Effect Of Globalization On Multinational Corporations Economics Essay

Globalisation is the competition in an international market. The growth rate of developing nations and their acquisitions of previously first-world owned corporations indicates that the developed world no longer has the upper hand- economic growth in the west has been miniscule in comparison. Success in this new global market requires the ability to accommodate the different needs of diverse consumer groups. Companies can achieve this through product and process innovations and maximise profits. Entrepreneurship is also increasingly recognised and as an alternative course to fortune as opposed to trading rare commodities.

The new market (developing markets)

Companies from emergent economies are following the lead of their developed counterparts, issuing stocks and encouraging investment. This encouraged growth and share appreciation, surpassing past expectations. Some emerging companies’ growth has even outpaced well-known multi-national companies (MNCs) from the developed world- competing, acquiring and exploiting the endeavours and experiences of first-world MNCs. Similarly, developed nations are tapping into emerging economies, for their market, stock markets and possible mutually beneficial co-operation opportunities.

If current economic growth pervades, a common interest for all MNCs could be consumers from non-developed markets. Increasing affluence leads to increased consumption of goods and services in developing nations, this trend is forecasted to continue for years. Local companies however, have an advantage of producing products that meet the minimum requirements of the locals. Developed corporations are unwilling to risk their reputation and may need other strategies to tap into low-end consumer markets.

Suspicion of bad capitalism (Baumol, Litan and Schramm, 2007) in emerging economies stirred protectionist sentiments in developed countries. This is reasonable as many emergent economies have government suppor, giving them unfair advantage over their developed rivals. Developing countries’ political systems differ greatly from those in developed nations, where corruption, political influence over business and intellectual property rights, could be a problem. One concern is that large MNCs may choose to adopt a different ethical stand in countries with lax regulations. Other forms of government intervention, like subsidies or grants, that fuels economic growth is not sustainable indefinitely, and may eventually induce economic backlash. This taught managers to implement strict regulations over the corporation and stick to effective and orthodox business strategies to stay competitive.

First-worlds (DEVELOPED MNCs)

Developed MNCs may have certain concerns when investing in emergent economies. These may include corrupt or non-meritocratic politicians in the government, protectionist sentiments against foreign MNCs and suspicion amongst employees of different backgrounds and ethnicities. The lack of diversification within the board of directors, and thus shortage of insight into developing economies, may be a challenge for first-world MNCs.

First-world MNCs relocate their businesses, acquire local firms and hire local talents to stay relevant. Combining competitive local resources with global operations, MNCs engage in risk-sharing and engage in mutually beneficial alliances with smaller firms to effectively tap into developing markets. Large MNCs might also approach government officials directly with an analysis of the country’s issues and offer solutions though their products and services. This alleviates problems and improves the country’s appeal to potential investors, and concurrently generates revenue for the firm.

Due to globalisation, skills of the old become obsolete; they no longer deal with the developed world, but developing economies instead. Large MNCs recognise this and to better manage overseas operations, they deploy more competent staff abroad and even look for talented natives to fill top positions, though eligible candidates are scarce and retaining them is difficult.

Emergent economies (FIRMS FROM DEVELOPING COUNTRIES)

Emergent countries bring forward products and strategies that push prices to a new low- specialising in low-end markets and increasingly compete with large firms in the middle-income bracket as well. Though growth may be rapid, studies have found developing MNCs’ business models and tactics short of their first-world counterparts’, placing doubt on the sustainability of their economic growth. Although these companies may still be inexperienced and face various problems, they adopt sensible measures and aspire to raise the company, and meet global standards. Individuals and companies in developing nations are also beginning to strive towards better governance and demanding higher ethical standards from politicians and businesses alike. This spurs positive sentiments to the potential of these firms, though they are not based in first-world nations.

Corporate-social responsibility on the world stage

Being a good corporate citizen has brought more benefits than costs. This has helped firms attract clients, be socially responsible and gain an edge over unethical rivals. However, some governments continue to devalue ethics and interfere in business dealings for political ends, proliferating bad capitalism. Government intervention in business deals can hinder or aid transactions. Corrupt officials can hasten legal processes for firms with bribes, and others boycott and ban transactions due to non-economic reasons. This raises the issue of how the governing body will affect business if they choose to start operations in the country.

Sovereign-wealth funds (SWFs) from developing countries have been increasingly active in acquiring stakes in foreign firms. Though this has provided needy corporations with capital, the expansion of the SWFs’ portfolios is attracting close attention. Concerns rise over what the SWFs will do with the acquired stakes and assets, for political reasons or for strategy or did they just invest their money for monetary returns. Criticisms are not well received by the SWFs and the IMF is working on guidelines for SWFs to follow in order to quell concerns.

As time passes, SWFs would have obtained a probable proportion of stakes in corporations around the world, making them partially or entirely state-owned. Some are concerned that SWFs from countries like Russia and China might exert unhealthy influence on businesses and move towards state-led capitalism instead of the free-market system, proliferating bad capitalism. Currently, there has been no concrete proof to incriminate them of these deeds.

Ultimately, if the world’s governments, businesses and societies were to be educated about good capitalism, globalization would bring the world together in the name of progress.