Multinational Operation in Finance and Banking - Research Proposal Example

Research proposal on multinational operation in finance and banking Contents Contents 2 Background 3 Objectives or key research questions 4 Literature Review 5 China 6 Brazil 7 Ghana 8 Mexico 10 Western Balkan countries 11 Research Methodology 13 Conclusion 14 References 15 Background In the past decade the growth of Foreign Direct Investment (FDI) has been one of the striking features of the global economy. FDI is a kind of investment that is made by the multinational or transnational enterprises in foreign countries in order to manage the operation and production activities and control the assets of these countries. There are different ways through which the development of the countries is affected by FDI. These ways may include market access, incomes and employment, market structure, technology and skills, social, cultural, political aspects, and the fiscal revenues. These areas can be affected by FDI either positively or negatively. FDI is one of the important sources from global economic perspective for development and economic growth. All of the countries in today’s scenario are continuously increasing the inflows and outflows of FDI in the economies. The factors that determine the impact of FDI in the country are globalization, liberalization of trade, cost factor, cultural factors, market size, political factors, cultural factors, and diffusion of technology. The development in infrastructure, education, technology, and health prevailing in the economy are the major determinants towards the success of FDI. The concept of FDI has been successful in the major countries however the same success of FDI is not observed in the third world economies. The research study deals with the impact that FDI have on developed countries and the developing countries. It is often stated that FDI has a positive impact on the country’s economies but it is not true in case of third world economies simple because it can lead to exploitation of natural resources and risks of destruction of local capabilities which cannot be adequately compensated by the foreign investors (Dunning & Lundan, 2008, pp. 56-57). The importance of the study is that it would help to analyze the positive and negative impact that FDI have on different economies. The benefits of FDI are multidimensional such as increased capital capacities, production capabilities, access to more resources and markets, sharing of knowledge and technology, and so on. The impact of FDI has a positive outcome in terms of growth and economic development of the developing countries. On the contrary the communication of FDI with the gross domestic product and inflation has a negative impact on the third world economies. However the developing countries accounts for one third of the total inflow of FDI in the world. FDIs in the developing countries are done through acquisitions and mergers which greatly affects the investment due to change of ownership. Green field investments are identified as a strong investment method in comparison to all of the investment activities. FDI is a very important topic in today’s scenario. Like it has positive impact on the economy of some countries it has even proved to be disastrous in certain economies. This study would highlight the impact FDI has on different economies such as China, Brazil, Western Balkan countries, Ghana, and Mexico. The study would encompass the challenges, success and benefits of different economies in terms of foreign direct investment. Objectives or key research questions Research objectives are the foundation on basis of which the entire research process is conducted. It is the specification of the ultimate reason related to the need for carrying out a research process. The research objectives are often required in order to specify the list of information that would be needed in the research process. The importance of these objectives is that it helps in making the researcher aware about the problem that needs to be investigated so that the research process would help to provide the required information. The research topic in this study is related to the FDI and its multidimensional impact. There would be three research objectives for this study – 1. To determine the impact of FDI on the developing countries or third world economies in comparison to the developed countries 2. To study the success, challenges, and benefits of different economies (China, Mexico, Ghana, West Balkan countries, Brazil) with respect to foreign direct investment. 3. To obtain the required information from the journals and books available related to the topic, and then obtaining a correlation between the gathered information. These research objectives would help to determine the relation FDI have towards the growth and economic development of different countries. The objectives clearly states that the main focus of the study would be determine that whether developing countries or rather the third world economies should opt for FDIs in their economy or rather prefer any other alternative approach towards increasing their overall economic development. The research questions would be – To identify the impact of FDI on different kinds of economies To identify the reasons that states FDI as a negative driver in the third world economies. The main structure of the research would be directly linked with these two research questions. The research methodology would be so designed that it would be able to provide significant answers to these two research questions. Literature Review The benefits, success, and challenges of different economies are described in the following segments – China China has been one of the most prominent examples of the FDI benefits towards the economic development. It mainly comprises of Greenfield investments. The high market attractiveness and the infrastructure of the country have been the positive determinants towards influencing many western multinational companies in order to support FDI activities. The major impact that FDI had on China is the rate of growth in exports. The FDI flows are directed towards the export sector of the country which in turn has boosted the total factor productivity and global trade activities in the country. The foreign companies have invested mainly in the coastal regions of the country and accelerated the growth and per capita income in these specific regions which is not so much significant in other parts of China. The political environment of China has not been very supportive for the foreign direct investment flows in the country. This factor has also restricted many of the potential investors to invest in this economy. There are certain reasons that have contributed towards the success of FDI in China, such as, low cost labor, infrastructure, accelerated economic growth since reform, increased level of integration with the trade activities, and rapid expansion of domestic markets in the country. The FDI inflows ahs strengthened the institutional capacity of China (Ersoy & Kok, 2009, pp. 105-123). The country has acquired competitive advantages in the form of step by step liberalization, and strong development of the institution due to synchronization of liberation which would help the country to withstand any financial crisis in the future. On the contrary the negative impacts that the FDI had on the Chinese economy is intra-regional disparities due to uneven investment distribution, round tripping of the capabilities of the domestic firms and transfer pricing, and increase in the environmental pollution in the country (Dayal-Gulati, & Husain, 2000, pp. 78-79). Brazil After the economic slowdown in 2009 the foreign direct investment has boomed in Brazil. There has been an increase in FDI flows from USD 65 billion in the year 2011 to USD 66 billion in the year 2012 in Brazil. This in turn has compensated the trade deficit in the country. The country has emerged as the fourth largest economy in FDI outflows and the fifth largest economy in FDI inflows. The policy and economic determinants have increased the competitiveness of Brazil in terms of attracting FDI inflows. The positive factors prevailing in the Brazilian economy has facilitated the FDI activities in the country (Mboweni, 2012, pp. 115-116). The positive factors comprise of diversification of economy, high scale of the market, availability of raw materials, high growth of the economy, and the most favorable geographical conditions that allows access to all of the South American countries. The heavy tax systems, slow bureaucratic policies, and stringent labor policies are the risks that are associated with the FDI system in Brazil. Brazil has an open economy and even the government of the country facilitates FDI into the country but the international trade activities in Brazil have been restrained by high administrative policies. The beverage industry, telecommunications, oil and gas industry, and financial sectors are the major industries that attract investment from multinational companies (Wan, 2010, pp. 52-56). The well developed infrastructure and the highly skilled manpower are the major factors that support the FDI inflows in the country. There has been an increase in the potential manufacturing and export sectors in Brazil due to the foreign direct investments. (Source: UNCTAD, 2012, p.4) The Brazilian government has taken effective measures to reduce the entry barriers for foreign investors, reduce the overall trade barriers, and privatize the public companies and deregulation of many sectors so as to facilitate the FDI flows in the economy of Brazil. Ghana There is an uneven trend in the FDI flows in Ghana. The first country in Africa that started off the economic reform was Ghana but it failed to sustain the FDI flows in the country. The new trade conditions, geographical advantages and the investor’s motive to access the existing market are some of the influential factors towards the FDI flows in the country. The large volumes of FDI inflows into Ghana during the economic reform were mainly due to the aim of the investors to penetrate into Africa. The weak determinants such as labor, policies, and infrastructure caused a decrease in the FDI flows in the country. The country is not able to maximize the benefit from the foreign direct investments due to the presence of poor supporting factors in the country. The challenges that are associated with the implementation of FDI in Ghana are macro environmental issues such as structure and institutional weaknesses prevailing in the country (Mallampally & Sauvant, 1999, pp. 1-8). The unemployment level of the country is very high but still there is low availability of the labor to facilitate the FDI activities due to low skill sets of the local labors. The FDI inflows in the country from 2011 to 2012 can be well described through the diagram described below- (Source: Mboweni, 2012, p.180) The country does not possess any factor that is suitable for the FDI activities in Ghana. Though the country in the initial stage has favored conditions for the investors to put in money into the country so as to penetrate into the African economy but Ghana did not have the potential to hold the FDI activities in its domain. The non-predictability in policies and lack of flexibility in the legal systems are the reasons that pose major risks towards FDI activities in Ghana. Mexico The foreign direct investment had a player major in the globalized economies and export oriented countries. Amongst such economies is that of Mexico. The FDI has contributed to over 5% of the total economic production in Mexico. FDI has affected the Mexican economy in positive terms and has greatly contributed towards the overall economic development growth and success of Mexico. The 18th economy that is preferred as the most preferable destination for FDI is Mexico. The manufacturing sector and the financial service sectors have evolved as the most desirable areas for foreign direct investment in Mexico. In the manufacturing sectors the industries involve the beverage industry, automotive industry, chemical industry, and iron and steel industry are the major recipients for the foreign direct investments. The acceleration through FDI is prominent in certain sectors of Mexico but yet there are other sectors in the country that still do not have been accelerated through such foreign investments (Nunnenkamp, 2002, pp.141-144). The FDI activities have been sustaining in this country from the last fifteen years. However the visibility of other countries had resulted into considerable decrease in the determinants of FDI. The FDI of the European Union in Mexico in the year 2010 to 2011 is shown in the diagram below- (Source: Krifa-Schneider and Matei, 2012, p.55) One of the strongest determinants of FDI in Mexico was the availability of cheap labor. The advantage that this country possessed in terms of cheap labor is decreasing due to globalization of other countries. The cheap labor determinant of Mexico is facing tough competition from other globalized countries that even has the availability of cheap labor in today’s scenario. Thus, the country still attracts FDI into its economy but due to intense globalization it is facing a strong competition to sustain the FDI growth into the country. Western Balkan countries In relation to EU countries, Western Balkan countries have a lower rate of FDI inflows. The Western Balkan countries comprises of Albania, Herzegovina, Macedonia, Bosnia, Serbia and Montenegro. These countries have shown a continuous growth in foreign direct investments. These countries are very much preferred by FDI in terms of location and even possess some of the competitive advantages that facilitate the FDI growth in the Western Balkan countries. The competitive advantages of these countries encompasses stability in the macroeconomic environment, highly developed financial systems, high economic growth rate, favorable geographical position in terms of closeness to the major markets of the European Union, and bilateral policies and trade agreements. These advantages have developed in these countries in the recent years. The economic determinants of these countries are very advantageous for the FDI inflows in these countries. Transparency in policy formulation, protection of the investors, development of the financial markets, and macro environmental stability has boosted the success of FDI in these countries (Hausmann & Cortes, 2001, pp. 117-140). However there are very high risks prevailing in these countries which pose a major challenge for foreign investment in these countries. Other challenges that the Western Balkan countries have is high barriers in administration, low per capita income, low bureaucracy functionality of the government, high rate of unemployment, less number of structural and institutional reforms, less share in the research and development of the gross domestic product, less percentage of exports, low implementation of laws and policies, high levels of corruption, and relatively lower capacities of the smaller domestic markets. The FDI growth and de-growth can be illustrated further in the below given diagram – The countries have certain advantages but it possess some of the critical disadvantages which needs to be taken care of so that the country can be more of importance to the foreign investments. Research Methodology The research would be based on the secondary data analysis. The reason behind selection of this methodology is that it would not be viable for collecting primary data. The topic is linked with the economies of different countries and it would not be possible to gather information regarding the concern areas through any kind of survey. In such cases where there is less of chances to get any accurate results through primary research it is always preferred to move forward with the research process using secondary research. This kind of research deals with gathering information that is already available over the Internet, or can be even be collected through some journal or books. The research question primarily deals with analyzing the impact of FDI on various economies. The answer for this question can be well determined by gathering information from educational journals. The journals would be related to FDI and its growth over the years. Some economies books that justify the positive and negative impact of FDI will be analyzed so as to determine the impact of FDI towards the third world economies. There are even some economy related websites which help in providing some data and graphs of the various economics as included in this study and would help in analyzing to what extent FDI have been affecting the economy and growth of these countries. Conclusion Foreign direct investment is the major growth driver in various economies but at the same time it requires some favorable conditions to support the activities. There have been not been much of the empirical support as to whether FDI harms an economy or is beneficial for the economy. There have been researches conducted in terms of FDI activities in various countries and how it has helped to build an economy and contribute towards the total economic production, but much of study have not been conducted on the third world economies which are being greatly impacted by foreign investments. The exploratory study conducted on this topic states the advantages and disadvantages that the foreign investments in developed and developing countries, but much more of correlation has not been drawn between the two so as to arrive at a more significant answer whether FDI activities is beneficial for any economy or results into over exploitation of natural resources of the respective countries. This research topic would help to provide a more prominent answer where lies the importance of the selected topic. This would even be a very interesting topic as it would provide an opportunity to the researchers to explore various economies and their prevailing conditions in terms of foreign direct investment. References Dayal-Gulati, A. & Husain, A. M. 2000. Centripetal Forces in China’s Economic Take-off. IMF Working Paper. Washington: International Monetary Fund. Dunning, J. H. & Lundan, S. M. 2008. Multinational Enterprises and the Global Economy. Cheltenham: Edward Elgar. Ersoy, B. A. & Kok, R. 2009. Analyses of FDI determinants in developing countries International. Journal of Social Economics. Vol. 36(1), pp.105-123. Hausmann, R. & Cortes, P. 2001. Will the FDI Boom Bring More Growth? Development Centre Seminars. Vol. 1(1), pp. 117–140. Mallampally, P. & Sauvant, K. P. 1999. Foreign Direct Investment in Developing Countries. Finance and Development. Vol. 36(1), pp.1-8. Mboweni, T. 2012. Globalisation and implications for monetary policy in South Africa. Cape Town: Independent News & Media International Advisory Board. Nunnenkamp, P. 2002. FDI and Economic Growth in developing Countries. Journal of world Investment. Vol. 3(1), pp.141-144. Wan, X. 2010. A Literature Review on the Relationship between Foreign Direct Investment and Economic Growth. International Business Research. Vol. 3(1), pp. 52-56. Read More