Global Financial Markets The Mnc's example essay topic

1.0 Introduction There were over 53,000 multinational companies, with over 450,000 foreign affiliates (according to the U. N). These had global sales exceeding $9.5 trillion. If we look at the largest economy in the world, U.S. A, if the parent or affiliate of the company acts as buyer or seller, then 99% of U.S. A's international trade is MNC's trade. This therefore has a clear impact on global trading and globalization. If we divide the top 100 MNC's we can see that, a small number of MNC's control the global markets of oil, foods, minerals, and a variety of agricultural products. While the rest play an important role in the globalization of production and services.

They in turn control 20% of global foreign assets, and account for almost 30% of total world sales of all MNC's. A firm that owns production, sales, and other revenue-generating assets in a number of countries, is the definition of a Multinational Company. In order for a firm to become an MNC it must engage in foreign direct investment. 1.1 Foreign Direct Investment Foreign direct investment (FDI) occurs when, acquisition of overseas raw materials, production plants and sales subsidiaries, which occurs due to the potential cost-efficiency it may generate.

There are two forms of FDI. The first approach is that of Greenfield investment, this occurs when the MNC is planning to build a new production facility overseas. Of course by doing this, problems arise, such as defining the channels of distribution, and entering the market with little respect. 1.2 Merger & Acquisitions The second form is Mergers & Acquisitions, which is the joining or 'taking over' of a foreign producer. There are 3 forms that M & A (merger and acquisitions) can take. Firstly the Horizontal M & A this takes place between firms at the same stage of production.

Such merger and acquisition between competing firms leads to greater market power / market share e.g. : pharmeucidicals, automobiles, and utility companies. The second form is Vertical M & A. This takes place between firms at different stages of production, this can be forward or backward integration. The firm in this case aims to reduce uncertainty and transactions costs e.g. : oil, or electronics. The final form of M & A is the conglomerate M & A. This is the merger between firms in different industries as they seek to diversify risk. 2.0 The theories There are many different theories about MNC's and FDI. Homer suggest that FDI protects advantage, but exploits foreign markets.

Kindle berger says that MNC advantage arises through factor / product market imperfections. Richard Coves basically states that MNC's have information advantage. Buckley and Casson, agree that MNC internalization must involve FDI. Calvert on the other hand has a mixture of theories, he states that there is a process for which FDI works; disequilibrium-FDI-equilibrium (this basically means that if there was a country where there was cheaper labor, due to high un-employment, the MNC would merge / acquisition foreign assets (FDI) and use cheaper labor, which would bring about a new equilibrium). He also says that due to government distortions FDI brings about profitability (in this case it suggests that the government may lower barriers of entry to the market in order to stimulate growth / investment ). Calvert goes on to say that the market structure, due to its imperfections could lead FDI to greater market power.

Also that Market failure in the knowledge of production and transfer will lead to MNC using FDI and bringing knew knowledge to the market. 2.1 John Dunning, Eclectic theory The most accepted theory concerning MNC's and FDI is John Dunnings Eclectic paradigm of international production. There are three main topics he delves into; firstly ownership advantages, secondly Internalization advantages, and finally Location specific advantages. Ownership advantages brings about the idea of intangible assets such as, experience / know how, but also product innovation (within the organization). It says that the organizations firm size will bring about immediate market power, and also due to the multi nationality it will bring with it operational flexibility. John dunning then talks about Internalization advantages.

By this he means reduced search and negotiation costs, because the organization has all the channels available to them. A greater control over pricing. A better control of supply and distribution, this is because the MNC owns most or all stages of production including the distribution channels. The size of the organization allows the MNC to cope with new government regulations, such as Trade and tax policies.

Finally because the organization is so internalized it can more easily control the quality of its products, this can be done through monitoring and testing. The third area into which John Dunnings eclectic paradigm delves into is Location specific advantages. Due to the merger / acquisition of foreign assets the MNC can reduce transport and communications costs, it will therefore save the difference of the previous import costs (production within foreign country). The productivity will also increase, seeing as the MNC most likely has found a cheaper labor force.

The MNC can also be closer and understand the difference in culture and politics, which will help the integration of its products in the foreign markets. There would also be a centralized research and development section, this will focus on the specific country in which the MNC wishes to sell its products, and this could be done through testing. The last location specific advantage is that the MNC can now take into account the resource endowments on a much more specific level. 3.0 Globalization Slaughter and Swage l (1997) define globalization as, "The international integration of goods, technology, labor and capital" 3.1 Global production Firms shift to international production, because they have competitive advantages, which are best exploited in this manner. Multinationals are key instruments in global production. As the MNC's have a desire to minimize all costs (production in several countries), to reduce tax liability, to strive to avoid regulations which may raise their costs.

More importantly, they aim to control their labor force, as well as, minimize its costs. When entering a foreign market the MNC's will be looking for among other things for political stability as this could signify a long term stay for the MNC. An incentive for the MNC's to start production in a new country could come in such forms as government subsidies, to decrease un-employment. This is where the government would lower trade barriers and make their laws more flexible for the foreign companies to start investing and for the much needed money to start its inflow into the market. 3.2 International trade When talking about international trade, MNC's play an important role in the allocation of trade / investment in the global community. As they account for about two-thirds of world trade, about a third of world trade happens to be MNC's intra firm trade.

They are also responsible for 80% of the world trade in technology. The majority of MNC's are located in rich developed countries; therefore it should not be a surprise that the majority of FDI comes from these very same countries in Western Europe and North America. It seems that developing countries are generally not an important element in FDI activity. The FDI that is allocated to developing countries seems to be highly selective.

30.6% of FDI to developing countries inflows alone to China. Between countries such as, Argentina, Brazil, Chile, China, Hungary, Indonesia, Malaysia, Mexico, Poland and Singapore get 2/3 of the entire inflow to developing countries. Barely any FDI goes into the least developed countries in Africa and Asia (who are the countries that need the stimulation the most). 3.3 Global Finance The advances in technological conditions across the globe have brought the financial markets closer together. MNC's play an important role within the financial market, with their large cash surpluses. Global Finance can be seen as virtually unregulated, it seems to have a 24 hour network (as when one is "closed" another somewhere else will be "open" and trading).

Global finance is based on city Markets, the most known of these are; New York, Tokyo, Hong Kong, Singapore, Frankfurt, Paris, London. 3.4 Liberalization GATT (General agreement on Tariffs and Trade) was setup to avoid the protectionism experienced in the 1930's, this was the basis for the future of the WTO. It was based on four main principles; Non-discrimination, reciprocity (basically meant that if trade barriers was lowered by a member all trading members should lower their tariffs equally), transparency (the reason as to why trade was taking place must be clear), and fairness (to protect countries from such externalities as dumping within markets). Since GATT was formed, there have been significant reductions in tariffs; they are the lowest they have ever been.

The WTO (World trade organization) also wishes to lower tariffs further bringing global trade closer together. The WTO also aims to lower non-tariff barriers, as well as differences in trading conditions between countries. Unlike GATT the WTO has more power and can settle cases in which trade rules are subject to dispute. This protects countries that previously could have been exploited. 3.5 Regionalization Regionalization or Free trade blocks seem to have both a positive effect for those within the free trade area / custom unions, and a negative effect towards developing countries. Whether it is NAFTA or the EU, They all aim to increase the welfare of the people within these trade areas, decrease transport costs, and inevitably the raise of external tariffs (making products from developing countries, which were previously considerably cheaper, more expensive).

Regionalization is a clear example of the theory of the second best, which states that, the elimination of a market distortion (tariff) does not necessarily mean an improvement in efficiency if there are other distortions present. 5.0 Impacts As we have established that MNC's are important in both the global financial markets, and in world trade, as well as them having annual turnover matching the complete GNP of several nations. It is then easy to see how these companies can have large impacts in less developing countries (LDC) as well as developed nations. An MNC entering into a LDC with large sums of investment for the country could see over the years the countries infrastructure, education and market growing rapidly.

Also training of the labour force, which is invaluable for many LDC's. There are now several organizations, such as the WTO, in place to protect, and ensure trade liberalization. As well as other organizations that protect children's rights in these countries, as many children can be exploited into working for these MNC's. MNC's within the more developed nations, such as W. Europe & N. America, have a different effect. In these situations the MNC's are required for private Research & Development (R&D), the introduction of new technology (as the MNC's innovate new technology to minimize long-run costs to the production phase), as well as for job opportunities.

Due to the amount of money flows in the global financial markets within these nations, the MNC's are vital to the stability of these markets. 6.0 Conclusion In conclusion MNC's are an important part for both LDC's and more developed countries, as in both cases they seem vital for the stabilization and future of the different nations. Within nations such as W. Europe and N. America, they serve as a stabilizing organization as they generate large turnovers, as they own 20% of global foreign assets and employ around 6 million people, keeping un-employment low. Within the global financial markets the MNC's are also a vital instrument, with large capital demand and their surplus of cash. Within the LDC's MNC's impact could be significantly positive as money invested into the country could increase many aspects of nations, from education, to the training of labour. It seems that though the MNC's can have a more rapid positive effect within the LDC's, that (as shown on the map) virtually no trade is done with the nations in more need of it.

The MNC's.