Multinational Enterprises and Foreign Direct Investment

Introduction

Multinational enterprises (MNEs) are organizations that produce goods and services in countries other than their home nation. They are one of the keystones regulating the growth of the international business and trade, through which world countries are drawn into the global market and receive the benefits it provides (Rugman & Collinson 2012a).

Analysis

One of the principal ways how multinational enterprises expand their influence to other countries is through foreign direct investment (FDI). Once most of the uncertainties about the country of interest have been eradicated, and the multinational enterprise has acquainted itself with its market enough to mitigate the perceived risks, the company stops exporting goods and services to that country, creates a production chain on the spot, and either sell the product locally or even begins shipping it out (Rugman & Collinson 2012a).

The particular approach the enterprise will take determines the country-specific factors, such as the comparative advantage, labor costs, etc. The benefits from a successful FDI include higher sales and profits at reduced expenses, access to quickly growing and developing markets, and economic unions. Foreign direct investment, either through the purchase of a company in a target country or complete expansion of the business into that area, also allows a multinational enterprise to obtain technological and organizational innovations (Rugman & Collinson 2012b).

Overall, foreign direct investment (FDI) has a massive role in international business. Reduction in economic and political barriers to the FDIs has led to a skyrocketing growth of multinational firms, and, consequently, has allowed innovation and technological advances to spread through the affected economies. It instigated and supported economic development, and further transition to FDI openness is projected to have numerous global economic benefits (McGrattan 2012).

On the other hand, there is also a different perspective on the effects of the businesses. The increase of multinational production can be beneficial to the host countries, by providing jobs and helping them transit to the global market. However, it can be detrimental to the industry in the home state, particularly if the multinational enterprises import the goods they produce, as can be observed with a number of Japanese MNEs (Arita & Tanaka 2014).

The FDI can be differentiated into two types, based on the MNE’s strategic goals. The first type is the horizontal FDIs, which means that the enterprises use the investment to produce the same or similar goods and products in other countries. It allows the companies to save money on exporting the product to the target foreign market. The vertical FDI refers to the fragmentation of the production process to countries that are the most suited for a particular part of the process and where it is the cheapest. The choice of the strategy is also very dependent upon the market and the industry. For example, the vertical type is quite popular within the automobile and computer manufacturing industry, while medical and consumer products like in the case of Procter & Gamble are more inclined towards horizontal FDIs.

FDI distribution and patterns are heavily driven by the amount of the economic freedoms offered by the home and host countries, as well as the subsidiaries and support from the governments (Lu, Liu, Wright & Filatotchev 2014)

Conclusion

An example of a successful MNE is Procter & Gamble Co., which is an American multinational consumer products company, with a revenue of $76.27 million, and as many as 110,000 employees of 145 nationalities (External Recognition n.d.). Through FDIs, it gained access to cheaper labor, making a profit where local businesses don’t, as well as usually having a technology advantage, and better opportunities for research and development.

However, the MNEs also can be at a disadvantage due to having to compete with an established local brand, to adjust to new laws and policies, particularly if those favor local protectionism. Not being able to adapt their strategies to the target market can easily result in a company failing to find a niche abroad, as it has happened in the case of eBay that has failed to compete with the local businesses in China and Japan.

References

Arita, S & Tanaka, K 2014, ‘Heterogeneous multinational firms and productivity gains from falling FDI barriers’, Review Of World Economics, vol. 150, no. 1, p. 83-113.

External Recognition. 2016. Web.

Lu, J, Liu, XH, Wright, M & Filatotchev, I 2014 ‘International experience and FDI location choices of Chinese firms: the moderating effects of home country government support and host country institutions’, Journal of International Business Studies, vol. 45, no.4, pp.428-449.

McGrattan, ER 2012, ‘Transition to FDI openness: Reconciling theory and evidence’, Review Of Economic Dynamics, vol. 15, pp. 437-458.

Rugman, A. & Collinson, S 2012a, ‘The multinational enterprise’, in International business, New York: Pearson, pp.36-37.

Rugman, A. & Collinson, S 2012b, ‘The Triad and international business’, in International business, New York: Pearson, pp.71-100.

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References

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