Multinational Corporations and its affect on Foreign Direct Investments

Multinational Corporations and its affect on Foreign Direct Investments

Introduction

The focus in the international business literature on host government policies that create market imperfections and that make FDI an economically rational strategic alternative for firms has diverted attention from a variety of other types of pertinent government policies and a wide range of their effects on FDI. This paper analyses understand and evaluating the mne is the way they reflect various types of market imperfections and hence on FDI. It finds that the causal connections of government policies to market imperfections and FDI are more variable and more complex than previously recognized. The clarification of those relationships at a conceptual level should facilitate more rigorous and encompassing empirical testing (Rugman, 2008 102).

First, there is great diversity in the types of government policies that affect market imperfections and FDI. Second, there are numerous dimensions of variability in government policies that affect market imperfections and FDI. Third, there is a variety of converse (i.e., opposite) effects, compared with those posited by internalization theory, of government policies on market imperfections and FDI. Fourth, FDI flows must be disaggregated in order to refine the analysis of the effects of government policies and market imperfections on FDI.

Other theories of multinational corporations focus on host country market imperfections and firm-specific knowledge as elements encouraging internationalization of production or marketing activities. Both criteria are present in international service firms.

Impacts of Market Imperfections on FDI

However, not all FDI is always in the best interest of the host country. Some nations have been increasingly viewing MNCs as a threat to economic autonomy. At times, they tend to be responsible for exerting negative influences on the host economy, for example, crowding out domestic firms and suppressing domestic enterprises. Profit maximization is inherently linked with maximization of efficiency and not necessarily with national, economic, and social goals. From the perspective of MNCs, various decisions have to be taken that can affect their effective working in the country—mainly since they operate in different economic, political, social, and cultural environments (Martens, 2008 45).

A lot is said as to why firms choose to transnationalize rather than simply export their products. Two of the reasons commonly cited are that (1) competition is extremely global, and volatile and (2) it creates an environment wherein advantages rapidly created, and eroded. Firms increasingly compete not with rivals on a national level but across the globe. Higher sales and profits result from foreign subsidiaries because domestic markets, where the company started, tend to get saturated over time and it is fruitful to conquer foreign markets with more potential consumers than in the home country. The information technology revolution, which began in the United States in the 1980s, was an important source of structural change in the international economic and business environment affecting FDI. There was a sudden upsurge in asset-seeking direct investment in the United States (Rosenzweig, 2008 145). Foreign companies, chiefly European, were responsible for a gamut of mergers and ...