Key Changes in International Production - Assignment Example

MULTINATIONAL ENTERPRISES Name University Course Tutor Date 1.0 PART A: Key Changes in Global FDI & International Production 1.1 Global FDI Flows The year 2013 recorded a Global FDI flows increase of 9% to a figure of $1.45 trillion as compared to $1.33 trillion of the previous year. This increase came in spite of international investments’ volatility resulting from a shift in the expectations of market towards a former tapering of quantitative easing in the US1. There was an increase in FDI inflows in all principal economic groupings; these are transition, developing, and developed economies. Developed economies’ share of total global FDI inflows was low but an increase is expected in the next three years. There was also a 9% increase of Global inward FDI stock to a figure of $25.5 trillion, a clear reflection of FDI inflows increase alongside stock markets’ outstanding performance in several parts of the globe. 1.1.1 FDI by Region An analysis of FDI by region takes into account FDI inflows and outflows. The 2013 increase in global FDI inflows (of 9%) is a reflection of a moderate recovery with respect to economic growth alongside a number of large cross-border M&A transactions1. Ideally, the improvement spread across the three groupings of economies. It is, however, worth noting that there were different reasons for the increase in various part of then world. ____________________ 1. UNCTAD, 2014. World Investment Report. United Nations Conference on Trade and Development. There was a 9% increase in FDI inflows to developed countries to a figure of $566 billion; this increase was primarily via improved earnings in EU foreign affiliates thus enhanced FDI to members of the European Union. With respect to the developing economies, there was an increase of FDI inflows to $778 billion which translates to 54% of the total global FDI inflows2. In transition economies, there was also a 28% increase of FDI inflows to a figure of $108 billion which translates to 7% of the total global inflows. There was an increase of inflows to the developing Asia with all sub regions recording an increase apart from West Asia. A 14% increase of FDI inflows was registered in the Caribbean and Latin America following continued stability in the year 20122. Unlike the case in the three previous years Central America became the region’s main driver. There was a 4% increase of FDI inflows to Africa resulting to a figure of $57 billion. Countries in the southern part of the continent particularly South Africa are characteristic of high inflows. Continued social and political tensions were main reasons behind declines of FDI inflows to many North African countries. Lower levels of inflows to Nigeria were a reflection of foreign transitional corporations retreat from the oil industry. Developed countries in Europe recorded a three percent increase of FDI inflows as compared to the previous year. North America recorded a 23% growth of FDI inflows owing to acquisitions by Asian investors. There was a 5% increase in FDI outflows to a figure of $1.41 trillion as investors from transition and developing economies went on with overseas expansion as a response to investment liberalization and economic growth alongside high income streams as a result of high prices of commodities2. ______________ 2. UNCTAD, 2014 1.1.2 FDI by mode of entry In regard to FDI by mode of entry, there was an alleviation of the downward trend recorded in the year 2012. This was a reflection of an improvement in the general investment outlook. There was a 9% increase of greenfield projects’ value; this was, however, lower than historical levels. On the other hand there was a 5% increase of cross-border M&As value. In the year 2013, FDI M&As and greenfield projects were characteristic of differentiated patterns among economies’ groups. Developed countries were outplayed by transition and developing economies with a 17% increase in announced greenfield projects’ values, alongside a73% increase for cross-border M&As. 1.1.3 FDI by Industry and Sector With respect to industry and sector, the types of investment exhibited variation. In the primary sector, greenfield and M&A projects’ value recorded 14% and 32% increases respectively thus regaining momentum in the year 2013. This growth, however, had differences on grounds of groups of countries. Extractive industry’s Greenfield activity by transition and developed economies dropped to almost near zero confining business in developing countries. In these countries, there was an approximately 100% increase in value of Greenfield projects2. In addition, cross-border M&As value increased from -$2.5 billion to $25 billion. In the manufacturing industry, the year 2013 exhibited relative stable investment characterized by a limited decrease in Greenfield projects’ value (-4%) alongside 11% increase in cross-border M&As value. ______________ 2. UNCTAD, 2014 With respect to Greenfield projects, the clothing and textile industries recorded an increase in investment with projects totalling over $24 billion. M&A and Greenfield projects were dominated by the services industry. 1.2 International Production International production also exhibited an immense deal of strength in the year 2013. Foreign affiliate activity’s indicators showed improvement, however, with different rates of growth. The highest growth rate was displayed by sales (9.4%), with consumption and high 8economicm growth in transition and developing countries being the primary drivers. Foreign assets had a 7.9% growth rate which is an indicator of stock markets’ strong performance in line with FDI outward stock growth rate. There was a 5% growth rate for foreign affiliates’ value added and employment (this was almost same as FDI outflows growth rate). A small rate of growth (2.5%) was recorded by foreign affiliates’ exports. 2.0 PART B: Evaluation of reasons behind multinational enterprises’ growth An immense deal of multinational companies finds significant growth opportunity in emerging markets. There are various fronts via which growth in these markets occurs: foreign investments’ opportunities, development of infrastructure, alongside consumer market expansion fuelled by increased income and emergence of the middle class. Such outsized emerging markets as Brazil, Argentina, China, and India have been identified as drivers of global and regional economic growth characterized by large populations, significant economic reforms, outsized physical sizes, significant political influence within their regions, alongside fast growth rates. Typical emerging markets are characteristic of constant changes representing both considerable risks and exciting opportunities for international enterprises. Businesses in merging markets are faced by the significant challenge of global financial crises. These markets exhibit high susceptibility to financial crises owing to the fact that they depend on external capital. Economists and scholars have made several attempts to explain the growth of international enterprises. To this effect, various theories have been developed in relation to the growth of multinational enterprises alongside other aspects of these enterprises. Outstanding examples of perspectives from which the growth of multinational enterprises can be viewed are the internalization theory and the transnational monopoly capitalism. 2.1 Internalization theory-Casson and Buckley The internalization theory is a conceptualization of Casson and Buckley. In brief, Casson and Buckley show that multinational enterprises have the culture of organizing several activities internally in order to have the capability of developing and exploiting firm-specific advantages-FSAs. These FSAs’ proprietary ownership has the responsibility of overcoming the externality of knowledge as a public good. With consideration of market failure presence, internalization is a governance mechanism in the development and exploitation of FSAs. Ideally, internalization acts as an external market alternative for the development and exploitation of knowledge. Generally, Casson’s and Buckley’s work is a demonstration of the way market imperfection can have the consequence of pressure for internalization by multinational enterprises3. The work of Casson and Buckley can be referred to as a rare original contribution towards international business thinking. The development of the primary idea arguing that MNE has the capability of replacing the market was entirely independent of the thinking of Oliver Williamson. The relationship between the internalization theory, markets, and Williamson’s hierarchy approach was resolved via a publication by Hennart in the year 1977. Ideally, internalization theory acts as a comparative institutional approach towards MNE behavior analysis. This theory is characteristic of allowing the assessment of the relative effectiveness and efficiency of alternative mechanisms of governance with the objective of managing economic interdependencies. Considering the MNE to be a network having weak and strong ties among subsidiaries and between subsidiaries and parent, the application of the internalization theory is possible for the evaluation of the relative benefits and costs of the management of economic interdependencies. This is an example of a positive explanation of organization and functioning of MNE that is efficiency-based3. This has the implication that there is a possibility of extending thus linking internalization theory to network analysis. It exhibits full compatibility with the explanation of the firms’ boundaries, alongside the distinctions of organization between hierarchy, joint ventures, and markets. _______________ 3. Casson, M., 2014. The economic theory of the firm as a foundation for international business theory. Multinational Business Review. 22 (3), pp.205 to 226. It is, however, worth noting that internalization theory’s initial work (as per Casson and Buckley had concern in the exploitation and development of FSAs in the external market and within the firm4. According to Dunning (1990), government’s role in enhancing economic development via policies complementing MNE FSAs ought to explicitly been brought out. This has the implication that the policies of government are of much essence to the development of FSA and exploitation processes. Thus one of the ways via which the internalization theory explains the growth of multinational enterprises is the development of relations between these enterprises and governments. Ideally, interactions between multinational enterprises and governments are subject to gradual evolution with the CSAs/LSAs vertical axis having the capability of affecting the strength of FSAs of a multinational enterprise. Ideally, the presence of numerous firms having formidable FSAs in one location has the capability of clustering merits thus being advantageous to future entrants of the market. The theory of internalization is also an explanation fro the growth of multinational enterprises considering that internalization is of much essence to dynamic innovation procedures. Ideally, decisions about internalization ought to take into account its potential contribution to the future development of FSA. According to Cason and Buckley, FDI takes place in the event that its advantages are more than the costs. In such cases, foreign direct investment normally acts as a replacement of exportation. _____________________ 4. Casson, M., 2014 Ideally, unnatural market imperfections are associated with as much power as the imperfections of Coasian natural market in the prevention of the efficiency of market operations5. Both imperfections result to internalizations and MNEs development. 2.2 Transnational Monopoly Capitalism-Cowling et al. Transnational Monopoly Capitalism offers yet another explanation behind the growth of multinational enterprises. According to Cowling et al6, multinational enterprises owe a significant part of their growth to the power of capital-this is found to have several, complex sides especially in relation to the state and labour. This concept bases its argument on the normative alongside the power of capital’s material aspects. Ideally, multinational enterprises refer to global organizations characteristic of global priorities; these priorities mainly appear in nation states’ public policies. The explanation of this dominance is subject to both normative power and structural power. According to Transnational Monopoly Capitalism, a decline in profit rates is an expression of a decline in the value of surplus provided that the value of constant capital: amount of labour power ratio is constant. A capitalist’s work is found to be inversely proportional to the capital size. Thus the formation of the concept of capital is subject to the interaction between producers and labour conditions. This interaction is characteristic of the ability to accumulate capital, thus a contributing factor to the growth of multinational enterprises. _________________ 5. Buckley, P.J., 2014. Forty years of internalization theory and the multinational enterprise. Multinational Business Review. 22 (3), pp.227-245. This process of capital accumulation is associated with tremendous expansion with respect to production scale and multinational enterprises-this would not have been possible in the event of individual capitals. In this way, enterprises are also said to receive social capital rather than private capital thus the rapid growth of international enterprises. Transnational Monopoly Capitalism also explains that multinational enterprises grow substantially as a result of cartels, trusts, and mergers. Ideally, groups’ formation is the last stage in monopoly capitalism development. Such groupings have the primary objective of controlling competition. The reaching of this stage is subject to an immense deal of centralization, which reduces the number of organizations in a particular sector, thus intensifying competition to such an extent that it has advantage to no one. According to orthodox economics, efficient capitals have the capability of driving out the inefficient ones via competition. In the event whereby one capitalist kills many, capital centralization and concentration proceeds so much that capital elimination threatens to take out both small and large enterprises. However, in such a situation there is combination of the few survivors thus the control of competition and production6. Ideally, via the formation of combinations, Transnational Monopoly Capitalism takes the view point of the internalization theory. This is the view that multinational enterprises have the culture of organizing several activities internally in order to have the capability of developing and exploiting firm-specific advantages. Such combinations are significant drivers of the growth of multinational organization as illustrated by the formation of mergers and acquisitions by leading international companies. _________________ 6. Cowling, K. and Tomlinson, P., 2005. Globalization and Corporate Power. Contributions to political economy, 24, pp.33-54. Ideally, these companies have been attempting to minimize competition fro market share via acquisitions thus their ultimate growth. On the other hand, the internalization theory also takes the view of Transnational Monopoly Capitalism via the concept of strength of capital. Ideally, Transnational Monopoly Capitalism recognizes that the accumulation of capital is of much essence to the success of multinational enterprises7. The internalization theory recognizes the accumulation of capital via the organization of several business activities in order to exploit advantages associated with FSAs. _________________ 7. Hoenen, A-K. & Hansen, M., 2009. Oligopolistic competition and foreign direct investment: (Re-) Integration the strategic management perspective in the theory of multinational corporations. Copenhagen: Copenhagen Business School. CBDS Working Paper. 3.0 PART C: Impact of a transnational corporation on the UK Multinational corporations have impacted the economy of the UK quite significantly. This can well be illustrated taking Starbucks Corporation as an example of international enterprises. 3.1 Brief background information on Starbucks Starbucks Corporation is coffee specialty marketer, retailer, and roaster. The company’s mission entails inspiring and nurturing the spirit of humans8. The company is characteristic of company-operated retail stores dealing in the purchase, roasting, and selling of packaged coffees. The retail stores are also involved in the sale of freshly brewed teas, coffees, alongside other beverages. It is also reported that these retail stores are involved in the sale of beverage-making accessories and equipment, alongside fresh foods. Starbucks, via the company-operated stores, is also involved in the sale of tea and coffee products through other channels with examples of convenience stores, warehouse clubs, national service accounts, and grocery stores. Besides the Starbucks brand, the company is also known for other brand portfolios which include Seattle’s Best Coffee® and Tazo® Tea8. Starbucks has a primary objective of maintaining the Starbucks brand to remain on of the global most respected and recognized brands. Reports also indicate that the Starbucks has significant commitment in the establishment of balance between social responsibility and profitability. _________________ 8. Oxford Economics, 2013. The Economics Impact of Starbucks on the UK economy. A report fro Starbucks. The first Starbucks shop in the UK was opened more than a decade ago and continuous investment has seen the number of shops in the country raise to more than 738. Notably, Starbucks shops in the UK have now have covered the key centres of the country’s population. This has the implication that the company has significantly impacted the economy of the country since its entrance into the country. 3.2 Effect of Starbucks on the UK with respect to Labour One of the principal ways via which the economy of the UK is affected by Starbucks is via employment, with number of job opportunities created by the company recording an upward trend in the recent years. Indeed, by the year 2012, Starbucks had employed 8,810 in the UK with the figure surpassing that of such industries as sawmilling and publishing9. 3.2.1 Direct & indirect employment Ideally, Starbucks has continued to provide the UK population with both direct and indirect employment opportunities. With respect to location, the Company exhibits the greatest concentration of employees in stores that are in high street (representing 27%). This is the most outstanding example of direct employment opportunities provided by Starbucks to the UK population9. On the other hand, the most outstanding example of indirect job opportunities provided by Starbucks in the UK is via the various premises that have been licensed by the company to sell its products. __________________ 9. Oxford Economics, 2013 These licensed premises employ 19% of the company’s staff in the UK with outlets in offices employing 13% of the company’s staff in the UK10. Notably, the highest number of Starbucks’ staff members work in customer sales and Sales occupations thus remaining consistent with split of employees between support, head office, and sales roles. With respect to both direct and indirect employment opportunities, Starbucks is characteristic of an extremely young workforce with 46% of the workforce consisting of individuals of less than 24 years of age. This is consistent with the 12% of the total UK employment being people under 24 years of age. The retailing department of the company exhibits the highest number of young individuals. This has the implication that the employment profile of Starbucks has main focus on age groups as the labour market of the US faces a high rate of unemployment. In the course of employment, Starbucks’ staff has been acquiring customer service, discipline, and team working skills10. This translates to the productivity of individual employees thus the increased productivity of the company. Consequently, the country’s revenue from the company (via taxation and other business regulations) continues to increase. The 8,810 employment opportunities created by Starbucks in the UK have the implication that the company has significantly contributed towards the alleviation of the unemployment state facing the country’s economy. In addition, Starbucks is helping to create a professional workforce in the UK via its direct and indirect employment opportunities. ________________ 10. Starbucks, 2015. Starbucks Corporation. Available at: http://www.starbucks.com/ [Accessed 24 April 2015] Notably, the skills gained in the course of service in Starbucks are transferable; therefore, individuals can pass them to workers from other firms thus helping the formation of professional workforce in the country. This has a direct positive impact on the economy as it increases the country’s general productivity. 3.2.2 Wages/rewards As stated earlier, by the year 2012, the company had 8,810 direct employees in the UK alongside supporting 3200 individuals in employment opportunities via intermediate inputs’ purchases from other businesses in the UK11. Ideally, these jobs have the capability of generating £84 million worth of wage income within Starbucks and £91 million worth of wages in the company’s supply chain. The wage income resulting from Starbucks impact has been spent across a wide basket of consumer services and goods. Ideally, wage income resulting from Starbucks increases the purchasing power of the UK. This has the implication that the resulting purchases have the capability of supporting further business activities meeting the businesses’ supply chains and consumer demand. In the year 2012, the 12,000 jobs resulting from the presence of Starbucks in the UK achieved a generation of additional value-added contribution of £48 million to the GDP of the United Kingdom, as a consequence of their consumer spending. Induced impacts, on the economy of the UK, resulted to additional 1,100 jobs on the tally of employment opportunities created by Starbucks. _________________ 11. Geereddy, N., nd. Strategic Analysis Of Starbucks Corporation. Starbucks Case Analysis. IBIS World, 2013. The Coffee & Snack Shop Industry in the US Report 3.2.3 Employee welfare Over the years, Starbucks has exhibited an immense deal of commitment to employee welfare especially through career development. For instance, the year 2012 saw the company announce plans that would see Starbucks hire over 1000 level 2 apprentices within a period of two years. This apprenticeship type has equal qualifications with five A-C GCSE grades. According to the same plan, the year 2003 would see 200 employees in Starbucks be subjected to Starbucks’ Shift Supervisor course. Ideally, this qualification of this course is equal to Level 3 apprenticeship. This plan thus offers a bold step towards career development in the United Kingdom. This implies that Starbucks exhibits commitment in the career development of its employees as it caters for further training of existing employees. This is a significant employee motivation factor thus increased output per employee. In return, the company’s overall productivity is enhanced as more positive impact on the economy of the United Kingdom. Starbucks is also commuted to the provision of benefits to its employees. Ideally, the pay package of Starbucks reflects the company’s pledge of treating its workers with dignity and respect12. Ideally, the pay package exhibits a variation on grounds of different countries in order to ensure that it is relevant in each respective country. The package of Starbucks is inclusive of such packages as comprehensive health coverage, stock options, bonuses, income protection, and competitive base pay. Notably, these components are provided by other financial institutions in the UK such as insurance companies and banks. ______________ 12. Clark, T., 2007. Starbucked: A Double Tall Tale pf Caffeine, Commerce and Culture, Little. New York: Brown and Company This has the implication that such financial institutions add to the national revenue of the country via taxation alongside other legal regulations involved in business. In addition, these financial institutions create employment opportunities in the United Kingdom that advancing the purchasing power of the population. There is also an immense deal of benefits derived from these financial institutions by the UK economy from Corporate Social Responsibility. 3.2.4 Longevity of employment Starbucks is characteristic of exhibiting significant recognition of longevity of employment. Ideally, the company hold high regard of skills, knowledge, alongside experience in the work place13. This draws substantial illustration from the company’s regular practice of conducting industrial salary surveys with an objective of determining competitive rates thus being able to pay its employees accordingly. Thus as the company spends more time hiring, alongside the creation of a satisfactory environment enhances its chances of becoming more profitable. The more profitable Starbucks becomes the more benefits it induces on the economy of the United Kingdom. In ensuring the longevity of employment, Starbucks often makes use of a number of organizations especially those involved in carrying out of surveys. This has the implication that the company creates more indirect employment opportunities via these organizations, besides increasing their incomes via payments. ______________ 13. Ietto-Gillies, G., 2012. Transnational Corporations and International Production: Concepts, Theories and Effects. Cheltenham: Edward Elgar Publishing Reflection Essential lessons can be learnt from this analysis and how to cope with any challenge that arises. For instance, business leaders can deduce the fact that, development of competent staff is an expensive yet the most beneficial investment in a business. This draws illustration from the case of Starbucks which has been displaying commitment in the development of competent staff hence enhancing its overall productivity. Business leaders can also learn the essence of collaboration and formation of mergers in the survival of multinational enterprises as advocated for by Transnational Monopoly Capitalism and the internalization theory. The most interesting aspect deduced from this evaluation is that transition and developing economies are currently the key drivers of the global economy. If they fail, the upcoming economies will suffer as they may lack some of the essential steps needed for devolvement. This draws illustration from the fact that the highest growth rates of FDI inflows were recorded in transition and developing countries. According to this evaluation financial crises and dependence on international funds poses the main challenge to economic growth and success of multinational enterprises. The module requires extensive information on matters that are relevant to the subject. It will enable the students get an in depth idea on the whole topic. Thus, integrating the leant topics to the real life will be an easy thing as compared to those who lack the idea. These and many more, are thus substantial proves that evaluation is of much effectiveness to the learning outcomes of the student module. References Buckley, P.J., 2014. Forty years of internalization theory and the multinational enterprise. Multinational Business Review. 22 (3), pp.227-245. Casson, M., 2014. The economic theory of the firm as a foundation for international business theory. Multinational Business Review. 22 (3), pp.205 to 226. Clark, T., 2007. Starbucked: A Double Tall Tale pf Caffeine, Commerce and Culture, Little. New York: Brown and Company Cowling, K. and Tomlinson, P., 2005. Globalization and Corporate Power. Contributions to political economy, 24, pp.33-54. Geereddy, N., nd. Strategic Analysis Of Starbucks Corporation. Starbucks Case Analysis. Hoenen, A-K. & Hansen, M., 2009. Oligopolistic competition and foreign direct investment: (Re-) Integration the strategic management perspective in the theory of multinational corporations. Copenhagen: Copenhagen Business School. CBDS Working Paper. IBIS World, 2013. The Coffee & Snack Shop Industry in the US Report Ietto-Gillies, G., 2012. Transnational Corporations and International Production: Concepts, Theories and Effects. Cheltenham: Edward Elgar Publishing. Oxford Economics, 2013. The Economics Impact of Starbucks on the UK economy. A report fro Starbucks. Starbucks, 2015. Starbucks Corporation. Available at: http://www.starbucks.com/ [Accessed 24 April 2015] UNCTAD, 2014. World Investment Report. United Nations Conference on Trade and Development. Read More