Globalisation: Advantages and Disadvantages
What are the main advantages and disadvantages of foreign direct investment as a means of entering new markets? Support your answer with real examples, where possible. Introduction Globalization describes the process by which regional economies, societies, and cultures have become integrated through a global network of communication, transportation, and trade. Bhagwati (2004). Big part of globalization is Foreign Direct Investment.
Foreign direct investment (FDI) can be defined as the process where both firms as well as individual entrepreneurs offer capital to newly or already established firms in other countries. Firms engaged in foreign direct investment are termed as multinational enterprises or multinational corporations (MNE’s or MNC’s). Jones and Wren (2006) FDI is also defined as investment geared to adding or deduction from an operating enterprise and out of which long lasting relationship is ensured.
Organisation for Economic Co-Operation and Development (OECD) also points out that FDI includes equity capital, reinvested earnings as well as intra company loans. ? According to Xiaowen Tian in his book ‘managing international business in China’ the major difference between foreign direct investment and foreign indirect investment lies on the mode by which MNC’s and MNE’s enter the foreign markets. It depends on whether a foreign investor opts to invest directly in an economy or for an effective share of production in an enterprise all with the aim of creating long term influence.
In both foreign indirect and direct investment the investors offer their technological know-how or skills, management as well as capital. The major distinction between the indirect and direct investment by the foreign investors is difference between equity and non-equity investment. The importance of this distinction is that it determines the level of involvement attached to each of them in the host countries. Tian (2007) Foreign direct investment refers to the acquisition of shares by a firm in a foreign based economy which exceeds a threshold of 10%.
FDI embraces managerial participation. FDI can be a source of both direct as well as indirect source of employment in a country. Other advantages perceived to be accrued to FDI include increased competition which precipitates innovation. Innovation ensures that there is quality production of goods and services and at a lower price; and this is beneficial to the local citizens. Bora (2002) Now, foreign direct investment or rather this equity investment carried out by multinational corporations can take a variety of forms. One is through the purchase of an ongoing company.
For example, Santander, the Spanish lender, which is Spain’s biggest bank, bought Abbey National of the United Kingdom, in order to ring up 150 million Euros of cost savings in the first year after the merger, rising to 300 million Euros in the second and 450 million Euros in the third. Rather than building this business from scratch, Santander gained a foothold in the UK banking market in 2004, in Europe’s biggest cross-border bank takeover, and bought its way into the financial sector of the United Kingdom through FDI.
Another form of FDI is to set up a new overseas operation as either a joint venture or a totally owned enterprise. For example, Deutsche Telekom’s T-Mobile and Orange owner France Telecom are now positioning themselves to become a major competitor in UK telecommunication industry and have recently entered into joint venture for the purpose of developing expanded network coverage, better network quality and improved customer services. In general, the objective of FDI is to provide the investing company with the opportunity to actively manage and control a foreign firm’s activities.
There are a number of advantages that multi-national corporations (MNC) face or rather factors that encourage MNC to take ownership position or gain control of foreign assets. Some of the largest and best-known multinationals such as Coca Cola or Nestle earn millions of dollars each year through overseas sales. In the EU, for example, companies in smaller economies need to look outside of their home borders. Some international markets are growing much faster than others, and FDI provides MNC’s with the chance to take advantage of these opportunities. A good example is China.
Over the past few years the Chinese economy has grown at an annual rate of around 10 per cent. This is quite good given that its GDP is in the range of $1 trillion. If the country continues to move toward a market-driven economy, MNC’s are likely to find a huge demand for goods and services that cannot be satisfied by local firms alone. Simply put, China is a market where most multinationals want to have a presence despite the fact that there are many problems in doing business there and virtually no MNC has yet been able to extract an adequate return on its investment.
A MNC can sometimes achieve substantial lower costs by going abroad than by producing at home, for example, Japan does not have enough land for most manufacturing companies to embark on setting up corporations, hence they have had to invest in countries like, China and Scotland . If labour expenses are high and represent a significant portion of overall costs, a MNC may be well advised to look to other geographic areas where the goods can be produced at a much lower labour price.
In recent years French car company PSA Peugeot Citroen have moved operations across the border to Slovakia to take advantage of lower labour unit costs. Company employed 3. 500 people and brought 350 million Euros investment into the country. During the mid-nineties many firms wanted to build up their production plants in Slovakia but they were rejected by the Prime Minister at the time, Meciar who promoted an “Inward-oriented strategy” highlighting a disadvantage of FDI, as political instability can ruin business plans.
But the creation of new jobs for local workforce is positive for most governments nowadays and many governments, now including Slovak government, play a big part in attracting FDI to their countries. MNCs would prefer to invest in a safe and secure country as insecurity would be of a negative impact to business for instance a country where demonstrations and protests are the order of the day will be a disincentive to any MNC investment. During protests violence could be registered leading to the destruction of property translating to losses for the multinational companies.
Good example is recent clash between the red-shirt protesters and the military in Thailand. MNCs urge the government to accelerate boosting political stability as soon as possible, in order to guarantee security for both existing investors and newcomers. At the same time, many foreign investors in Thailand maintain confidence in prospects here and still view the country as an attractive investment destination in Southeast Asia. Inaccessibility to modern technologies is a major impediment to the effective involvement of developing countries in foreign investment.
This is bore witness by the fact that more and more MNC’s are engaging in research and development investment increasing the developing country’s accessibility to this technology. India as developing country became R&D hot spot as technology companies cut costs. At Microsoft Corp. ’s research centre in a leafy lane in India’s technology capital, a new generation of researchers is being groomed half a world away from the headquarters in Seattle. With around 60 full-time researchers, many of them Indians with PhDs from top universities in the US, the centre is at the cutting edge of Microsoft’s R&D.
Its success, including developing a popular tool for Microsoft’s search engine Bing, underscores the potential of R&D in India at a time when cost-conscious firms are keen to offshore to save money by using talented researchers abroad. FDI is also linked with negative effects on the host country as it is blamed for exposing people to unsafe working conditions at some instances. Environmental concerns are also raised towards MNC’s and MNE’s. Some host countries complain that MNC’s pollute their environment either through water, air or sound thus compromising on their natural environment.
FDI is also blamed for a change in the host country’s culture where at some instances foreign culture dominates the host country’s culture. One of the best example of huge environmental damage by FDI is recent BP’s Gulf of Mexico Oil Spill. An estimated 90 million to 170 million gallons of crude oil have spewed into the Gulf as of 2010 July 19. This is one of the main disadvantages of FDI and it puts every government in a situation where they have to choose between attractive FDI Vs damaging the ecosystem, FDI Vs sacrificing future generations or FDI Vs risking daily life.
One of the most influential changes came with the introduction of fast food restaurants like McDonald’s into foreign countries. Transformations have taken place which could be perceived as beneficial or corrupting to that culture. According to William Gould (1996), before the introduction of McDonald’s overseas “fast food was almost unknown. McDonald’s been the first company to try to export America’s love of fast food and changes in eating habits of other nations. McDonald’s has over 31 000 restaurants and about half of the total franchises are outside the U. S. in over 119 countries.
Amidst all the fame and fortune of McDonald’s, there are concerns about how the spread of standardization of the franchise is affecting culture, attitudes and the environment. Conclusion The main conclusion that can be drawn from the study (despite the fact of many disadvantages) is that the economic benefits of FDI are real, but they do not accrue automatically. To reap the maximum benefits from FDI, a healthy enabling environment for business is paramount, which encourages domestic as well as foreign investment, provides incentives for innovation education and improvements of skills and contributes to a competitive corporate climate.
But the question is: will developing country governments be able to strike a balance between attracting foreign investments and strict regulations that would protect not only their own peoples and ecosystems, but also be a guarantee for a sustainable development? BIBLIOGRAPHY Bhagwati, J. (2004). In Difense of Globalization. Oxford: Oxford U. Bora, B. (2004). Foreign Direct Investment: Research Issues. Routledge Publishers Gould, W. (1996). McDonald’s. N T C Publishing Group Jones, J. And Wren, C. (2006). Foreign Direct Investment and the Regional Economy.
Ashgate Publishing Ltd. Tian, X. (2007). Managing International Business in China. Cambridge University Press References 1. Organisation for Economic Co-Operation and Development (2010) (online) Available at: http://www. oecd. org/document/32/0,3343,en_2649_34893_45922144_1_1_1_1,00. html#Q8 (Accessed 16th October 2010) 2. BBC News (2008) (online) Available at: http://news. bbc. co. uk/1/hi/business/7740042. stm (Accessed 16th October 2010) 3. BBC News (2010) (online) Available at: http://www. bbc. co. uk/news/technology-11199786 (Accessed 16th October 2010) 4.
Investment Week (2010) (online) Available at: http://www. investmentweek. co. uk/investment-week/news/1800196/chinese-economy (Accessed 16th October 2010) 5. PSA Peugeot Citroen (2010) (online) Available at: http://psa-slovakia. sk/sk/o_nas. php (Accessed 22nd October 2010) 6. U. S. Department of State(2010) (online) Available at: http://www. state. gov/r/pa/ei/bgn/3430. htm (Accessed 22nd October 2010) 7. The Nation (2010) (online) Available at: http://www. nationmultimedia. com/home/2010/05/31/business/Foreign-investors-still-optimistic-but-want-Govt-t-30130544. tml (Accessed 23rd October 2010) 8. Submit Edge(2009) (online) Available at: http://www. submitedge. com/news/bing-sweeps-india/ (Accessed 23rd October 2010) 9. Organisation for Economic Co-Operation and Development (2010) (online) Available at: http://www. oecd. org/document/17/0,3343,en_2649_34287_2665233_1_1_1_1,00. html (Accessed 23rd October 2010) 10. Guardian (2010) (online) Available at: http://www. guardian. co. uk/environment/bp-oil-spill (Accessed 23rd October 2010) 11. Wikipedia (2010) (online) Available at: http://en. wikipedia. org/wiki/McDonald’s