Goals of Transnational Companies and the Government - Essay Example

Sale and Purchase of owned Enterprises and Goals of Transnational Companies and the Government In the last decade of 20th century, the developing nations initiated the beginning of a global trend of privatizing state owned enterprises inviting bidders from all across the world. The above mentioned beginning had been well received cash rich companies of developed world and also provided them a window to evolve themselves into a translational corporation or a Multi National Company. Often regarded as smart investors and great profiteers, these companies have a great feel of opportunities and upcoming market possibilities. Channeling their money in form of foreign direct investment, the companies buy controlling stakes in domestic firms and then reenergize the whole structure of the firm to make it more profitable and competitive. Their strategy have been quite simple as even a layman would believe in putting money in those areas or economy where the market if not growing at some astronomical rate but at least have a positive growth despite sluggishness (Krugman, 1998). The merger movement around the world has caused massive effect with growing rate of cross-border mergers and acquisitions. Being termed as an important tool for investment from industrial nations to developing ones, these merger and acquisition are relatively small size in if compared with mergers as compared to those in advanced countries, it gives the receiving developed nation a much needed boost to the economies of their nations. The involvement of transnational companies in the domestic market also provides the developing nation an environment of technological and managerial efficiency. The major bane in the growth of developing nation has been the lack of modern approach in management practices and use of technology. The indigenous research of the government and other agencies has been either lagging behind or has failed to yield any result. The need of the hour for the government is to adopt newer policies and its approach to engage transnational companies in its territory would yield higher growth in GDP and per capita income. The capability of domestic companies also gets strengthen in a pro-growth environment. As a whole the government’s agenda of creating an era of growth and prosperity gets fulfilled in various phases. Government achieving its main objective The purpose of government selling its controlling state in public sector units or state enterprises is for strengthening the support system of the nation. Support system in this scenario is actually the infrastructure that would provide the base to individuals, investors and other enterprises in delving the nation into a situation of self sustaining and growing market structure. For this the government needs to concentrate on the infrastructure sector rather than that of product based with government controlling manufacturing units and marketing system. The government should act more as a managing entity; it’s the country and the people with entrepreneurial ability to explore opportunity. Other purpose for this is to reduce the expense of the government. The structure of the country and its economy should be towards meritocracy rather for bureaucracy. Through merger and acquisition, the government has been able to collect great amount of fund in form of Foreign Direct Investment and would use those funds for developing the required infrastructure. And for transnational companies, FDI has been considered by as the most stable among all types of investment which includes Institutional Investment as well as investment in government securities. All other types of foreign investment have high liquidity and the withdrawal time is very less. The FDI on the other hand is like investment by the investors only with guarantees from the government being the lowest of all. The government has the job of creating a desirable environment but it has nothing to do with the performance of the sector which has seen FDI and at the same time through FDI more capital enters the market thereby creating new jobs and sectors. Many countries in Eastern Europe undertook extensive privatization of state-owned assets. This government policy caused massive inflow of FDI in later half of 1990s. With the resurgence of local financial markets, FDI growth saw significant improvement. The favorable condition compounded with stable political condition made the market more predictable with continuous growth pattern. The service sectors got the most through the privatization of state-owned firms and with the innovation in telecommunication industry, the service sector more employment than any other sector. Merger and Acquisition have been the main mode of foreign entry. An established firm with a list of clients has always been a source of attraction for a number of foreign players when they are put on the platter for sale or merger (Sinn & Weichenreider1997). If we look into what every major financial organization like the IMF; the World Bank; and any of the OECD states, the most common thing is that all of them have suggested that this de-nationalization of control over the market and economy is very much similar to a doctor’s prescription which is for the improvement of ailing industrial sectors. The advent of transnational companies has been termed as a vital fuel which can take the engine of growth of a nation to super fast zone. With this theme each and every global organizations have stated that the degree to which a developing country can get benefited is a very lucidly documented fact. This miracle drug not only powers the growth of the nation but simultaneously improve environmental and social condition in the receiver country. The transfer of cleaner technology and better management as well as socially responsible corporate policies helps in improving environmental and social conditions by enormous amount (Gallaghar & Zarsky, 2006). Policy making and goals of privatization With the beginning of 1980s, an era of privatization begun and yielded fabulous result transforming several thousands of sick and loss-making state enterprises into profitable private enterprises. But still even today, the privatization process is still the most debated with politico-economic nature and hence requires careful planning by policymakers. As, privatization forms the one of most of important goal of the government these days, hence setting the target of the same requires extensive analysis of the historical facts associated with the privatization as a whole. The policymakers must have clearly identifiable goal behind the transfer of control of state owned enterprises to the private players. The purpose could be anything like, raising money through the sell of state-owned enterprises (SOEs) for paying foreign debt or for promoting competition, sometimes might be to modernize old industries as well as making the business process more innovative. Privatization is perhaps the best possible solution to achieve all the above mentioned goals but at the some time requires pursuance of primary objectives and goals. The actual benefit of the privatization process could be observed when the government is fully decided in relinquishing the control over the organization and at the same time, providing the new owner complete independence in deciding the way the organization should move. The privatized organizations should learn to allocate resources efficiently and meet the demands of competitive market. Better efficiency and higher profits by private firms is equally important for the nation and enhance job opportunities as well as national wealth. As most of the SOEs command monopolistic control over the market but selling those enterprises to a private player while keeping the monopoly intact would actually create more problem than solution. This act may be against national interest and customer may get oppressed. The government should begin with changing the market structure from monopolistic to open and then make the state enterprise available for sale. So, instead of the price of an enterprise, it’s the market structure that needs more focus. At, the same time, the government shouldn’t overvalue its enterprises as the prices in the market in modern days is not decided through the calculation of spending being made by the government in establishing the organization but through its potentiality to compete in domestic and international market as well as the quality of its product (Pirie, 1998). As, it has been already been mentioned that government’s intention should be towards a competitive market, so, the process of privatization must consider the level of competitiveness of the market. This magnifies the possibility of better services to the customers and at the same time enhances the final outcome of the privatization process as a whole. The simplest way to improve the competitiveness is the removal of protection of the state owned enterprises and acknowledging the importance of new player into the market. Next to competitiveness, it’s the shared responsibility and support. The stakes of the company could be sold to large number investors who could further be the client of the company and help in furthering the interest of the company as whole (Jarblad, 2003). The state while moving with privatization process wishes for complete privatization rather than joint ventures between the state and private entrepreneurs. The commercial sector can sustain its existence and growth only on the basis of competiveness and corporate efficiency. The productivity of the whole nation gets improved as there is improvement in different sectors irrespective of the type of companies present in a given sector. Rise in Transnational Companies through sale of state owned enterprises The investment by foreign companies in government controlled organizations has also been very instrumental in actual sense in the creation of Multinational corporations. These corporations create more money through the transfer of superior technology and management practices. This transfer of technology and management practices is meant for benefiting those MNCs to maximize the productivity of their system. The MNC creates a new market of technology transfer and equipment renting with clients being local firms which with an intention to compete and improving efficiency. The employees of these firms need to be trained so that they can handle those equipments. And again the MNC are required for the training purpose hence generating more revenues (Jarblad, 2003). Another way of creating a market of this type is to link the productivity and efficiency of suppliers and associates with superior technology. To match with MNCs the supplier are often convinced to upgrade their production technology as well as management practices. So in form of help, the MNCs create more revenue by asking the suppliers to meet high quality standards and then develop their capacity of production and associated workforce. All these things which MNCs provide have always come at a price thereby encouraging domestic investment in those MNCs. This reality is in sharp contrast to what actually been assumed that the MNCs invest rather it’s these MNCs who attract investment that’s too from the country where they have entered through FDI channel (Blomstrom and Kokko, 1996). The business strategy of transnational companies has been quite aggressive in case of crisis. MNCs have often been found to put money in form of investment in the state of financial crisis. The crisis which hit the East Asia in the late 1990s led to the occurrences of a large number of cases involving fire-sale. The domestic firms in a state of cash crisis are made available for purchase at a price which has been much lesser than the asset of the firm. Another advantage that foreign firms possess is their superior information management. These firms often create high market expectation through wide spread transfer of information which are emphasizing on issues like their superior technology and news of efficiency. Through this way the MNCs manage to raise the confidence of domestic investors and often sell their equity stakes at highly inflated cost. So the highly inflated market cap of MNCs local subsidiary is more due to tactical business rather than superior technology usage and genuine investment policy (Kokko, 1994). Hence, the advent of TNCs is based on the central philosophy that it’s going to be an important ingredient in the wheel of growth of nation. Through the simulation of domestic investment and improved technology, the over all productivity and efficiency of the industry gets a boost. So the FDI cause “crowding in” effect on investment. Even the simple assembling firm can make a very profitable growth with rising consumer demand. The higher consumer demand can make the industry with more players can make good returns through better technology and efficient managing (Gallaghar & Zarsky, 2006). The beginning and end of the financial crisis of late 1990s in Southeast Asia showed that a very different business approach of MNCs. The companies were found to be putting great amount of money through FDI channel in Korea and other South East Asian countries. But this time the company went into large scale buying of local firms. These local firms were found to be facing financial crisis causing great fall in the total value of the firm with equities available at throw away prices. The Foreign Institutional Investors and investors in government’s securities taking their money out of the country but the same financial crisis created an investment opportunity for MNCs. A number of companies changed hands with a number of MNCs from US and Europe buying controlling stakes in different South Asian firms. Though this approach of corporation and their investment pattern is more of crisis driven rather than opportunity driven but it provided the much needed thrust to the falling economy and again raised the confidence of the foreign and domestic investors. The government also shelled out its stake in PSUs to foreign investors to get over the ongoing financial crisis (Aguiar & Gopinath, 2004). Now when role of investment is looked upon; the foreign players are handed over the control of beleaguered domestic firms. The logic behind this transfer of control is that the firms’ productivity will get a boost under new management. But again the question is how a particular firm can be assumed of higher asset value under foreign control and at the same time are expected to bring higher return both in terms of productivity and profitability. The foreign investors with their strong financial condition are better placed to buy out a domestic firm than other domestic firms in an economic crisis. So the phases of overpricing and then panic stricken under pricing in case of financial or economic crisis and better record of foreign players both in terms of financial condition and efficiency causes rise in the cases of fire-sale. Reference Aguiar, M. & Gopinath, G. (2004) Fire-Sale FDI and Liquidity Crisis, The Review of Economics & Statistics, Vol. 87, No. 3, Pages 439-452 Gallagher, K. V., Zarsky, L. (2006). Rethinking Foreign Investment for Development, Boston University and Businesses for Social Responsibility, USA Jarblad, G (2003). The Global Political Economy of Transnational Corporations: A theory of asymmetric independence. Lulea University of Technology Krugman, P (1998).  Firesale FDI, Working Paper, Massachusetts Institute of Technology. Kokko, Ari (1994). Technology, Market Characteristics, and Spillovers, Journal of Development Economics, Vol. 43, pp. 279-293. Kokko, A. and M. Blomstrom (1995). Policies to Encourage Inflows of Technology Through Foreign Multinationals, World Development, Vol. 23, No. 3, pp. 459-68 Pirie, M (1998). Policy Making and Privatization: Ten lessons from experience, Economic Reform Today. Read More