Fdi Of Emerging Economy Multinational Enterprises Economics Essay

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To begin lets understand what FDI actually means, it is basically transfer of knowledge and capital of a particular organization from one economy to another (Kogut and Zander 1993).The issue of FDI investments of MNE's and the impact it has on most emerging economies is still a big question and an issue of interest for many economists. The general importance and the need for foreign investment has caught the eye of many countries and created a very intense competition to attract this foreign direct investment. (Dănescu and Nistor 2012). FDI inflow also has a great deal to do with, who the next new world economic powers are going to be. The main aim of this paper is to analyse how different are MNE's in terms of market strategy, entry strategy and MNE operations. Government policies also play an important role in both emerging economies and developed economies which will help you analyze their differences and some of the problems faced by these MNE's.


Foreign Direct Investment, Government policies, Market entry, FDI from Developed and Emerging Economies, Entry strategy.


The following journal explains the literature for FDI of MNE's in developed economies as compared to FDI of MNE's in emerging economies and how they differ. There are a lot of questions that have been raised as to whether FDI is good for these emerging economies, and has it been good for the developed economies. There is also a question about the entry strategy that has been adopted by these MNE's in these two different economies. Hence have stated a few different perspectives that these MNE's have adopted in terms of when they want to invest in these economies, which will help you, differentiate between them.

FDI of multinational enterprises in emerging economies:

FDI is an important factor for any emerging economy as it generates huge amount of capital and introduces the latest technology and is also a great influence to the economic growth of that economy (UN 2005). An advocate for these MNEs also states the benefits that FDI will have, to the economic exchange, and the investment that will be infused into these emerging economies and the benefits like giving cheaper products to the consumer. There will also be huge amount of knowledge transferred from these MNEs in terms of values and management skills. The mode generally used by the MNE's to enter into the global markets is known as "Frontier Issue" and it is also seen as a very strategic decision for these MNE's in their global expansion (Agarwal and Ramaswami 1992). These MNE's not only are concerned of which emerging market to enter but also how and when to enter these markets. However there are a lot of inside investigations carried out by these MNE's before entering into these emerging economies (Werner 2002). The MNE's themselves have to decide whether they are capable enough and if they have researched enough in the host country to be able to start up and be able to sustain and take care of their operations (Guillen 2003). However these MNEs have certain motives and certain objectives because of which they will invest in these emerging economies. A couple of main objectives mentioned below:

They undertake sale of imported goods and also have entry to the local markets through local production.

They also deal in low cost labour production for export to foreign markets and use the natural resources available to them (Meyer 2005).

These MNE's do also have a particular specific entry strategy when they decide to enter these markets in these emerging economies. They have 3 phases that they divide their entry into E.g. 1) The Experimental Phase 2) The Strategic Investment Phase 3) The final Dominant Phase (Luo and O'Connor 1998).

FDI has a lot of effects on the economy of a country in terms of influencing the prices of commodities and the production, the employment factor, the income of the people, it affects the economic growth sometimes in a more positive way than as compared to other countries, it also affects the development and the general well being of that country. It is also stated that FDI is one of the important ingredients for any emerging economy, because of which the economic growth is at a very rapid pace and there is an organised transfer and acceptance of 'best practise' across countries. Taking the above into consideration the foreign investors rely on 3 group factors before investing: 1) The amount of profit that will be generated by the projects.2) The easy at which the investors, foreign strategy can be implemented in their subsidiaries operations.3) The local countries environmental condition and the ability for them to sustain themselves (Christiansen and Ogutcu 2002).

However when these MNE's invest in these foreign economies they influence the local individuals, the organizations and the institutions. Beyond this there are other effects that FDI has on the natural and the social environment, macroeconomic variables, the host economy's institutional framework (Meyer 2005).

There are also some economists that propose that there are a some worries in these emerging markets which are divided into 3 parts 1) Unique business culture 2) Political hazards 3) Not a perfect industrial arrangement (Luo 2002, Delios and Henisz 2003a).

Government polices also play a very important role in the interaction between the MNE's and the local firms, which in a way sometimes help both sides. The main outcome of this is that the policies made by the government help in the promotion of the local businesses which helps them make the best of their interaction with these MNE's for e.g. competition or education policies, infrastructure (Meyer 2005). Stated below are some demands laid down by the government towards the MNE's: They want: 1) Their economy to grow but are not positive about foreign companies owning some percentage of their local economy. 2) Foreigners to train in technology and skills, but don't want to be to dependant on them. 3) The economy to be developed but without damage to the environment or social conflict which may be caused by these foreign firms.4) The locals to relish the services and products from foreign markets however still maintaining the local flavour, culture and the values . 5) To maintain their economies interest, in times when there is a lot of global pressure to achieve super-natural goals.

However the relationship between the government and the MNE's is very complex as they follow some common goals and also experience some conflict of interest (Grosse 2005,4).

The above gives us a brief overview of the importance and the difficulties faced by these MNE's, it also briefs us on what strategy is used by these companies, the research that they have to put in, some factors that affect their entry.

Further to the above analysis of emerging economies we will now take a look at developed economies and the strategy they use and also the problems they face which will help us differentiate between the two.

FDI of multinational enterprises in developing economies:

The flow of FDI whether it is inward or outward generally tends to go hand in hand. The reason I say this is because countries that invest heavily in other countries also have a huge amount of FDI inflow into their own country (Lipsey 2000). FDI is one of the most important factors leading to the globalisation of the foreign economy, which has lead to a great increase in FDI flows across the world economy for the past 20years (UNCTAD 2006).

Therefore MNE's can be classified as "unincorporated or incorporated" corporations that mainly include their parent company and their foreign affiliates (UNCTAD 2007). The MNE is basically the parent company that controls the property and resources of companies in foreign countries generally by holding an equity stake. Also FDI of these MNE's involve the long and short term provision of loans between the parent and the affiliated corporation, the involvement of equity capital and the reinvestment of profits made by the parent or affiliated company (UNCTAD 2007). The basic strength of a MNE lies in the fact that it can part with knowledge internally more efficiently and quickly rather than when it has to negotiate with firms externally (Hymer 1968).

These MNE's however adopt a different strategy before investing into these developed economies. They look at internationally reducing cost and "seeking enhanced differentiation" (Caves 1997). They undertake production at different stages and in different countries to check the cost and the accessibility of inputs required for their production of their particular product. For e.g. the production of a product which requires a lot of labour will be undertaken in a country where the labour is comparatively lower, however the production of a product that requires a lot of capital and technology to produce will be undertaken in a country which has highly skilled labour and good infrastructure and stable economies. One of the main reasons why FDI was the preferred mode of doing business in these developed economies was to avoid competition and rivalry in the foreign markets. Secondly was that FDI allowed these MNE's to take advantage of their strong product which allowed them to set and manipulate prices with little or no consequence. Thirdly FDI allowed these MNE's "strong diversification of risk" (Caves 1997).

We will also look at the governments of these developed economies and how they influence the inflow of FDI from these MNE's. The MNE's also carefully study the government's behaviour in terms of government policies, transparency in the functioning of the government

and also infrastructure has become an important factor for these MNE's before they enter any foreign economy (Dunning 2002).

However there are few government factors and policies that affect the inflow of FDI in these developed countries can be defined in three types. Firstly the economic fundamentals are improved by increasing the locational advantages of FDI in the host country. Secondly the transaction cost of foreign corporations is reduced which is stated in the national FDI policy by the government. Thirdly the foreign FDI policy that generally deals with these investments from these MNE's whether multilateral, bilateral or regional. The FDI policy works on a greater macro level and helps increasing the economy of that country e.g. the availability of skilled labour, the local market size and structure and also the infrastructure which helps in increasing the inflows of FDI. However based on the vulnerability and susceptibility to change the 3 categories of government policies on FDI could be affected or impacted over a period of time making it more difficult for these foreign investors and their managers to sustain themselves in these developed economies. The overall economy of a country might however take long for any major changes to take place which will affect the inflow of FDI but other economic conditions e.g. market size, labour availability and infrastructure are subject to regular change which could be a worrying factor for these MNE's.

Critical analysis:

The results of the above analysis shows that FDI of MNE's from developed countries and that of MNE's from developing countries differ in their own ways. The FDI of MNE's from developed economies generally are influenced or attracted to large market size, high labour productivity and education, better infrastructure and the domestic lending rates should be lower, however cost plays a role in determining whether these MNE's would invest in developing economies. Also apart from the economic conditions of a particular economy which may determine the inflow of FDI, the government policies and the agreements on investment play a vital role. But what is most clear from the analysis is that the policies that determine cost factors e.g. lower tariffs, concessions on tax etc play an important role in attracting FDI of MNE's from developing economies and large government policies that help facilitate business of MNE's in the host country generally concern the FDI inflows of MNE's from developed economies.


To conclude what we know?

After a critical analysis of the overall study of the way in which the inflow of FDI by the MNE's is conducted in the two economies (emerging and developed) I can conclude by stating, that these MNE's face certain problems and also how they are affected by government policies. Following are some of the factors that they take into consideration before investing abroad e.g. external and internal environmental factors, infrastructure, labour, cost, taxation, availability of skills and technology. We can also state that the method of investment, the entry strategy, the market requirements, also differ for these MNE's when they invest in these different economies.

What we don't know?

What we don't know however is if these MNE's after all the research and technology and different strategy used to analyze the entry mode, the market entry, the cost factors and other issues on a macro level are still able to sustain themselves in the two different economies respectively,(emerging and developed) because most MNE's would want to invest in emerging economies as those markets have not yet been explored and cost are much lower and some MNE's would rather invest in a market where the conditions are already standardised and they can learn from other companies who have invested before them? (Developed economies) .

What we need to know, and why? (GAP)

What we need to know on a much larger scale is how these economies have actually benefited from the FDI of these MNE's whether emerging or developed and if it has made a difference to the world economy. And also what kind of affect it will have globally if the FDI flow across the world stops or the flow is directed towards only one particular type of economy.

I conclude by stating that there have been many changes in the approaches at the global level of investments flows which have also brought huge capital in the form of FDI across the world economies. It is mainly the policies adopted by these MNE's when they want to invest in these two economies that have affected the flow of FDI across the globe. But we can also say that FDI for emerging economies and FDI for developed economies are both equally important in context to the growth of world economy. Looking forward we will further analyze how the flow of FDI has affected or benefited these two different economies and also the global economy on a much larger scale.