Multinational Enterprise in the U.S.A - Essay Example

?Running head: MULTINATIONAL ENTERPRISE (U.S.A) Multinational Enterprise (U.S.A) Insert Insert Grade Insert May 9, Multinational Enterprise (U.S.A) About USA The United States of America, most commonly referred to as the United States, is a federal republic located in the central part of North American continent with Canada to the north and Mexico to the south. It consists of fifty states and the District of Columbia. The capital city of the US is Washington, D.C. Some of the states are in the mainland of North America whereas other states like Hawaii are islands in the Pacific Ocean. United States was under colonial rule for a long period and obtained her independence from the British in1776. With a total area of 9,831, 513 square kilometers (Census bureau, 311), the United States is the third largest country in the world after Canada and the Russian Federation. The large stretch across the North American continent makes the country experience different kinds of climate and thus different types of vegetation. The region is thus a home to various species of plants and animals. This is a contribution towards being the country with the largest economy in the world. According to Population Reference Bureau (para.1), the US “is the third most populous country in the world after China and India” (See Appendix 2). The 2010 population census showed a figure of about 308 million and the population is currently estimated to be about 311 million (Population Reference Bureau, para.1; US Census Bureau, para.1). The population consists of individuals from diverse culture due to the slave trade that brought individuals from across the world into the country in the middle of the second millennium. There are Americans of African, Asian, Spanish, Mexican, or French origins that came into the country either as the conquerors or as slaves that were brought in to promote the agrarian and industrial revolution that was already taking place in the region. The presence of different cultures in the United States also led to different languages being spoken in the country. English is the most popular language in the country (Schmidt, 1). There are other languages like French, German, Spanish, and many others spoken in the country (See Appendix 1). For some period after the Second World War, a Cold War was experienced between the United States and the Union of Soviet Socialist Republic. USA was and remains to be a capitalist state whereas USSR was a communist state. The two federal states were fighting for allies from different countries and the power to monopolize the economy of the world. Each of the countries had expertise in the development of war weapons and was a threat to each other’s power to rule the world. The collapse of the Soviet Union in early 1990s led to the emergence of the United States as the worlds’ super power. Introduction A multinational enterprise (MNE) or Multinational Corporation (MNC) is an organization that operates or conducts business across two or more countries. The company produces its products and services and delivers the products/services to different countries. The organization usually has its central place of operations (the head quarter) located in one country called the home country and operates in other countries referred to as host nations. As globalization increases with an increase in competition in the local and global markets, most large organizations strive to establish themselves in other countries that perhaps may have better market opportunities, availability of materials for the production of the products or cheap labor that reduces the cost of production. The increased deregulation and liberalization of local markets across the globe has attracted foreign investors into other countries in search of new market opportunities, raw materials that are readily available and cheap labor in these regions. In many cases, the developed nations are the source countries for most of the foreign direct investment as they have well established organizations that venture into the foreign investment. The United States account for a substantial percentage of the FDI inflows in the world. By 2003, the United States had the largest share of 5% of the total global FDI inflows (Urban, 1). The kind of foreign direct investment that has been practiced in the United States over the past is such that the outward investment by the nation involves direct investment whereas the inward investment is mainly in portfolio form (Lipsey, in Froot’s Foreign Direct Investments, 113). What this means is that the foreign investment by the United States in other countries were directly controlled by the US firms whereas the inward investment involved lending by the foreign investors to the government agencies and other private firms in the US. The total outward investment in the United States had been higher than the total inward investment in the better half of the last century. From the beginning of the nineteenth century up to 1960, the proportion of the US private investment in other countries was far much bigger than the proportion of the foreign private investment in the US (Lipsey, 114). This was surprising since it is believed that there were already more technologies and skills in the European countries during this period that could accelerate inward investment into the country. Perhaps this could be explained by the difficulty that was experienced in controlling the foreign investments in the US from the home countries and the difficulty in the means of transport and communication during this period. The transfer of skills would call for the migration of skilled employees of an investing firm into the United States. It was observed that even the portfolio investors were at times involved in the management of US firms when there was need for such intervention. Later developments were registered in the kind of foreign investments that were seen in the United States and what is experienced now in inward investments and outward investments in the United States is quite different from what was seen in the 1960s. The foreign direct investments in the earlier time were mainly owned by foreign individuals and not foreign firms (Lipsey, 114). It was then possible to convert these firms into domestic firms when the owners migrated back to their countries. Before the 1970s, the outward investment by the United States was more than half of the stock of direct investment in the developed world (Lipsey, 115). The second nation with the largest share at this time was the United Kingdom with about 15% of the developed stock of direct investment. In 1967, the inward investment in the United States stood at only 9%. It was then observed that there was an increase in the inward investment and a steady decrease in the outward investment in the subsequent years. The percentage of the outward investment of the US remained at almost half of the developed stock in the late 1970s. In the early 1980s, the proportion had reduced to less than 20% and it was less than 15% towards the end of the decade. During this period, the proportion of inward investment took an opposite transformation. The inflow of direct investment in the United States accounted for less than 10% of the total inflow to the developed countries in 1960 (Lipsey, 116). The figure rose to 17% between 1967 and 1969, about 25% between 1973 and 1975, and was more than 33% towards the end of the decade. Similarly, the share of the world inflow also grew steadily from 15% in the early 1970s to over 45% towards the end of 1980s. This decreasing trend for the outward investment and increasing trend for inward direct investment continued and in 1988, the US accounted for 35% of the outward investment stock in the world and 31% of the inward investment stock (Lipsey, 116). The percentages were almost the same in the early 1990s. The increasing trend in outlays for foreign direct investors t establish or acquire firms in US continued into the twenty fist century with some decrease between 2001 and 2002. The increasing trend continued and the 2008 outlays hit a $260.4 billion mark (Anderson, para.1). The United States that initially was an exporter of foreign investment was now experiencing much influx of foreign investors into the country. Inward foreign direct investments in China China has recorded a remarkable development in the inflow of foreign direct investments over the last century to the current situation. Li & Chang (1) note that, China, which is the “world’s most populous country with over 1.3 billion consumers,” (See Appendix 2) currently attracts enormous FDIs. For almost three decades after the end of the Second World War, the Republic of China did away with all its foreign investments and paid back all the foreign loans (Chinability, para.1). The situation remained until 1978 when Deng, Xiaoping developed new economic policies that would allow for and attract foreign investments into the country. The beginning of the 1980s marked the beginning of steady inflow of foreign investors from various parts of the world. During the 1980s, there was a steady inflow of foreign direct investment, though at a low rate. Most of the foreign direct investments were joint ventures between the foreign firms and the Chinese state-owned firms (Chinability, para.3). These investments were threatened by the 1989 Massacre at Beijing and most western companies held back their investments in China for some time. Later developments were witnessed in the early 1990s that encouraged inflow of FDIs fully operated by the foreign firms (Wei & Li, 1). The restrictions that had been put earlier regarding solely foreign-owned investments were removed attracting more investors (Long, 316). This resulted into a significant inflation and growth in the Gross Domestic Product in China in the period (Chinability, para.4). The developments continued and China was ranked by the World trade Organization as the best country in a position to attract foreign direct investment in 2003. The inflow of foreign investment continued up to 2008 after which it fell in the first half of 2009 as shown in Chart 1. Good policies, stable economy, and a promising market were some of the driving forces behind the increase in FDIs (Anonymous, 1). Chart 1. FDIs inflow in China between 2008 and 2009 Adapted from Chinability http://www.chinability.com/FDI.htm The foreign direct investments in China originate from countries in the East Asia like Hong Kong and Taiwan. The developed nations like United States, Japan and the other European countries are also key contributors to the foreign direct investments in China. Some restrictions provided by the Chinese government concerning state-owned enterprises have provided countries like US investment opportunity (Huang, 41). The United States is the second largest foreign investor in China after Hong Kong. By 2002, the United States had the third largest share of FDI projects in China after Hong Kong and Taiwan, with a share of 8.79%. It was the second after Hong Kong in the Contract Amount and the FDI realized with share of 9.21% and 8.90% respectively (Long, 319). Large and renowned business organizations like IBM, Motorola, and Samsung from the developed countries are the major foreign investors in China. Impacts of foreign investment by MNEs The foreign direct investment by the MNEs has both positive and negative impacts on the economy of the home country and the host nation. The multinational enterprises also have influences on the political, social, and cultural aspects of growth in a given region (Urban, 5). The employment opportunities, technology transfer, and the influence on financial inflow are the main contributions of FDIs to the host nation (Li & Chang, 2). The increased use of modern technology in research development has been stimulated by these multinational corporations. These organizations usually have high level of expertise that can be borrowed by the professionals in the host nations. There are also employment opportunities that are provided by the foreign investors to the locals of a given host nation. In many cases, the multinational enterprises owned by individuals or corporations from developed nations and are operating in the developing nations opt for the cheap labor that can be provided by the citizens of the country. On the other hand, the foreign investors can also exploit the resources in the host nation especially if the host country was found to have low ability to invest in a given business. Such problems cannot be experienced in a multinational enterprise operating in a developed country like US as the host nation. However, the problems can be greatly felt in the economy of a developing nation like China. Types of industry The foreign direct investments in China are mainly Greenfield investments that involve the establishment of new industries by the foreign investors in the region. Manufacturing industry dominates the foreign direct investments in China and accounted for about 70% of the total FDI projects in 2001 (Long, 317). The manufacturing industry has attracted more FDI in China due to the competitive edge provided by the country. China has low costs of production and high availability of the other products necessary in the industry. The other industry is the real estate industry in the services sector. However, this has not expanded so much due to the restriction put on the FDIs by the government regarding investment in the services sector. Agriculture and infrastructure have also remained in a lower profile (Wei & Liu, 2). Effects on employment The establishment of an FDI in a given host country also has impacts on the employment in the country. The rate of employment, the types of jobs created, the working conditions that are prevailing as well as the remunerations for these jobs are points of concern here. Foreign investors in a given area boost the economy of the region by providing employment opportunities in a number of ways. The locals of the region can be directly employed by the multinational enterprise (Urban, 7). The investments by the MNE can also lead to establishment of other business organizations like banking or insurance that provides yet other employment opportunities. Besides, the employment provided to the locals boosts their living standards and other investments on consumable commodities can be possible due to a promising market. The foreign direct investments in China provide direct employments to the locals due to the cheap labor cost in China. The wage level in China is almost 50 times lower than that of the United States (Yu, 2). The US FDIs to China are therefore able to provide better wages than the domestic firms in China. Crowding Out effect In certain instances, the investment by MNEs in a given region may cause a wide rift between the domestic firms and the foreign investors. In most cases, the multinational corporations are financially equipped and can attract the talented and skilled laborers by providing high wages. This will block the domestic enterprises from obtaining the skilled laborers due to their inability to offer attractive remuneration. The result is a widening gap between the domestic enterprises and the multinational enterprises operating in the country. In China, this scenario was evident in the 1990s. Both the private firms and the state-owned enterprises could not provide remuneration that was attractive as that provided by the FDIs (Long, 333). However, the technological improvements that have been adopted by the domestic enterprises and the restructuring of the state-owned enterprises have eliminated this problem in the recent years. The domestic enterprises in the country have emerged and developed into the leading technology providers. The Chinese professionals that had fled the country in search of knowledge and/or employments have been seen to return to the country providing yet another solution to the crowding effect created earlier. Balance-of-payments effects In enacting the economic policies, it is important that the government of a host nation considers the effect of the foreign direct investments on the balance-of-payment accounts. The balance of payments accounts in a given country consist of the current account and the capital account. The export and import of goods and services within a host nation are examined in the current account. It also entails a check into the investment income. A comparison between the income from the foreign investments and the payments made to such foreign investors in a country is also contained in the section. Capital account considers what is generated during the purchase or sale of a given asset. In this respect, the foreign direct investment into a country can have effect on the balance-of-payments in one way or the other. The foreign direct investments can provide substitute for the imports of goods and services into the country. In this case, the FDI can improve the current account of the balance-of-payment account of the host nation. On the other hand, the foreign investment in a country may import a lot of input from the parent organization in the home country resulting into a debit on the current account of the host nation’s balance of payments. The multinational enterprises in China have contributed significantly to the total revenue of the nation. In 2002, the inward FDIs contributed 20.52% of the total national tax revenue (Jiang, 2). The corporations will definitely use some of the products in the host nation and remit revenue taxes that contribute to the country’s economy. The imports and exports in China have increased considerably as shown by the following graphs. Chart 2a. China Import and export Trend 1980-2007 Chart 2b. China import and its trend 1980-2007 Chart 2c. China export and its trend 1980-2007 Adapted from http://www.starmass.com/china_review/imports_exports/import_export_trends.htm However, there is an increasing fear that the FDIs in China may impact negatively on the countries international balance of payment in the long run (Yu, 3). The investment incomes for the FDIs in the country have significantly increased with a corresponding increase in profits sent back to the home countries like the US. Technological advances and the spill-over effect Another important contribution of multinational enterprises to the development of a host country is the incorporation of skills and technology that are necessary in the production. Most of the foreign projects invested in China use the advanced technologies in production (Jiang, 1). The MNEs carry out research and development in ways of developing new products leading to global competition among companies. In this manner, the foreign investment into a country brings in new skills and techniques into the host country that can be transferred and applied to other sectors of the economy. Most of the multinational enterprises employ the locals and train them on the technologies used in production and other operations of the organization. The MNEs train their employees on management and entrepreneurial skills that could later be applied to management in other organizations in the country. They collaborate with the other local firms in developing and producing new products into the local markets. Later on, the trained employees are lost to the domestic enterprises and the state-owned firms (Long, 331). This spill-over effect has been seen to have positive impact on the technological development in China. The few empirical studies that have been conducted to investigate the spill-over effect of manufacturing industries in China indicate that there was a positive impact on the product innovations in China (Cheung & Lin, 27). The FDIs to China in the 1990s introduced research and development programs that improved the ability of the local firms through the spill-over channels. Implication of the above impacts for government policies by host nation In the last two to three decades, China has been in the continuous process of enacting and revising policies that regulate the foreign direct investment in the area. There were laws in relation to the Foreign Wholly Owned Enterprises, the Sino-Foreign Joint Ventures, the Sino-Foreign Cooperative Enterprises, and the Industries that were open to foreign investments (Long, 318). There have been various revisions of some of these laws like that governing the industries for foreign direct investments. Most of the policies have been seen to encourage foreign investment. The policies outline the differences in treating the FDIs in different industries in the country. There are also provisions by the patent law on the protection of innovation (Cheung & Lin, 30). The patent applications depended on the regions of the country as shown in Appendix 4. As a result, the FDIs enjoy special treatment in China as compared to the domestic enterprises. A number of reasons made China to encourage the foreign direct investment, the main one being aiding its development agenda. The FDIs were welcomed into the country to bring in new technologies and industrialize agriculture that was going on in the country (Long, 319). The FDIs were also welcomed to improve the overall infrastructure in the country. The investors would improve the transportation infrastructure, sources of energy for domestic use, and other products that are necessary for human needs. The FDIs were encouraged to come in and establish research and development centers in the region to improve on the technology standards in the country (Long, 321). They were also intended to open up certain areas of the country that had good resources but were still very much underdeveloped. There were other reasons like encouraging the FDIs to set up export-oriented projects to increase the revenue generated by these foreign investors to the country. Most of these goals of the government policies on FDIs have actually been fulfilled. Conclusion It has been perceived that the inflow of foreign investment into a country is of economic importance to the host nation. It is seen to be capable of improving the economic development of the nation by exposing the economy of the country into the global market. However, to achieve this, the host country must develop and adopt some policies and measures that are appropriate in ensuring that the foreign investors actually benefit the country. One of the policies that can be of some importance is the performance requirements. The performance requirements will help in understanding the importance of inward investment into a country and address the issues related to such benefits. The policy regarding the performance requirements should be developed in such a way that it will be in line with the development objectives of the host country. Due to the changing needs of the individuals in the society, there is a constant need to review the regulations that are imposed on the FDIs especially in regard to the industries that are allowed, those that are restricted, those that are prohibited and those that are encouraged to be set up by the foreign investors. The government should respond to the technological advances that are transpiring in other sectors and in other nations in order to ensure compliance with the international standards in all the industrial sectors. Besides, in developing the policies, they should be aimed at promoting local and regional development, ensuring proper international relations, and improving the industrialization process in the country. The development objectives of the country should be the first consideration in developing such policies. Works Cited Anderson, Thomas. Foreign Direct Investment in the United States: New Investment in 2008 June 2009. http://www.locationusa.com/studiesResearchPapers/06-30-09/FDI-US-2008.shtml Anonymous. U.S treasuries Shed. Beijing Review, Vol. 53 Issue 34, p36-37, 2010. Census Bureau. Statistical Abstract of the United States 2010 (Hardcover). Washington, D.C: Government Printing Office, 2009. Cheung, Kui-yin and Lin, Ping. Spillover effects of FDI on innovation in China: Evidence from the provincial data. China Economic Review, 15, pp. 25– 44. 2004. 09 May 2011. http://www.ln.edu.hk/econ/staff/plin/CER-04.pdf. Chinability. FDI inflows into China 1984-2009. May 2011. http://www.chinability.com/FDI.htm. Froot, Kenneth A. Foreign Direct Investment. Chicago: University of Chicago Press, 1993. 09 May 2011. http://www.nber.org/chapters/c6536.pdf. Huang, Yasheng. FDI in China: an Asian perspective. Passir Panjang: Institute of Southeast Asian, 1998. Jiang, Xiaojuan. FDI in China: contributions to growth, restructuring, and competitiveness. New York: Nova Publishers, 2004.  Li, Li and Chang, Ching-Hsi. Can FDI Save the Shaky Chinese Economy? Chinascope, p16-33, 2008. 09 May 2011. http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?sid=fe3fbf22-50a0-4eab-9aa7-54e3a8724d94%40sessionmgr14&vid=8&hid=111 Long, Guoqiang. China’s Policies on FDI: Review and Evaluation. 09 May 2011. http://www.piie.com/publications/chapters_preview/3810/12iie3810.pdf Population Reference Bureau. U.S census 2010 & ACS. 2010. 9 May 2011. http://www.prb.org/Topics/Census2010.aspx. Schmidt, Ronald. Language policy and identity politics in the United States. Philadelphia: Temple University Press, 2000. U.S. Census Bureau. U.S & World Population Clock 9 May 2011. http://www.census.gov/main/www/popclock.html Urban, Roland. Multinational Enterprises and their hosts: An ‘impact’ assessment on the United States of America. Seminar paper. Leeds Metropolitan University. 2005. Wei, Yinqi and Liu, Xiaming. Foreign direct investment in China: determinants and impact. Northampton: Edward Elgar Publishing, Inc. 2001. Yu, Yongding. FDI in China. Institute of World Economics and Politics, Chinese Academy of Social Sciences. 9 May 2011. http://www.joho-fukuoka.or.jp/kigyo/asif-fko/third/YongdingYu.pdf. Appendices Appendix 1. The Five Top spoken languages in the United States Language Population English 215,423,557 Spanish or Spanish Creole 28,101,052 Chinese 2,022,143 French (incl. Patois, Cajun) 1,643,838 German 1,383,442 Tagalog 1,224,241 Adapted from MLA Language map http://arcgis.mla.org/mla/default.aspx Appendix 2. The world’s most populous countries (Top Ten) Country 2010 Pop. 2000 Pop. Pop. Increase 2000 – 2010 Expected Pop. for 2050 1. China 1,330,141,295 1,268,853,362 61,287,933 1,424,161,948 2. India 1,173,108,018 1,004,124,224 168,983,794 1,656,553,632 3. U.S. 310,232,863 282,338,631 27,894,232 439,010,253 4. Indonesia 242,968,342 213,829,469 29,138,873 313,020,847 5. Brazil 201,103,330 176,319,621 24,783,709 260,692,493 6. Pakistan 177,276,594 146,404,914 30,871,680 276,428,758 7. Bangladesh 158,065,841 130,406,594 27,659,247 233,587,279 8. Nigeria 152,217,341 123,178,818 29,038,523 264,262,405 9. Russia 139,390,205 146,709,971 (7,319,766) 109,187,353 10. Japan 126,804,433 126,729,223 75,210 93,673,826 Adapted from Internet World Stats http://www.internetworldstats.com/stats8.htm Appendix 3. The US FDIs in China Non-Financial Foreign Direct Investment (FDI) Inflows, 2000-09 Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Total FDI Number of projects 22,347 26,140 34,171 41,081 43,664 44,001 41,485 37,871 27,514 23,435 Growth (%) 32.1 17.0 30.7 20.2 6.3 0.8 -5.7 -8.7 -27.3 -14.8 Utilized FDI ($ billion) 40.7 46.9 52.7 53.5 60.6 60.3 69.5 74.8 92.4 90.0 Growth (%) 1.0 15.1 12.5 1.4 13.3 -0.5 4.5 18.6 23.6 -2.6 US direct investment Number of projects 2,609 2,594 3,363 4,060 3,925 3,741 3,205 2,627 1,772 NA Growth (%) 28.6 -0.6 29.6 20.7 -3.3 -4.7 -14.3 -18.0 -32.5 NA Utilized FDI ($ billion) 4.4 4.9 5.4 4.2 3.9 3.1 3.0 2.6 2.9 NA Growth (%) 4.8 11.4 10.2 -22.2 -7.1 -20.5 -3.2 -12.8 12.5 NA US share of utilized Investment (%) 10.8 10.4 10.2 7.9 6.5 5.1 4.1 3.5 3.2 NA Adapted from The US-China Business Council http://www.uschina.org/statistics/fdi_cumulative.html Appendix 4. Patent applications according to the regions Distribution of patent types within regions (%) Coastal region Central region West region 1996 1998 2000 1996 1998 2000 1996 1998 2000 Invention 12.5 12.7 17.7 17.6 18.1 20.1 17.9 18.4 18.5 Utility model 54.5 48.1 43.8 70.4 62.9 60.4 63.3 56.2 50.4 External design 33.0 39.2 38.5 12.0 19.0 19.5 18.8 25.4 31.1 China’s Statistical Yearbook for Science and Technology Adapted from K. Cheung, P. Lin / China Economic Review 15 (2004), 33 http://www.ln.edu.hk/econ/staff/plin/CER-04.pdf Appendix. 5. U.S./China Media Brief Foreign Direct Investments (FDI) http://www.aasc.ucla.edu/uschina/trade_investment.shtml The material illustrates the inward and outward foreign direct investments between the two nations China and the United States. It is observed that by 2007, the total inward investment in China were far much higher than the outward investment. It was also observed that the US foreign investment into China was much higher than the China’s investment in the US. Read More