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Foreign Direct Investment and Emerging Markets

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Question :

Topic - Foreign Direct Investment and Emerging Markets

Formative Essay Questions

Answer all three questions with a maximum of 1,000 words for each question (3,000 in total)

1. Apply the Resource Based View (RBV, sometimes referred to as the VRIN framework) identify the most important factors underlying ownership advantages for Multinational Enterprises (MNEs) from advanced economies locating in emerging markets. You can use the cases from the course to illustrate your answer. Discuss how these ownership advantages may help these MNEs overcome the liability of foreignness they face in emerging economies.

2. “Corruption is the most important factor facing MNES from advanced economies as they enter emerging markets.” Do you agree? Apply the cases from the course to develop your answer.

3. Examine the relationship between international trade and investment and the way it is changing because of the growth of global value chains. Differentiate between tariff and non-tariff barriers, analyse how barriers to international trade impact the MNEs decision to internationalise through trade versus foreign direct investment? Please support your answer with case examples given below.

Cases from Course

1: Theory 1 (SE): LoF; OLI, O(ownership)-advantages, RBV. Case: Best Buy

2: Theory 2 (SE): I(nternalisation)-advantages: transactions cost theory; institutions and institutional voids. Case: Sherritt goes to Cuba

3. Global value chains (CC). Cases: Supply chains - Apple plus Walmart

4.   Issues in international trade and investment (CC). Case: Nike versus New Balance

5. International strategy (SE): including globalisation strategy and 3 A’s. Case: Daimler in China

 6. Emerging market multinationals (SE). Case: Yilditz Holdings

 7. Entry mode and emerging markets (SE). Cases: Amazon & Walmart

 8: Gravity models, distance and CAGE (SE). Case- Arcelik

 9. Impact of FDI (SE): Case: China National Petroleum in Sudan

Answer :

INTRODUCTION

Foreign Direct Investment can be referred to as investment which is made in terms of a controlling ownership in one nation by a company based in another nation. This is distinct from a foreign portfolio investment when seen from the point of view of notion of direct control. Besides this, emerging market can be defined as a developing nation which is progressing towards growth and development by undertaking effective course of action.

Using the Resource Based View (RBV, Sometimes Referred to as The VRIN Framework) Identify the Most Important Factors Underlying Ownership Advantages for Multinational Enterprises (MNEs) From Advanced Economies Locating in Emerging Markets. Use The Cases From The Course to Illustrate Your Answer. Explain How These Ownership Advantages May Help These MNEs Overcome The Liability of Foreignness They Face in Emerging Economies.

MNEs can be referred to as organisations which run their operations within more than a single nation. A corporation or an overseas venture is not regarded to be MNE until it possesses significant investment within the confines of foreign markets and proactively does management of such business operations. It is important that those operations are considered as the integral part of organisation in a strategic context. Another important term within the statement is emerging market which does not hold any particular definition (Dau, Purkayastha and Eddleston, 2020). As per some authors or researchers, emerging market is a developing market as their growth patterns are quite quick, extensive and stable. In usual sense, there are certain characteristics which are held by emerging markets. The first one is economic development as per average GDP per capita. The second one is relative speed of economic development expressed in terms of GDP growth rate. The last one is that it is a free market system.

As per the Resource Based View approach, an entity encompasses a wide array of tangible as well as intangible resources. These are not perfectly mobile within the premise of a company and are transmissible across the globe within the territory of an organization (Estrin, Mickiewicz and Wright, 2019). The transfer of such resources is monitored via the integration of hierarchical governance structures, as laid down under the internationalization theory. It implies that multi-nationality of an enterprise can be illustrated with the help of decision making executed by a company, to enable value increment by internalizing marketplaces for several intangible assets across the national territory.

Hereby, it is analyzed that that there are a number of important factors underlying ownership advantages for Multinational Enterprises (MNEs) which aim to move from advanced economies to gain access into emerging markets. Such factors are identified to be the international experience of company, size of corporation, age of entity and tangible as well as intangible assets held by the firm (Nazlioglu, Gormus and Soytas, 2019). All of these provide assistance to multinational enterprises to gain entry into emerging markets and thereby facilitate their growth and expansion within its confines. In this regard, it is identified that by opening a store or outlet in emerging market, multinational enterprises strive to establish proper networking with the citizens belonging to that region. This provides assistance to the business organisations in appealing to the people pertaining to emerging market place in an effective manner and taking effective measures by way of which they can be retained for a rather long period of time. In this relation, it can be said that by establishing a healthy relation with customers, multinational enterprises gain ownership advantage (Wu and Deng, 2020). By leveraging ownership advantage, a large number of multinational enterprises are able to deal with the liability of foreignness that they encounter during the execution of their operations within the confines of emerging economies. This is done by organisations by capitalising upon the positive environment provided by emerging markets to come up with new and innovative products. Also, it assists in developing new capabilities of the firm to ensure their sustainability in market place for a long period of time.

“Corruption is The Most Important Factor Facing MNES From Advanced Economies as They Enter Emerging Markets.” Do You Agree? Use The Cases From the Course to Develop Your Answer.

It is usually seen that emerging markets encompass some sort of political instability together with ongoing growth. Even though there is no fixed list of emerging markets, however, it is identified that China, India, Indonesia and South Korea in Asia; Poland and Turkey in Europe; Brazil, Mexico and Argentina in South America and South Africa in Africa are regarded to be emerging market (Nazlioglu, Gormus and Soytas, 2019). MNEs carrying out their operations within emerging market possess golden chance to gain growth, development and establish their name within the mindset of people. Emerging markets strive to become better with each year. Thus, MNEs leverage upon the development of these regions to facilitate their prosperity. However, it is important for such organisations to also bear in mind that emerging markets are characterized by instability and other substantial challenges.

It is immensely important for such corporations to gain adequate comprehensibility of the challenges so as to deal with them in a strategic manner. Gaining understanding of the constraints of emerging markets would make it easier for MNEs to operate in a stable as well as comfortable manner in those regions (Dau, Purkayastha and Eddleston, 2020). By leveraging the knowledge gained of these challenges, MNEs strive to enhance their scale of business operations and thereby attain the attention of larger base of customers. This inflates the opportunity for them to fulfil the needs and demands of a bigger base of individuals prevailing in market so that they can be retained for a long period of time in future (Dau, Purkayastha and Eddleston, 2020). This ensures that such corporations are able to build their effective image in the eyes of customers and gain support from them in the long run.

The large number of people of world lives in emerging market in which they are moving from basic need to consumption oriented era. With the rise in current trends, there is increase in corruption that is faced by MNEs whenever they enter into emerging market to expand their business in appropriate manner. Corruption is an inseparable element of the emerging markets as they hold political instability. To get things done in a rapid and easy manner within a region having such complexities, it is easier for corporations to take advantage of money and thereby get indulged in corrupt activities. This inflates the chances of completion of difficult business tasks within due course of time (Estrin, Mickiewicz, Stephan and Wright, 2019). However, all of this holds negative outcomes for corporations. It is analysed that this leads to decline in the brand value and goodwill of MNEs at market place. It is also not easy to remove corruption from emerging markets as this is created by people and businesses themselves. This issue is faced by each and every organisation operating their business operations or emerging into new market for attainment of profits and large level of revenues. Corruption gains the attention of people as it largely guarantees completion of those activities and practices also which otherwise seem almost impossible for multinational enterprises. Thus, this acts as a strong force which influences the ethics and functioning of organisations while expanding from developed economies into a range of emerging markets for the facilitation of growth and development in rapid course of time.

In context of given case study on Sherritt Goes to Cuba (A): Political Risk in Unchartered Territory, they have gone through many issues and problem while entering into emerging market. As per scenario, risk is something which cannot be identified by people. There is risk in each and every factor (Ge, Carney and Kellermanns, 2019). During the time of Canadian divisions of US firms, there have been changes taken place in different aspects. Sherritt has to evaluate each and every aspect for positive outcomes.

According to the given case study of Hard Choices: Best Buy and Five Star in China (A), there is growth and increase in Chinese market (Nazlioglu, Gormus and Soytas, 2019). As there is difference in culture, tradition, consumer behaviour of Chinese market from those of other. It is very important for MNEs to adopt and localised necessary steps for surviving in China. This lead global customer electronics retailer is about to open their branded stores in China. In this context, Best Buy Brand has to shut down their stores due to lack of facing competition with such market. In this context, global has brought all stores of best buy brand stores to expand their market. Global has followed corruption path to survive and sustain at Chinese market and expanded their business.

On the other hand, the scenario given in case study of APPLE INC.: MANAGING A GLOBAL SUPPLY CHAIN says that this is the largest business at market place. It has manufactured several products and services for their consumers. While the time of doing product assembly, it has faced that worker were laid off (Sauvant, 2019). Public were treated in unfair manner where Apple has clearly mentioned their policies governing different practices like involuntary labour, harassment, human trafficking. This has impact on Apple's inventory projection. There is decline in output which leads to increase high cost and debt servicing obligations. They were following unethical practices while manufacturing products for their consumers which lead them to decline in sales and profit.

There are various aspects which can be faced by organisation while emerging their business at marketplace (Donaubauer, Neumayer and Nunnenkamp, 2019). Main issue is related with corruption which is increasing day by day that create problem in proper survival and sustain of business at competitive market. From the above, there are different case study which has been analysed that faces problems for survival and sustainability of their business at emerging market. Therefore, it is very important to determine each and every factor which is creating problem for operating business.

Discuss The Relationship Between International Trade and Investment and The Way it is Changing Because of the Growth of Global Value Chains. Distinguishing Between Tariff and Non-tariff Barriers, Explain How Barriers to International Trade Impact The MNEs Decision to Internationalize Through Trade Versus Foreign Direct Investment? Please Illustrate Your Answer With Case Examples.

International trade and investment both plays significant role in the economic growth of each and every nation. International trade is mainly considered as the exchange of products and services among different nation (Carter, Wellhausen and Huth, 2019). Trading activities performed at international scale directly provides opportunity to individual to use and explore range of products which are not available in their home country. Along with this, many a times it has been analysed international trade allows customers in buying products at cheaper rate which are expensive in their domestic market. On the contrary foreign direct investment is determined as the investment made by one company in another nations with the motive of enhancing their control of ownership. This is also seen as the indirect form through which company focuses on maximising their control in non native nation (Dau, Purkayastha and Eddleston, 2020). The terms investment or foreign direct investment and international trade are highly related to one another. Apart from this, their relationship can be understood effectively by making use of one example (Koepke, 2019). For instance: If one company invests in one another country in the form of expanding their business in different nation then it can be directly considered as the part of international trade. This is so because, this kind of investment will also lead to future integration in business activities that ultimately promotes international trade.

It has also been seen that relationship between international trade and investment is quite positive as if FDI will enhance with the passing time then it will also increase international trade. With changing time, it has been analysed companies are emphasizing on enhancing their profitability (Cerutti, Claessens and Puy, 2019). For this, they tries increase their trading activities in different nations so that they can easily approach international customers and enhance their sales performance. This connection with the international customer can easily develop with the medium of investment in the new nation. For executing this effectively, large scale company establishes their firm in the new nation. In this, they performs all activities associated to the business type. This directly improves their control over another nation in terms of ownership.

Global value chain is mainly seen as the sharing of production activities at international scale. In this, the overall production is bifurcated into two main sub sections that is activities and task in different nations. In other words it can be said that global value chain is determined as the integration of several activities and people associated with the production team who manages overall supply, distribution as well as post sales activities while having transactions at international scale (Jin, García and Salomon, 2019). It has been determined that growth of global value chain is growing day by day. This is so because business are now a days focusing on maximising their business output by bifurcating their activities associated with production department. In addition to this, the influence of global value chain's growth can also be on international trade and investment in positive manner. This is so because, businesses are now a days going towards international expansion in order to ease their business non-functioning and enhancing its output effectively. This thing is mainly done by going for global value chain in effective manner . The rapid growth observed in global value chain, directly improvises core relationship between international trade and investment (Dau, Purkayastha and Eddleston, 2020). This improvement is beneficial for the customers too as they are now getting facilities to buy their favourite products at cheaper prices. In addition to this, it also contributes in enhancement of national economy too as employment is expanding with more international trading.

Trade Barrier is basically seen as obstacles which are faced by companies while performing their business activities at international scale in effective manner. In addition to this, it has been analysed trade barriers are mainly of two types that is Tariff and non tariff barriers (Lien, Lo and Bojanic, 2019). Tariff barrier basically includes custom tariffs that are imposed by government as well as legal authorities on goods which importing in the nation. On the other hand, non tariff barriers are the one which could directly place impact over exporting goods and services. This includes all kind of goods and services no matter belongs to which category. It can be basically seen from food related items to the digital services.

Both the kind of tariffs are basically applied on international trade that is export and import (Dau, Purkayastha and Eddleston, 2020). But, at the same time they have many kind of differences between them. Few of the differences among them are stated as below:-

  • From tariffs governments is mainly getting revenue which is further used by them nations development. On the contrary, non tariffs measures does not provides any kind of benefits to the government in terms of revenue (Bishop, 2019).
  • It has been seen that non tariffs holds huge price differences among two countries as flow of import is not all free where price differentiation in tariff will remain equivalent as cost of transportation is approximately equivalent while importing and exporting products and services between different countries (Dau, Purkayastha and Eddleston, 2020).

The specified information clearly depicts that tariff and non tariff barriers are different from one another. It has been further seen barriers in international trade are directly placing impact over the decision making of multinational enterprises decisions. This is so because, it becomes obstacle for the company to expand their business in another countries because of tariff barriers (Chhabra and Popli, 2019). Along with this, management team of the companies are required to take decisions according to these barriers and restrictions only that whether they should enter into the nation or not. Also, it also influences companies to analyse all barriers in detailed manner which helps them in taking decision that whether they should go for internationalisation through foreign direct investment or by international trade.

CONCLUSION

From the above discussion, it can be inferred that there are several factors underlying ownership advantages for MNEs while moving from advanced to emerging markets. Further, it is analysed that there is effective relationship between investment and international trade. This relation is constantly altering owing to the development of the global value chains.

Also read:- SWOT Analysis of Marks & Spencer

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