Multinational Enterprises and the Global Economy - Essay Example

30 July Ec3002 Introduction Globalization has already turned into the dominant economic and social trend. The globalization of economic activity and the integration of global markers are the two definitive features of the postmodern economic reality. In these globalizing conditions, multinational enterprises continue conquering new and existing markets, turning globalization into the source of their competitive advantage and, simultaneously, leading to ever increased integration of the basic economic activities and solutions. Today, multinational enterprises influence globalization in several distinct ways: they increase the flow of Foreign Direct Investments, speed up the internationalization of knowledge transfer, improve and increase international trade and globalize R&D activities. Generally, a multinational enterprise “that engages in foreign direct investment (FDI) and owns or, in some way, controls value-added activities in more than one country” (Dunning & Lundan 3). This definition, however, is subject to considerable criticism, for scholars in economic studies seek to distinguish between multinational enterprises that participate in “foreign-owned production and those that have increased overseas commitments” (Dunning & Lundan 3). Nevertheless, these deviations in the definition of multinational enterprises does not have anything to do with the role which MNEs play in the processes of globalization. It would be fair to say that MNEs have already turned into the essential components of the daily economic routine. MNEs play one of the dominant roles in competitive markets and are not the last drivers of globalization in the world. MNEs increase and speed up globalization via increased foreign direct investments (FDI), increased knowledge transfer, growth of the international trade, and internationalization of R&D activities. Foreign direct investments (FDI) have already become an essential feature of the deepening economic globalization. The integration of global markets and the growing number of MNEs reflect in ever rising FDI flows (Markusen & Venables 185). The second half of the 1980s was marked with the rapid advancement of the international FDI opportunities which, obviously, became the starting point of what we currently know as globalization (Markusen & Venables 186). During the six consecutive years, the worldwide stocks of FDI almost doubled and continued to grow during the 1990s (Markusen & Venables 187). Such increase in FDI is easy to explain by the growing number of MNEs, which seek to invest their resources in the developing countries, to invest in the developing economic markets and, thus, to increase the state of globalization and integration of the international economy. The continuous growth of FDI also contributes to the growth of intra-industry FDI share; as a result of these trends, industries that rely on MNEs and FDI become more consolidated. Such consolidation within industries has a profound effect on the globalization processes, because it gives MNEs better chances to conquer international tangible and intangible resources and turn consolidation into the source of their competitive advantage. As a consequence, MNEs come to dominate the global economic markets, turning them into a cluster of large international organizations. FDI, however, are not the only way MNEs contribute to increasing globalization. The transfer of knowledge is often cited among the basic sources of globalization opportunities for MNEs. The transfer of knowledge “allows MNEs to learn from others and to acquire specific knowledge located in the host environment” (Gugler & Michel 67-68). Actually, MNEs often use their dominant economic and market position as the source of additional privileges while acquiring new knowledge from the minor market players. This knowledge is then transferred to the parent company and influences the whole organization and, as a consequence, the whole market. Today, the situation with license fees payments and royalties is dominated by MNEs which have a continuous advantage in the production of technology intensive goods and possess a larger capacity, compared with smaller organizations, to absorb and develop new technologies (Markusen & Venables 200). These trends result in the concentration of knowledge and technologies in the hands of a few MNEs and the internalization of knowledge transfer. New knowledge and technology are immediately spread to other developed countries, turning MNEs into the basic drivers of knowledge transfer across national borders (Markusen & Venables 200). The multinational character of business erases geographical borders and makes internalization of knowledge transfer possible and justified. Knowledge produced at the headquarter is transferred to the foreign affiliates and subsidiaries; knowledge acquired from the minor market players is transferred to the host office and later distributed among other foreign affiliates and partners. MNEs conquer technology markets and emerging knowledge opportunities, making knowledge global and globalized. International trade is just another way of how MNEs contribute to globalization and fight against the existing market imperfections. Throughout the development of economies, international trade has always been among the basic channels of the integration of the international economy (Markusen & Venables 191). Like the transfer of knowledge and the growth of FDI, international trade takes place mostly among the most advanced and developed economic players, and the growing share of international trade occurs within one and the same industry (Markusen & Venables 192). The fact is in that postmodern markets are characterized by a whole range of imperfections and the misbalanced distribution of the raw materials, including knowledge and research. MNEs present an excellent means of resolving and reducing these misbalances, using their multinational status as an excellent means to access available and scarce raw materials (Markusen & Venables 193). As a result, MNEs not only globalize the process of manufacturing goods and services but lead to the ever increasing consolidation of separate industries, especially in technology-intensive market segments. These enterprises increase international trade and globalization through the development of the sophisticated import and product delivery networks, which have to compensate for the lack of available resources in the host country and increase the MNEs’ access to supply opportunities. The expansion of these networks that are connected via efficient trade relations between host companies and their subsidiaries and among the subsidiaries is the basic explanation to the growing international trade and, as a result, the increasing globalization of economic activity. Professionals in economics predict that with time, globalization will replace exports with foreign production, leading to the further consolidation of markets and production opportunities in the hands of MNEs. Finally, MNEs are integrally linked to globalization by means of international R&D processes. R&D is integrally linked to knowledge transfer which has already been discussed in this paper but, due to its importance in globalization, deserves special attention. The fact is in that where MNEs use available knowledge opportunities to drive globalization and integration of economic activities, these very knowledge opportunities and the development of global knowledge networks may become the source of additional concerns for MNEs. It appears that in the process of interacting with their partners and subsidiaries, MNEs risk losing control over their proprietary technologies and, as a consequence, lost their strategic advantage in the global markets (Gugler & Michel 68). The transferability of knowledge over the national borders creates conditions, in which knowledge can easily fall into the hands of foreign competitors (Gugler & Michel 68). That is why, to protect their knowledge achievements and to overcome the growing level of competition, MNEs choose to absorb potential rivals and use them as the source of innovations and knowledge. These mergers and acquisitions lead to the centralization of R&D activities in the headquarters, reduce the risks of information leakage and minimize the costs of communication between various departments. Ultimately, these mergers and acquisitions result in the globalization of economic activity in general, and R&D activities, in particular, and turn multinational networks into the distinctive feature of the postmodern economic reality. Conclusion That multinational corporations contribute to the globalization of the economic activity and the integration of international markets is difficult to deny. In the globalizing conditions, multinational companies try to turn globalization into the source of their competitive advantage by conquering existing markets and entering new ones. MNEs have already turned into an essential component of the daily economic reality. Through increased international trade, increased FDI, increased knowledge transfer and internationalization of R&D activities MNEs have already turned into the principal drivers of globalization. It is due to multinational corporations that globalization has become the distinctive feature of the postmodern reality. Works Cited Dunning, J.H. & Lundan, S.M. Multinational enterprises and the global economy. Edward Elgar Publishing, 2008. Gugler, P. & Michel, J. “Internalization of R&D Activities: The Case of Swiss MNEs.” The International Business & Economics Research Journal, 9.6 (2010): 65-79. Print. Markusen, J.R. & Venables, A.J. “Multinational Firms and the New Trade Theory.” Journal of International Economics, 46.2 (1998): 183-203. Print. Read More