Globalisation, Transnationals and Economic Policy - Essay Example

Globalisation, Transnationals and Economic Policy INTRODUCTION: Foreign direct investment (FDI) is described the long-term investment by a foreign based direct investor in a business organization or enterprise residing in an economy that is not where the economy of the the foreign direct investor is located. Basically, the relationship in a foreign direct investment supply scheme, consists of a investing parent enterprise and the foreign affiliate where money is invested in. This business relationship is described as a transnational corporation.. To qualify as Foreign direct investment company, the acquisition agreement must afford the parent enterprise control over its acquired foreign affiliate. The United Nations explains that control in this case is owning at least 10% or even more of the ordinary shares or voting power of the acquired or subsidiary company. BODY: Question 1 (a) To what extent has FDI been important to the economic development of countries in Central and Eastern Europe over the last decade? Foreign direct investment has been very very important to the economic development in Central and Eastern Europe over the last decade. Basically, importance is marked by successful resource seeking there. Also, Market seeking is another important economic development in Central and Eastern Europe. Lastly, Efficiency seeking has improved the economic situation in Central and Eastern Europe. Basically, importance is marked by successful resource seeking there. Some parent companies invests large capital resource in order to to acquire major factors of production that are more efficient than if the factors are obtained in its home country base. In fact, these scarce resources may not even be available in the home economy at all. These major factors include cheap labor and natural and resources. This exemplifies why Foreign Direct Investors set up shop into developing countries like the Asian third world countries. Specifically, some parent companies would go out of its way to seek cheap and hard to find natural resources in the Middle East and Africa. Other foreign direct investment companies prefer to set up manufacturing plants in in Southeast Asia and Eastern Europe because of the cheap labor costs there. This will increase the purchasing power of the workers in Eastern Europe. As a result This will decrease the unemployment rate in Eastern Europe and Southeast Asia. Also, Market seeking is another important economic development in Central and Eastern Europe. Some foreign direct investment companies would daringly venture in uncharted waters as they set up shop in Central and Eastern Europe. The companies main aim is to increase its market territory. Expectedly, this marketing strategy of expansion will increase total world-wide sales thereby increasing profits. Reasonably, the parent companies only want to protect or their current sales figures. Hopefully, some parent companies just want to infiltrate the markets of its competitors while protecting its markets in its home country base. Some parent companies enter this type of international marketing strategy through mergers and acquisitions. Lastly, Efficiency seeking has improved the economic situation in Central and Eastern Europe. Clearly, some foreign direct investors venture into Central and Eastern Europe in order to exploit the economies of scale and the scope there. The market in Central and Eastern Europe can be segregated into the rich, the average and the poor customer prospects. It is even suggested that this type of Foreign Direct Investment can be realized after either resource or market seeking investments have been cropped up. Then, this will in all probability will increase the sales as well as the profitability of the firm. Typically, this is the type of Foreign Direct Investments that is mostly widely practiced in highly developed economies. This is what is actually happening within closely integrated markets like Central and Eastern Europe. EXAMPLES: In Western Europe( Thuermer, 2006) stated that the continually emerging economies of Central and Eastern Europe are giving countries like Germany, France, the United Kingdom and the Netherlands a run for most of for money. Definitely, the United Nations Conference on Trade and Development (UNCTAD) emphasizes that Asian and Eastern European nations offer the most positive foreign direct investment (FDI) prospects until the year 2008. she clarifies that many companies like L.G. Philips, Hewlett-Packard find lower costs of doing business in both these growing regions. Emerging markets: Central and Eastern Europe The Business Economics(Wieners, 1996), stated that the prior sphere of influence of the Soviet Union, is composed of a very heterogeneous group of countries politically and economically. Whereas Russia is facing a presidential election on June 16 that is of crucial importance for the country's political and economic future, the nearby four countries of the so-called Visegrad group, nmely: Poland, Hungary, the Czech Republic and Slovakia, had a clear aim which is to become members of the European Union (EU) as soon as possible and even discussing joining North Atlantic Treaty Organisation. Of the different states in the Central and Eastern European arena(CEEC), the four states ranks very high in terms of state privatisation, markets and trends and on the effectiveness of legal rules on investment for foreign direct investments. This is a signal for foreign companies to consider these four as they are looking for business opportunities for their companies in the CEEC. The four Visegrad-group states above have posted the best figures in nearly all ten criteria above. Reasonably, it is not a surprise that the overwhelming majority of foreign direct investment (FDI) is in reality directed at these four countries. As evidence, in 1995 these four countries had attracted US$9 billion or an estimated 70 percent of all Foreign Direct Investments in Eastern Europe, including the former Soviet Union. Also, the per-capita concentration of Foreign Direct Investment is even greater. Furthermore, in 1995, Foreign Direct Investments of US$7 per capita had been directed at Russia. Whereas, it had been as much as US$200 in Hungary. Conclusively, Foreign Direct Investment therefore had played a very different role in the development and growth process in the Central and Eastern European business sphere. Although Foreign Direct Investments are a very important factors in economic development in Hungary, the Czech Republic and Poland, it had already been of miniscule significance for Russia. In reality, the financing aspect of Foreign Direct Investments has positive economic effects. These are concentrated on the transfer of know-how, marketing and technological progress. Further, Hungary used to be the favored location for foreign direct investors. Now, Poland is coming on strongly and there finally are telltale signs that Slovenia is opening up to the juicy foreign direct investors phenomenon. There are many people who should know better are now calling Russia's catastrophe a failure of capitalism(Hanes, 1998). In reality, it is a failure of Russia to improve its economy by embracing capitalism. Evidently, people can just to turn to Central Europe to find half a dozen models of how the transition from a communist economy to the more popular free-market economic environment can be managed with flying colours. Realistically, Poland, Hungary, and the Czech Republic are very high up the ladder of economic transformation. Additionally, the tiny Baltic countries of Estonia and Latvia are quickly revising its economy to keep with its capitalist and foreign direct investment neighbors. Of the Balkan states, It was Slovenia stands out as an economic jewel. This occurred after it divorced itself from the extinct Yugoslavia. Its success was because it had created the inducive and enticing market economy that courted foreign direct investors to enter its territorial domain and set up shop. Accordingly, the study by the United Nations Conference on Trade and Investment (UNCTAD) declared that these six countries have garnered an estimated $38.6 billion in Foreign Direct Investments during the past five years. CONCLUSION: (b)   What advice would you give to a government in Central and Eastern Europe on an appropriate policy towards FDI? In summary, Foreign direct investment (FDI) is the link in the relationship between an emerging economy like Central and Eastern Europe and other it foreign counterparts. It consists of a investing parent enterprise and the foreign affiliate where money is invested in. This business relationship is described as a transnational corporation. To reiterate, foreign direct investment has to be very very important to the economic development in Central and Eastern Europe over the last decade. Basically, the importance should also be implemented with the government help in the search for successful resource. Also, Market seeking must be one of the important economic development in Central and Eastern Europe. Lastly, Efficiency seeking had already uplifted the economic situation in Central and Eastern Europe. The advice would be to lower taxes so that foreign direct investments still hurricane itself into the Central and Eastern European countries. Also, the Eastern and Central European countries should lower the workers’ Minimum wage in order to entice foreign direct investments. Lastly, the government must put into place the laissez Faire economic system where the government takes a hands off policy when such policies will drive the foreign direct investments detouring to other countries like the Southeast Asian countries where labour is less costly. In conclusion, Foreign Direct Investors are the missing links to the current borderless economy. REFERENCES: Thuermer, K., Manufacturers turn to Central and Eastern Europe for expansions: companies like L.G. Philips, Hewlett-Packard find lower costs of doing business in this growing region, Expansion Management, July, 2006 by Thuermer, Karen E. Wieners, K., Business Economics, July, 1996 , Central and Eastern Europe Slavin S., Economics, Irwin, London, 1989 Intriligator, M., Econometric Models, Techniques, And Applications, Prentice Hall, N.J., 1978 Schiller, B., The Economics of Poverty and Discrimination, Prentice Hall, N.J., 2001 Samuelson, P., Economics, McGraw-Hill, London, 1973 Parkin, M., Microeconomics, Addison Wesley, England, 1998 Chisholm, R., McCarty, M., Principles of Economics, Scott, Foresman & Co., London, 1981 Read More