being purely a facilitator of growth and development. The extent of impact attributed to TNCs is so vast that their failure will be detrimental to economies. For some economists, some of the largest corporations can even surpass the economic outputs of some states. This discrepancy is critical since countries naturally have more capacity to provide various products that the uniform commodities manufactured by large firms. Moreover, it is believed that TNCs have shaped the international relationships of states. Countries that house several TNCs are being pushed by these institutions to seek for economic agreements with countries in need of investment. Through these treaties, TNCs immediately penetrates target location with reduced constraints. Countries that have benefited from the emergence of TNCs have seen the positive effects provided by such developments. The presence of TNCs made the transfer of technology faster making it easier for local companies to improve their production capabilities. Competition has also intensified affecting the level of prices imposed on important products. In addition, local firms have started producing high quality products since TNCs are known for their commodities. Foreign Direct Investments The discussion of FDI holds several technicalities that need to be satisfied and provided. According to the International Monetary Fund (IMF) (2003), direct investment is part of the international investment that shows the motive of direct investors in a particular economy through the establishment of an enterprise in another economy. It is important to note that there is a necessity to build long-term relationship and the direct investor has the autonomy to direct the operations of the enterprises. Technically, the investment is observed in the initial transaction of the entities and the subsequent exchanges performed. IMF (2003) suggested that direct investors can be an individual, a group, company, or a government. The incorporation of firms that act as direct investors is discussed separately. It is important that the direct investors control a significant share in the ownership of a subsidiary, associate, or branch of its entity based in other economies. Countries have varying laws regarding foreign ownership and investments. Although this serves as a barrier, it is important to define the extent of influence that the investors can make as far as their investment decisions are concerned. As discussed above, the significance of ownership is a fundamental determinant of foreign investment. Depending on the nature of the enterprise, investors need to control at least 10% of the shares in the event that the TNCs are incorporated. The 10% required by IMF is crucial because such level of ownership will allow the invertors to substantially influence the direction of the firms and manage the decision-making process. The existence of TNCs in different countries is described as a subsidiary, a branch, or an associate. Subsidiaries are firms owned by TNCs fully or above 50% of the voting power. In addition, TNCs have the capacity to make critical decisions such as removal and adding of subsidiary components. An associate, on the other hand, requires TNCs to own at least 10%-50% of its voting rights. Finally, a branch is an unincorporated firm that can be one of the following: a permanent establishment owned by the TNC; an unincorporated partnership venture forged between the TNC and a third party based is another economy; and land, equipment, and developments in another country controlled by a TNC. FDI flows, as framed by IMF (2003) consists of basic components with various descriptions. First, equity capital refers to the equity in all branches and the shares on associates and subsidiaries. This also includes capital contributions made by the TNC on the foreign entities. Reinvested earnings are revenues of the foreign entities and the dividends attributed to the entities that have yet to be transferred to the TNC. Other direct capital investment exits in the form of debts and securities. This is manifested between the TNC and its foreign entity and can also be practised by two foreign entities owned by a single TNC. Indeed, these are essential requirements that TNCs consider before exploring in different countries. TNCs understand that their foreign venture goes beyond the desire to promote corporate robustness. In their decision to expand, there are critical aspects that TNCs need to consider to ensure that all parties involved will be benefited. Although the nature of FDI is technical, its design was purposely created to include the legal matter than will be encountered by TNCs. Benefits of FDI Definitely, FDI created by TNCs affect the trade and investment conditions of several countries. The primary benefit of FDI that affects trade for developing states is observed in its long-term contribution to integrating the host economy more closely into the world economy (OECD, 2002). This can be clearly established by the process in which imports and exports are sustained. Indeed, TNCs ensure that trade and investment are recognised as mutually reinforcing channels for cross-border economic activities. Domestic markets are also affected especially small and medium scaled enterprises in host countries. Empirical studies suggest that the transfer of technology facilitated by TNC expansion is the most important contribution to host states by TNCs. It is technology that creates an avenue for TNCs to provide vital investments in different forms. Most TNCs have created most of world renowned research and development techniques. The technology improves the level of methods and strategies being used in several developing countries. Spill over of technology is crucial especially for some sectors that highly depend of such attribute (Haddad and Harrison, 1994). The FDI attributed to TNCs can improve the current state of human capital among developing countries. Through the establishment of foreign investment, employees based in the host countries will have the opportunity to acquire training and other valuable labour enhancements. These developments are imperative among countries that have labour extensive capital portfolio. The employees become highly skilled and can eventually spread their learning locally. Despite the inadequate empirical evidence, it is obvious that the presence of TNCs fuel the competition among host countries. TNCs are expected to affect decisions of consumers because of their global reputation and performance. For the local firms to maintain their domestic control, their level of improvement has to consistent and equals the quality emanated from TNCs. The threat on the local industry posed by TNCs is immense and can become a detriment when ignored by local firms (OECD, 2002). Because competition is intense, expect the products to be manufactured with high levels of quality. Most important, price will be determined according to the preference of the consumers. One of the fundamental aspects that drive TNCs to channel FDI is for improvement. TNCs become more adept in dealing with varied market conditions and economic circumstances (Shatz and Venables, 2000). The environment that tends to vary in different host countries allows TNCs to formulate sound policies and better strategies. Moreover, TNCs find is cost-effective to distribute their activities in other countries. Some developing states require low labour costs and the overall production requirements are lessened. The innovativeness of TNCs also improves as the intricacies of consumer preference evolve. Generally, the presence of TNCs and their FDI contribution boosts several economies. It is evident that TNCs have created more employment opportunities and better buying options for consumers. The government also gains for the TNCs in various ways. First, the investment enhances the economic performance since it supplements the Gross Domestic Product (GDP). Lastly, the tax attributed to the operations of TNCs is vital to finance government spending. Strategies on FDI Maximisation TNCs are provided with several methods in order to maximise their efforts on providing FDI. It is possible that TNCs will use their investment to lower cost of production. This is evident among TNCs that primarily use other countries to house their manufacturing sites (Knickerbocker, 1973). The investment is used to create labour opportunities in host countries. The strategy illustrates cost-effectiveness since labour cost is reduced. The investment is further enhanced by the continuous expansions. TNCs transfer their operations to developing countries and consider crowding the market as the primary strategy. It is possible that FDI can be enhanced by TNCs vertically among host countries. The process can be achieved in two methods and is the conventional approach to enhance FDI. The first strategy is described as the backward vertical FDI. In this scheme, a TNC will provide the inputs of production used by firms in other countries. The TNC serves as the supplier and the product of the TNC becomes part of the domestic commodity. The second strategy involves TNCs selling the products produced by the domestic firms in host countries. This method is usually observed among global distributors. Some TNCs have considered channelling their entire operations to other locations. This strategy enables TNCs to provide total control of their operations and other support activities. Moreover, the cost of operations is reduced significantly because the transfer of production inputs is manifested domestically. TNCs adopt their strategies in a different setting and the results will allow the TNCs to develop better strategies. Merger and acquisitions are the most effective method of propagating FDI. This scheme allows TNCs to transfer their operations abroad through the acquisition of firms based on other countries. Foreign mergers are important because the process can improve the foreign firms depending on the details and speculations. By acquiring foreign firms, TNCs will effectively improve the transfer of FDI. Mergers combine the expertise of TNCs and the resources of the foreign companies (Pralahad and Doz, 1981). Several mergers have transpired between TNCs and other foreign companies. The trend continues to improve with the support provided by economic and political policies. The motives of TNCs in promoting FDI can be described as defensive (Dunning, 1993). For some TNCs, the establishment of foreign partners can create new markets. The new markets allow TNCs to abandon unproductive activities and focus on the markets that require different activities. Most important, TNCs consider their foreign counterparts as insurance in the event that their domestic efforts fail. Their success in the international level can compensate for the inability of TNCs to control their local realm. Moreover, TNCs can use their global success to change the market moods in the local scene. Aside from these strategies, there are other methods used by TNCs to further enhance the transfer of FDI. TNCs consider partnerships with the public sector to further expand their operations. This strategy is commonly seen in developing countries in dire need of infrastructure developments. Investors agree with to governments to construct communication and transportation structures and the ownership will be transferred to the government after the agreed period. Issues and Challenges The political influence of TNCs and their FDI is established. Most of these TNCs have become part of the process in which the policies are made. To encourage investments, government become more amenable with barrier reductions. One of the most important changes is the manner in which TNCs are taxed. Governments contend that their efforts on limiting taxes will entice more investors to penetrate their markets (Rodriguez-Clare, 1996). In addition, governments have suspended their policies on quotas and restrictions. In targeting FDI, governments need to make their markets more lucrative. Although the positive effects of TNCs in foreign markets are established, there are other outcomes that suggest negative outcomes. Once TNCs decide to operate on developing countries, it is expected that their capacity is higher that firms in host countries. This mismatch will eventually become detrimental to the foreign companies (Caves, 1996). Despite of the technology introduced by TNCs, it is hard to assure that the effect will be positive. Small and medium scaled firms consider the technology as costly and hard to afford. Foreign firms are endangered of losing their own consumers because TNCs products better. The environmental issues concerning TNCs are widely discussed in the crafting of policies. One of the strategies used by firms is to extract the physical resources abundant in other countries. Some groups have been concerned that their resources will be exploited by firms coming from different countries. Moreover, several concerned institutions have been observing the environmental effects of new technologies. Social fibres are critical in uniting governments. When these fibres are distorted, then concerns will arise. The distortion can be possibly caused by the influx of TNCs (Lipsey, 2002). It is evident that there are several societies that were changed because of products coming from different countries. Specifically, consumers have changed their preference from the local products to imported goods. Several commodities produced by TNCs have been slowly embraced by different market. Some contend that is part of the continuous consumer maturity. On the other hand, incidence have shown that the behaviour of individuals have also changed because of the presence of TNCs. Issues on labour have hounded TNCs through the years. Labour unions have complained that some TNCs have exploited human resources without providing just salary (Figini and Holger, 1999). Because of these accusations, some governments were inclined to provide minimum wages on certain labour categories. For some TNCs, this policy is considered as a major barrier. To settle the issues, TNCs have created avenues of communication between the management and the labour union. The collective bargaining agreement serves as a legal document that stipulates the rights of both TNCs and employees. But perhaps the most important issue that needs to be addressed in the dependence of countries to FDI. Instead of focusing on their own capacities, developing firms have become more concentrated with enticing TNCs. It is hard to argue that capital is a problem among poor countries. Also, the lack of quality infrastructures and low social condition affects the countries aiming for FDI enhancement and the willingness of TNCs to invest. Conclusion Undoubtedly, the impact of FDI in economies is immense. The influence of FDI in the performance of countries is important since it consist a portion of the Gross Domestic Product (GDP). The investment that TNCs provide improves the employment opportunities and the entire economic climate of host countries. In addition, the transfer of knowledge and technology improves the enterprises in developing states. Likewise, TNCs become more adept with their operations. New markets challenge TNCs to be highly innovative and concentrated on continuous developments. Moreover, there are several methods introduced by TNCs to propagate FDI. These are generic and innovated strategies that are employed to ensure that FDI penetrates efficiently. The strategies used by TNCs are part of their effort to promote their products and services. The conventional strategies involve merger and acquisitions. Other preferred schemes include vertical and horizontal FDI penetration. New strategies such as build-operate-transfer are frequently preferred in developing countries. The strategies continue to evolve as the needs of consumers and the economic environments changes. Although it is true that FDI is essential to the economy, dependence of investment is highly discouraged. FDI, however, can be used as the mechanism to improve host countries’ own capabilities in creating sustainable growth and development. The emergence of TNCs has benefited most of the home countries. The challenge for TNCs is to ensure that host countries are provided with the benefits as suggested by the concept of equality. References Bakan, J. (2004). The Corporation: The Pathological Pursuit of Profit and Power. New York: Free Press. Caves, R. (1996). Multinational Enterprise and Economic Analysis. Cambridge: Cambridge University Press. Dunning, J. (1993). Multinational Enterprise and the Global Economy. Wokingham, UK; Addison-Wesley. Figini, P. and G. Holger. (1999). Weltwirtschaftliches Archiv. “Multinational companies and wage inequality in the host country: The case of Ireland. Haddad, M. and A. Morrison. (1993). Journal of Development Economics. “Are there positive spill over from foreign direct investment?” International Monetary Fund (IMF). (2003). 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The Journal of Corporate Citizenship. “From casualty to ‘ capability: New understanding of TNCs’ enlarged global responsibilities. Read More