Multinational Enterprises and Its role in International Business

Question: Discuss about theMultinational Enterprises and Its role in International Business. Answer: Introduction Analyze the theories and perspectives of foreign direct investment Foreign Direct Investment has increased significantly and impacted the world's economy. This has played a substantial role to initiate the growth of an economy. The Different Kinds of Foreign Investment FDI follows four principles. They are commercial foreign direct investment, international portfolio, commercial loans that are primarily the bank loan assigned to foreign companies. Official flows refer to the development assistance that the developed countries provide to the developing countries. There are three types of FDI such as horizontal FDI which happens when MNEs enters in the foreign countries to produce the same product as it produces at parent country. Conglomerate FDI refers to a situation when the FDI in the foreign country provides a product which is not manufactured by the parent company. The vertical FDI occurs when the MNE operates in a foreign country to produce a product or intermediate goods, which are used as inputs in parent country (Suhag and Rani 2013). Strategic Goals of Multinational Enterprises Undertaking FDI The rationale behind the multinational companies conducting FDI are as follows- proper utilization of natural resources, seeking the market for FDI that follows the expansion or exports in an entirely new market. The costs related to transportation and other Government regulations are key factors behind searching for the new market. To some extent it may contribute to firms clients in foreign subsidiaries, the requirement to modify the products as per local market demand and preference and to reduce the transaction costs. Efficiency-seeking refers to transferring the production to a location where the cost of production is low which happens in an industry which is characterized by unskilled and semi-skilled labor that reduces the production cost considerably. The other type of efficiency was seeking at increasing the competitive advantage and gaining economies of scale. Therefore finding the proper market or exploring the ways to reduce cost is the factors or the pre-conditions which stimulate FDI. Finally, the strategy that the MNE's are taking that its increasing tendency for foreign investment and the firms are looking for FDI to access the tangible and intangible and get benefit in long run. Therefore, it emphasizes and helps to build the ownership advantage that will support companys expansion strategy in the long term in the home country as well as in foreign countries. So the FDI not only strengthening the firms position but also increases its competitive advantage (Bose 2012). FDI Distribution and Patterns A recent analysis has revealed that U.S portfolio investment liability is larger than the portfolio of investment assets . Whereas Germany which is having the same amount of portfolio investment assets. This reflects the fact that U.S assets is more attractive to the outside investors than the investors of U.S. It further analysed that the developing nations FDI constitutes the highest percentage. A recent study has revealed that in developing countries 51% of resource flow caused by FDI compared to bank loan flows and portfolio flows. Advantages of MNEs Location Advantages Increased the Efficiency of FDI It refers to the benefits and the competitive edge that the FDI is getting from its host country operation. Improved the performance from structural differences Structural differences regarding revenue, growth potential, competition between parent country and the host country. It has Increased Return From Ownership Advantage The property benefit derived from assets, resources increases the competitive advantage, and FDI helps them to utilize its core competency. Apart from that it ensures growth and contributes to developing skill and diverse capabilities which providing learning opportunities (Narula 2016). Disadvantages The local employment market is vastly affected which creates a disequilibrium in the labor market that may lead to unemployment and reduces the scope for local entrepreneurs. Essential Capabilities The skills referred to building capabilities by deploying the resources. Capability deployment includes quantity-based and quality-based deployment. The quantity based implementation relates to the resources that are utilized in a foreign market, whereas the quality based deployment engages the rare resources of a target market. While transferring the resources, the MNE needs to bring the capabilities to the international operation to enhance competitive advantage (Salim et al.2015). Reference List Almond, P., Ferner, A. and Tregaskis, O., 2015. The changing context of regional governance of FDI in England.European Urban and Regional Studies,22(1), pp.61-76. Bose, T.K., 2012. Advantages and Disadvantages of FDI in China and India.International Business Research,5(5), p.164. Krautheim, S., 2013. Export supporting FDI.Canadian Journal of Economics/Revue canadienne d'conomique,46(4), pp.1571-1605. Narula, R., 2016. The Modern MNE as an Efficient Meta-integrator: Emerging Market MNEs Need to Foster Internal Embeddedness to Succeed. Salim, A., Razavi, M.R. and Afshari-Mofrad, M., 2015. Foreign direct investment and technology spillover in Iran: The role of technological Capabilities of subsidiaries.Technological Forecasting and Social Change. Suhag, V.I.N.E.Y. and Rani, K.A.V.I.T.A., 2013. FDI and Higher Education in India.International Journal of Social Science Interdisciplinary Research, IJSSIR,2(8).