Benefits Of Multinational Corporations In Developing Countries Economics Essay

Benefits Of Multinational Corporations In Developing Countries Economics EssayLow economic growth rates, obsolete technology, less capital, racy unemployment rate and poor standard of living are the characteristics of developing countries. According to UNCTAD (2008), these countries usually invest 3 to 4 % of their GDP against estimated 7 to 9% per annum in infrastructure which in results into gap in current volume of investments. This is where Multinational Corporations (MNC) maximizes their benefits by investing in armament developing countries through their expert and other assets advantage.These corporations are usually large watertights operating in imperfect market to open up naked sources of information and knowledge and broaden the options of strategical moves which make the comp both competing with its understructure and global competitors.In the 19thcentury, the newly emerged capitalist in substantial Europe started to invest in less developed countries of the wor ld including United States. This gave rise to Multinational enterprise in those countries particularly held by France, Germany, Britain and Holland. A multinational enterprise is an enterprise that engages in foreign conduct investment and owns or, in some way, fits value-added activities in much than one country (Dunning Lundan 2008). These firms have substantial direct investment in foreign countries and manage their operations both strategically and organizationally. Examples of MNCs include American Express, Wal-Mart, IBM, Hitachi and Unilever. About 85% of worlds automobiles, 70% of computers and 65% of soft drinks are produced and marketed by MNCs. According to World Development composing, most 450 companies with annual revenues in excess of $1billion account for over 80% of the check investment made by all companies outside their home countries.One of the tralatitious motives for companies to invest abroad was the need tosecure key suppliessuch as Standard Oil interes ted to open up new fields in the Middle East, Canada and Venezuela which turned out to be largest emerging MNCs of 19thcentury. Companies wish Nestle, Ford and Bayer expanded internationally mainly in search of new market due(p) to insufficient support from their small home markets compare to the technology and volume-intensive manufacturing process they pursue. In 1984, Nike shutdown its last US factory and shifted companys total production to the cheap labour in Asia to have access tolow-cost factors of production. Apart from labour,lower-cost capitalalso became a strong traditional cause for internationalisation such as subsidies from emcee countries government. These driving traditional factors push companies mainly from the US Europe to become Multinational Corporations. According to the World investiture Report 2002, the overall value-added of ExxonMobil in 2000 was $63 billion and the value-added GDP of Chile was $71 billion in 2000. According to Professor Vernon, compa nies developed a much richer seat for their international operations as the global business environment became more complex and complicated.As MNCs established international sales and production operations, their strategy became more integrated in global sense. The first new first emerging set of forces were the rising economies of scale, expanding RD investments and shortening product life cycles which became necessary for firms to survive in those businesses. Global scanning and learning was the second factor that often became essential to a firms global strategy to enhance their technological or marketing advantage. Lastly, it became manifest that firms started to bring competitive positioning as the third factor for internationalization by cross-subsidization of markets.This clearly evaluate firms were rarely driven by a undivided motivation factor.According to Dunnings eclectic paradigm, multinational enterprises moldiness meet three prerequisites for their existence. Firstl y, foreign countries must offer certain location-specific advantages to motivate MNCs to invest there. Secondly, in enact to counteract or match with some strategic capabilities with foreign markets, the company must provide a unique strategic competencies or ownership-specific advantages. Lastly, company must have some internalization advantages or organizational capabilities to earn good returns from leveraging its strategic strengths internally rather than externally through emancipations or contracts. Companies like Wal-Mart entered in UK by buying supermarket chain ASDA with high- shipment-high-control mode of operating. Amazon.com, for example, uses same approach in Canada by managing its website control from the United States and securing reliable Canadian postal wait on for order fulfilment.Dragon multinationals from developing countries like Asia Pacific succeed regardless of limited primary resources, skills and knowledge, and social capital. In the era of state-driven development, these firms often internationalized to avoid utmost(prenominal) regulation at their home countries. Their main driver was to search for new markets and technological innovation by using strategies of linkage, leverage and learning. According to World Investment Report 2004, few top Dragon multinationals from developing economies are Hutchison Whampoa (Hong Kong), Singtel (Singapore), Petronas (Malaysia) and Cemex (Mexico).In the light of the degree of commitment and risk involved, set against the level of control and thrift of market, there are range options available for firms looking to internationalise its operations. The firm can choose range as per their growth of experience and degree of commitment to operate globally. Exporting is the first stage where firms can enter international business. It involves selling goods or services from one country to another in cardinal ways. Technic group a UK based tyre making company developed its overseas business by arrangi ng exclusive distribution agreements in separately country for the two brands it manufactured which is direct exporting. Flymo a medium-sized British lawnmower making company shifted its overseas business from a distribution to more direct control to think long term for its own export success. This is an example of indirect exporting.Licensing is another stage where firms enter foreign market by providing license to a host countries firm to utilize or sell intellectual property in exchange for financial returns. A major potential drawback in any licensing is when the agreement between the two firms comes to an end the licensor firm may stand up as a potential powerful competitor. In 1969, the French pickup Elle granted a license for a Japanese version to a local firm, Mag House to sell its magazine. except the Japanese version ripe beyond the original concept and the contract was void in 1988.Franchising is a phenomenal growing form of licensing for firms to internationalize the ir operations abroad. In UK, franchise accounts for 10% of retail sales with expected increase to 25-30% in coming years. Benetton is a good example whose shop grew from 0 to 650 in US in flipper years by providing franchisee to firms who can use companys marketing benefit as a well known trademark against hold payments and systems of control. But many problems are associated with franchising which revoke a franchise and end up being very costly. Due to failure of operating 14 outlets according to McDonalds standards, company had to withdraw the license of its largest franchisee in France.In the post-war period, there has been substantial growth in joint enter activity which is the second stage strategies for firms operating internationally. The General Motors Toyotas joint venture NUMMI is an equity joint venture with a separate legal personality which operates in US with an agreed life of 12 years in the sign agreement for long term commitments. Another type of business ventu re between firms where no separate legal personality is formed is described as contractual join venture. Here firms will assist and share the risks and rewards of the collaboration in a clear specific ways. British Aerospace and Taiwan Aerospace in 1993 agreed to set up a joint venture for the manufacture of a regional jet aircraft. This enabled British Aerospace to shift some of its final assembly piss to Taiwan to access lower labour costs. However, due to potential conflicts between partners can lead to the termination of the co-operation agreement such as operational disagreements or disagreements over use and requisition of profits.Firms can also internationalize through other contractual forms of international business such as management contracts, turnkey operations, contract manufacturing and countertrade. According to Financial Times report (1992), Canadas Four Seasons Hotels will chthonian take management of five Japanese Regent International hotels under an agreement b ecoming worlds largest operator of luxury hotels. But one of the top stage strategies for firms becoming multinational enterprise is Foreign Direct Investment (FDI) where firm is seeking high growth of experience with high degree long-term commitment. FDI has been defined as the acquisition or establishment of profit-generating assets in a host country over which the investing firm has control. According to Financial Times report (1989), Bosch a company from West Germany decided to invest 100 billion on a production facility in Miskin, north west Cardiff in order to produce high technology car alternators. The decision got finalized due to lower labour cost in Britain compared to Germany and availability of Welsh labour force who demonstrated its keenness and flexibility to adapt at Japanese transplants. But there limitations for FDI such as the security of fixed and liquid investments, the business units economic feasibility, and ability to move currency freely inside and outside of the host country. Despite these limitations, countries like US and UK had the largest stock of outward FDI in 1991 i.e. $385 billion and $226 billion respectively.Due to the emergence and the growth of the MNCs, there have been massive changes in the world economy. The scopes of MNCs operations in the number of host countries and all kind of strategic alliances have expanded. Also, there have been remarkable changes in the relations with home and host governments as well as with international governmental and non-governmental organizations.