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Multi-National Enterprises and their Impact on Economic Growth in Emerging Economies

Table of Contents
Table of Contents....................................................................................................... 2 Introduction................................................................................................................ 2 MNEs and Emerging Markets...................................................................................... 3 Impact of MNEs on Emerging Markets .......................................................................4 Opportunities in Emerging Economies........................................................................6 Risks in Emerging Economies..................................................................................... 8 Conclusion.................................................................................................................. 9 References................................................................................................................ 10

Introduction
Multinational enterprises (MNE) have today become one of the key proponents of global economic growth with an ever growing stature in world economics. With time, the influence of MNE in developing economies has increased. Emerging markets now account for almost one thirds of global inward Foreign Direct inflows (FDI), up from one fifth in the early 1990s. FDI inflows have brought significant benefits to the emerging economies and played a pivotal role in creating new jobs, introducing technology and innovation, best practices and management practices in the developing economies. This has forced the governments in the developing nations to formulate effective policies to encourage FDI investments into core sectors needing funding and global expertise. Although business practices of MNEs have also come across a lot of criticism and controversy raising social concerns. They have been accused time and again for their anti competitive practices, labor exploitation and environmental concerns. Thus, in spite of multinational

organizations playing a pivotal role in linking the so called rich and poor economies globally, distributing capital, knowledge and value systems, they have become central points of the debates on issues of merits and demerits of Globalization, especially in regards to the developing nations. This research will study the impact of the FDI strategies of the MNEs on shaping and influencing the policies in emerging markets. The policy makers try to accommodate growth and capital inflows with the demand of the local businesses and the traders. The FDI strategies of the MNEs are focused towards achieving the objective of accumulating resource capacities for future growth and employment.

MNEs and Emerging Markets

The last decade and a half has witnessed the growing importance of Foreign Direct Investments (FDI) in the global economy. According to Policy Brief published by OECD (2008), the total FDI stock increased from a meager 8% in the early 1990s to around 26% by the end of the year 2006. A large part of this increase in the inflows has taken place in the developed countries. But, fast growing emerging markets have been a prime contributor towards the increased economic activity. This economic integrations has particularly been a feature of the BRICs (Brazil, Russia, India and China) integrating into the global economy. The growth in the FDI activity in the developing economies like the BRICs and South African nations has been splendid. Their share in the global outward FDI has risen from 22% in the year 1990 to 32% of the total outward FDI in 2006 (OECD, 2008). China has been one of the largest beneficiaries of the global inward FDI accounting for almost one third of the total in the year 2005. Other developing economies too have attracted significant FDI interest. Inward FDI has become one

of the largest sources of external capital into the economies, outnumbering the development finance received by these nations by almost double. MNEs in both developed and developing economies have contributed and benefitted significantly from the growth in global trade and FDI. MNEs have played a central role in developing the linkages for trade and financing between the developed and the developing economies transmitting capital, knowledge and values across the borders (UNCTAD, 2000). MNEs unlike purely domestic firms have benefitted from the Globalization in a better way. Despite the additional cost incurred by them to synchronize global operations and coordinating global market operations MNEs have been successful in establishing themselves in the developing markets. They have the advantage of better technologies, scales, modern management practices and knowledge. The growing capital flows into the emerging markets as benefitted the workers in the developing economies by creating high quality jobs associated with higher pay, technical expertise and better working conditions. MNEs have played a critical role in shaping the policies of major financial institutions and the government bodies related to investments, development and trade. Policy makers are influencing the regulatory authorities in emerging markets to safeguard the interests of domestic firms which have larger political implications (UNCTAD, 2000). Therefore, policy makers today, are concerned more about the impact of MNEs on the local firms, employment, local environment, development and welfare as a whole.

Impact of MNEs on Emerging Markets

The impact of the multinational firms on the social and political factors is relevant to the policy makers in the emerging economies. The inflow of foreign capital and the influx of MNEs into the emerging markets have created many positive and negative spillovers which in the medium to long term have invited reactions from the political and the business communities in these countries. There have been conflicting and complimentary interests in the process of globalization. MNEs and stakeholders in the host nations or developing countries have to find sustainable solutions and complimentary benefits in spite of the existence of conflicting interests in trade. The impact of MNEs on the host economies is grossly misunderstood and wrongly stated most of the times. According to Wells (1998, p.102), Some FDI is good and the others are as bad,

but it is difficult to clearly distinguish which kind of investment will fall under which category, even if the measurement is based solely on economic criterion. The relationship between the MNEs and the stakeholders in the host nations or the developing economies is very complex The changing role of multinational companies in the global economy demands a continuous evaluation and review of the role that FDI plays in the development of the economy and in shaping the socio-political climate of the host nation (Dunning, 1994). The rapid growth witnessed by the MNEs and the trend as shown by the rapid influx of sizable chunk of foreign capital flows into emerging economies has changed the way MNEs and policy makers interacted with local stakeholders. The major trends as a result of this rapid growth in foreign capital inflows were as mentioned below 1. Knowledge is the foundation of the competitiveness of global and local firms competing for the same set of customers in the markets. Thus, both domestic forms of MNEs have continued to focus on in depth knowledge of the market they are operating in. 2. Industrial production firms have gained dominant position in creating long term relationships. 3. MNEs global operations have benefitted from their global strategies and synergies towards optimal utilization of existing resources through a combination of local and international resource capabilities. 4. FDI has played a pivotal role in creation of industrial clusters or economic zones, perceived to be engines for economic growth. 5. Citizens globally are becoming more aware of the environmental impact and the impact on the socio economic factors of these FDI proposals of large infrastructural projects. The macroeconomic factors also get impacted by the influx of the FDI into the economy. FDI actually is the flow of capital across the borders which encourage the host nations or the developing economies to invest in infrastructural projects and projects that are capital intensive in nature. FDI is preferred and appreciated source of capital as it is more stable and the horizon is mostly long term. The investors in an FDI proposal will make a long term commitments towards a project, thus reducing volatility in the capital flows. However, the commitment comes at a higher price as the investor will look for higher returns to compensate for the increased risk

undertook while investing in a developing economy. Another macroeconomic impact is the impact on the trade balance of the country. MNEs have the advantage of accessing their global reach for centralized operations and benefitting from the economies of scale and supply chain. This strategy gives them a strategic advantage of having global presence. Thus a large share of the trade in a globalised economy is through exports and imports made by affiliated companies. Lately the focus has shifted to economic growth impact of the inward FDI into the host nation (UNCTAD, 1999). The impact of the transmission of technical knowledge through research and development, strategic relationships and technology transfers have been positive for local companies as the knowledge is generated in a different country and the positive effects of the same are borne by a developing country. Given that the host country has sufficient absorption capacity for the FDI, the impact of the FDI inflow is significant (De Mello, 1999). FDI is not independent and is influenced by the technological capability, resource capacity and market size (Kholdy, 1995). Foreign investments and capitalists are potential sources of knowledge related to technical factors as well as systemic factors. MNEs can contribute not only by transferring knowledge but also by laying instances, rules and institutions for the development of the economic and financial environment. MNEs exist because they possess competitive advantages or firm specific advantages. The purpose of the foreign operations is to expand the resource and capabilities of the global operation of the firm. One of the other impacts of the MNE operations in developing economies is the impact on the development of the entire supply chain. The MNEs will invest the capital brought into the host country into core assets and resources. They develop the forward and backward linkages to fulfill their objective of resource capacity expansion and also by transfer of better technical knowledge and expertise (Lall and Streeten, 1998).

Opportunities in Emerging Economies

The emerging economies lead by the BRICs and the African nations have taken the centre stage for global economic growth. Since the last decade developing economies have presented themselves as a strong global economic force for political, economic and trade issues globally. Industrialization, infrastructure development, stability and growth in these economies have attracted foreign direct investments as well as interests of investors from abroad into their markets. The developing economies though have a lot of challenges arising out of the changing

policy frameworks, instability in the political environment and the change in trade policies that pose difficulties for foreign investors. But the need for infrastructure, development and capital assures more than the normal rate of returns in these countries, which attracts investors with a long term horizon and appetite for a little higher risk to bring in FDI inflows into the economy (OECD, 2007). Emerging markets have always presented the MNEs with immense opportunities. These opportunities are motivated by the need of the MNEs to expand to newer markets and tap new resources capacities for further expansion and optimum utilization of existing resources. With the developed economies faltering on growth concerns emerging markets have again come to the foreground of the world economy, with an increasing number of multinational firms eyeing opportunities in developing nations to tide over the current growth crisis. The recent years have seen the emerging markets grow at a rapid pace, income of the people has risen in absolute and relative terms, infrastructural development has risen and reforms have been undertaken by government to increase further the economic activity for sustainable high growth. These benefits have attracted many multinational into the developing economies seeking opportunities for growth and investments. The advantages of expanding into the developing economies include increasing their present resource base, taking advantage of their global presence and competitiveness to capture a new market with high growth. Labor advantages are one of the key reasons for investments into developing economies (Dorucci et al., 2003). The labor rates in the developing economies is lower than the comparative rates in the developed economies, By setting up operations in the developing economies the MNEs plan to create a competitive advantage based on the low cost of production. The size of developing economies and their markets is huge. An example of the population of India and China, the consumption in these two economies is huge. This consumption led demand attracts huge interests in foreign multinationals looking for newer markets to expand. Developing markets ever growing need for infrastructure, capital goods, consumer goods, defense, etc has made them a preferred destination for the FDI (Lipsey, 1999). The manufacturing sector, services sector as well as the agriculture sector continues to grow and serve the demand of the population. The governments in most emerging market have a policy framework that encourages investments and FDI inflows into the economy. The technological advantages, knowledge, R&D facilities as well as the availability of capital positions the MNEs at a distinctive advantage Vis--vis the local players. The competitiveness depends on the cost, quality and the strategies used by competing firms (OECD, 2007).

MNEs in emerging markets have been using a strategy of innovation and research to compete with the local brands and establish themselves as key players. In core sectors, FDI is welcomed by the policy makers. Emerging markets provide the MNEs with an opportunity to create new capacity and achieve economies of scale in production; bring the cost of production down.

Risks in Emerging Economies

The emerging economies or the developing economies are potentially big opportunities for multinational firms to expand and take advantage of the resources available to the firm in terms of the raw material, human capital and the infrastructure. The developing economies have seen interests from numerous MNEs in the past one decade seeking to expand operations globally. Though, the opportunities in the emerging markets come with a cost to the company. The emerging markets in spite of being a fore ground for growth opportunities are influenced by policy makers and the politicians in general. There are many risks involved in setting up and carrying out operations in a developing country. These risks are mentioned as underneath Political Risks Political risks are one of the major risks involved in doing business in an emerging market or a developing country. This is because the policy framework in these economies is not that stable. There are frequent changes in key policies. There is a lack of stability in the elected government at power. Change in governments often lead to change in trade and other policies related to opening of FDI or increase of limits in FDI is certain sectors. These possess risks in doing business in an emerging market. Other political risks relate to change in trade policy or regulation.

Economical Risk: The economic risks relate to issues related to balance of payments, inflation, monetary policy, interest rates for borrowing capital and foreign exchange risks. The companies with global operations have to manage and control the affects of these factors on their business. The change in monetary guidelines, interest rates , cost of borrowing funds and the exchange rates might make the cost of production costly thereby uncompetitive. They may also lead to losses for MNEs operating in different countries. The lack of proper infrastructure and other bottle necks also result in slowing the FDI inflows into the country (Kojima, 1978).

Social Risk: Social Risks relate to the cultural risks of operating in a different country. MNEs face a lot of problems due to cultural conflicts as well as social issues related to employment, development and general attitude and behaviors. It is important for a company with global operations to understand the local cultures and traditional beliefs of the locals in order to do business with them. Social risks also involve the growing awareness of the citizens globally about the ill effects of new industries and new projects on the ecology of the place. Conservation of the environment and sustainable growth are the two most important factors global companies are focusing on to build reputation and goodwill (Zarsky 1999). Corruption is a major issue in most developing economies. Foreign companies lured by the notion of doing the things as the locals do loose the opportunity eventually.

Technological and legal Risks: They involve risks due to the infrastructural bottlenecks and the absence of technical knowhow. Though most multinationals in emerging economies will bring the technical knowledge and the best practices with them, there are risks related to technological issues that global companies face while operating out of developing countries. Legal risks arise out of the legal implications arising out of the action of the company. MNEs lately have been accused in a lot of cases for undue exploitation of natural resources, cutting on employments due to global pressures and infringements on patents.

Conclusion
This report presents an outlook on the impact of the FDI strategies of the multinational firms on the regulatory framework and the local factors related to business. MNEs are pivotal to the global economic growth today, and so are the emerging economies. The MNEs have acted as agents for the transfer of the much needed growth capital for the rich nations to the poor developing nations. MNEs have a trade-off between the potential risks involved in doing business in developing countries which include the political, economical, environmental, social and legal risks. Emerging economies provide a great opportunity to invest for MNEs as a

source of raw materials, human capital and creating a competitive advantage over its competitors using its global operations and the synergies to be more productive and competitive. T

References
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UNCTAD (1999): World Investment Report 1999: Foreign Direct Investment and the Challenge of Development, Geneva: United Nations. De Mello, L.R. (1999): Foreign direct investment-led growth: Evidence from time series and panel data, Oxford Economic Papers 51, p. 133-151. Kholdy, S. 1995. Causality between foreign investment and spillover efficiency, Applied Economics 27, p. 745-749 Lall, S. and P. Streeten 1997: Foreign Investment, Trans-nationals, and Developing Countries, London: MacMillan.