How Have Changes In The World Economy Since 1945 Affected Room For Maneuver Of Multinational Firms - Essay Example

? How have changes in the world economy since 1945 affected room for manoeuvre of multinational firms? Date of Submission How have changes in the world economy since 1945 affected room for maneuver of multinational firms? Introduction: The World War of 1945 proved to be a massive disaster for world’s economy with its most effects on the European countries and Japan. These two countries were considered to be the greatest raw material suppliers throughout the world which significantly fell down in the war years. The countries who were not directly involved in the war were the gainers of the economy soon after the war as they fulfilled the gaps and needs of world economy in that crucial time. However, post war phase that is the recovery period from the war had been quite rapid and remarkable for the affected countries, the reasons being that the civilian production came to a halt in the war period and there was growth in the fields of metal working, engineering, chemical capacity etc that boomed during the period and was utilized in the peace time. The infrastructure of the countries was well established in the pre war phase and had to go through the repairs after the war. Additionally there was ample trained and knowledgeable human resource to be mobilized to improve and recover the conditions. All these reasons altogether along with the help from some undamaged countries like USA and Canada helped them in the recovery phase. It was seen after 5 years, in the available statistics of 1950 that the GNP and income levels of most of the affected countries was way more than it was in 10 years before the war in 1930s. USA had played a significant role in world economy after the world war. Right after the world war the European countries faced shortage of fuel, food and resources. The only country who could have helped them with its undamaged economy was USA, but to buy all these resources huge reserves of dollars were required and dollar shortage was faced. It seemed in that era that all the world’s resources were shifting from Europe to North American regions and the US economy boomed and it looked it would be impossible to catch up with such an economy which is richer in resources and is the hub of investment. This era give US the opportunity to utilize its resources to the maximum and US utilized this well. (POLLARD. 1997) Post World War II Period: After the Second World War many imbalances were seen in the world’s economy in technological advancements, investment and consumption policies etc. In the late 1950s the prices of primary commodities in the world started decreasing along with general fall in the world trade which led to accumulation of debts for many countries. These reasons mainly later on accounted for the economic crisis in 1970s. The poverty and problems increased in the world economy with an increasing trend of international division of labor introduced by the uncontrolled activities of multinationals all over the world. The result of this unequal distribution in the world’s economy lead to unequal and imbalanced international relationships among highly industrialized and experts and monopoly of industrial research and technology and peripheral countries which were dependent on few industries but were technologically controlled by the transnational companies. The most affected by these imbalances were the developing countries which paved ways to global world crisis in later years. (GONZALEZ, CAMPO URBANO & MESA.1984; TOLENTINO. 2000) The boom in the development of MNCs was a result to various important forces. The economic conditions prevailing in the post world war era were more nurturing. The bad experiences faced in 1930s provided the guidelines for not repeating the economical mistakes. The set of policies adopted were designed to rebuild, strengthen and restore the economies of affected countries during the World War. (COHEN. 2007) Role of USA: A few theorists argue that after 1945 the conditions to ‘catch up’ arrived. The USA accelerated in its expansion thorough out the world by opening branch plants widened the technological gap during the war time. The conditions were favorable as the forces of conservatism weakened by the war and rapid transfer of new ideas were permitted because of easier international trade and payments. As far as Britain is concerned, the manufacturing sector didn’t do well in the post war period due to weak management, lack of technical support and investments, poor industrial relations and marketing techniques so not much growth was seen even till the 1970s. (BOOTH. 1995) The US Government acted as a savior and provided aids to European countries and Japan along with giving open access to its markets and reduced the exports barriers for these countries. In the period after 1950s and 1960s came the golden era of the world economy in which massive and prosper economy was seen with increase in demand, revenues, profits and exports etc. This era even brought the question of increasing and growing foreign markets in the long run. The biggest single reason for such growing FDIs in this era was the US companies expanding and opening its branches in European countries. Many companies established their factories in the region due to the establishment of European Union; on one hand this initiative promised increasing economic growth rates in the member countries while on the other hand it put threat on the US export market as the exports from non members will have to face common external tariffs which wouldn’t be feasible economically. In response to these issues the US negotiated the tariff reduction on economic platforms and took a private sector initiative which allowed a foreign owned factory to have the same status as a European firm which gives it the benefits to setup production in any EU country and ship them to other member markets. Many US firms were established in the industries of electronics, automobile, computers, pharmaceuticals etc in the Common Markets which enjoyed massive profits and business in the region. There were mixed views about these developments, some believed the steps taken will promote the European relations with US along with cooperation with the member countries and on the other hand some believed it as USA’s attempt to dominate the world’s economy. (COHEN. 2007; TOLENTINO. 2000) Changes Affecting World’s Economy: The increased concentration and centralization of capital are the results of the changes and disturbances in the world’s international labour division which have affected the countries in material and social aspects and the changes in the multinationals and economy all over the world are the results of this phase. On the other hand the technological development and scientific revolutions have made evolutionary changes in the material factors of productions, in the demands and needs of markets and investments, acceleration of concentration of capital, in the utilization of man power, both horizontally and vertically. The development of large corporations has introduced the need of social relations of production in the world’s economy which is different from old colonial relations. In colonial relations investment was concentrated in primary producing sects, these were labor intensive industries made up of unskilled and cheap labor which usually came from the lower class or rural areas. Recently the investments now focus on the production of luxury consumer goods and the raw material and investments have been directed towards the production of these which requires high level of technology and capital investment. The products have markets in the local market, in the neighboring countries or can be exported to other foreign subsidiaries around the world. (GONZALEZ, CAMPO URBANO & MESA.1984; ROSEMARY WAKEMAN. 2003) The main reason seen in the rapid growth of the world’s economy is because of the advancement and changes that have occurred in technology which accelerated in last two decades. Advancements affected aspects of industry like information technologies, improvements in communication and transportation etc. These changes have affected social behavior of the people globally, by the introduction of better and cost effective means of transportation and efficiencies seen in the dissemination of information have made communication easier globally which is beyond the control of the government. Further the economic changes associated dates back to the nineteenth century where expansion of international trade and division of labor internationally took place which resulted in interdependence of economies and integration of resources world wide. In the late twentieth century changes in the world’s economy was seen as which included importance of growth of multinational corporations, free capital flow, integration of financial markets, delocalization of production sites in order to achieve benefits of cheap labor, economies of scale and being closer to local markets, the influence and presence of Big Four firms and the influence of world’s institution in national decision and policy making. There are counter arguments from the critics of multinationals that they just appear to be multinational, there are various companies from different countries which have international operations but have a strong base in the countries in which they have their head offices. Critics further argue that even in the nineteenth century there was a free flow of capital investment globally assisted by the standard international unit of exchange- the gold. It is also stated that that the greatest capital Exporting countries like USA and Japan haven’t reached the position what Britain had in the beginning of twentieth century. They further argue that the international relationships and dependence over each other existed in all times in which the powerful influenced the weak and the international institutions have merely disguised and balanced the relationships only on the face of it and hadn’t affected the relationships in really. (ANDERSON. 2000) Facts and Figures of Growth in FDIs and MNCs: Until the eve of World War II the companies engaged in extractive activities had an evident large share in world’s total FDI. In the start of 1960s synergistic forces triggered a period in which FDIs amount increased dramatically along with the increase in the number and forms of MNCs all over the world. A relatively sharp increase was seen in the number of subsidiaries and their foreign outputs and their value of output as compared to domestic economic output that is GDP. Enormous growth was seen in the number of MNCs, in 1970 there were 7,000 MNCs which reached to 30,000 in 1990 and reached the figure of 77,000 in 2005. The historical data available for FDIs and MNCs highlights the growth of these companies and their contribution in world’s economy after 1945. The global FDIs increased about nine times from $ 27 billion in 1982 to $239 billion in 1990 and $ 730 billion in 2004. The sales made by various foreign subsidiaries all over the world increased from an estimated $ 2.8 trillion in 1982 to $ 18.7 million in 2004. And the total assets possessed by these companies grew by seventeen fold from $ 2.1 trillion to $ 36 trillion in between these years. (COHEN. 2007) Period of Growth of FDIs and MNCs around the World: A slow and steady growth in FDIs was seen in the 1970s and 1980s which was the result of overseas investments by western European nations and Japan after the recovery phase of the World War. The time when USA companies constituted around 80% of the world’s FDIs came to an end by 1970s and other countries which were active foreign investors like Britain, France and other European countries opened foreign subsidiaries. Japan after its recovery phase developed rapidly and a wave of foreign investment was seen in the 1980s from the region, when many Japanese manufacturers opened foreign subsidiaries. The era of 1990s witnessed a record growth in the FDIs. Due to downfall of communism and debt crisis in Latin America which led to bank’s being reluctant in investing in less developed countries (LDCs), these countries took a more market oriented approach and made proactive policies to attract MNCs, similarly many European countries adopted the same policies from planned to market based economies. These steps taken by most of LDCs affected the MNCs and FDIs in two ways, firstly by making the markets attractive for investments from the foreign companies and secondly by privatizing the state owned companies and industries which were bought by many foreign companies operating in the same sectors. The era of 1990s witnessed a massive growth in FDIs due to the frequency of merger and acquisitions all around the world between various international companies. Most of the acquisitions seen during this time were of US companies being acquired by the European ones. FDIs related to the merger and acquisitions amounted to $10 billion in 1987 to 1994 period which reached to about $ 67 billion in 1998 to 2003. Towards the end of the century it was seen that much number of companies present in the developed countries and economies looked for international presence and increasingly expanded their operations and presence all around the world. One of the main changes seen in this era was the importance of China which started growing in the 1980s and grew rapidly in the 1990s, reaching a $ 50 billion annually in 2003 becoming the world’s number one recipient of FDIs leaving USA behind. (COHEN. 2007; BILLET. 1991) Advancements in Technology and its Impact: As mentioned earlier the technological advancements and time shrinking technology are mainly responsible for these rapid changes in the patterns of world’s investment. The costs of managing and running a subsidiary concerned with nay operations become affordable due to cost cutting efforts made in transportation and communication. The distance wasn’t an issue with the introduction of the internet which disappeared the communication gaps. Further many technological improvements and introduction like cheap and fast ways of transportation and travel for e.g. Air crafts, cargo containers, larger ships and communication means like fax machines, satellite communication, video conferencing and virtual communication improved the level of communication while being cost effective. Easy coordination and collaboration between the different production lines become possible and every company targeted the most cost efficient location in the world to set up. Emphasis had been laid for the achievement of economies of scale in the production of high tech products, which tend to incur high level of fixed costs in the post production phase. The attempt was to compete in the world market through FDIs and locate the operations in a place where the lowest possible unit cost could be achieved, better than the competitors. Further due to the rapid increase in the intra-firm transactions seen across the world between high-tech companies mainly due to vertical integration for easy availability of parts to be assembled or raw material for the next process and cost cutting initiatives, FDIs were directed into subsidiaries. The constant pressures faced by the technological companies due to high customer demand, increased levels of sales, increasing need to reduce prices or keeping them steady and pressure to improve and innovate have made the companies to invest all their resources in the cost reduction and constant innovation to offer better products to their customers. Companies on the other hand made attempts to capture markets in many countries in order to diversify in different products, increase market share, increase sales and profits and reducing risk by globalization of its operations. Another cause of the increasing MNCs world wide has been because of the liberal international economic order have made the expansions of MNCs easy and have reduced the obstacles in capital movement. Further multilateral trade negotiations and freer trade policies have made it extremely easy for any company to globalize its operations in order to serve international markets. (COHEN. 2007; SANTANGELO. 2002) The changes in the information and communication technology had introduced the knowledge based economy and have great implications on the MNCs all around the world. In order to adjust with these changing technologies the MNCs are required to restructure their operations, locational and organizational strategies. Due to rapid inter and intra firm transactions taking place the companies are required to cope up with the technological changes. The structural changes have occurred and the subsidiaries have now gone from being top-down structured to network of subsidiaries, involved in the overall corporate development and strategy. The emphasis is now on dissemination of information and knowledge in the group of companies and the subsidiaries than the simple product supply to the market. Due to the importance given to innovation, the companies have geographically dispersed its research and development operations to favorable locations. The cumulative generation of technological competencies in a company is a vital element of firm’s future strategy and implementation of these strategies since with the introduction of new techno-socio-economic environment the corporate competitiveness have increased tremendously. These complex factors prevailing in the environment call for the need of corporate strategies that deals with information and technology management of the MNCs and their subsidiaries. (SANTANGELO. 2002) Conclusion: Multinational corporation’s presence dates back to pre World War I age which has gone through evolutionary change in the post World War II period. It had gone through many rise and falls and had been affected by many changing circumstances mainly influenced by the changes in economic, political and technological changes throughout the world. Now a days MNCs and FDIs constitutes a major portion of world’s economy which have benefited various companies and countries throughout the world. The importance of the MNCs has increased in recent years for both home and host countries. The emergence and growth of MNCs have made many emerging economies of the world strengthen their position in the international market. MNCs have changed and contributed in the world’s economy by altering the patterns of consumptions, need for innovation and advancements, importance of cost cutting and needs to serve global markets. Bibliography GONZALEZ, M., CAMPO URBANO, S. D., & MESA, R. (1984). Economy and society in the transformation of the world. New York, United Nations University in association with St. Martin's Press. ROSEMARY WAKEMAN. (2003). Themes in Modern European History since 1945. Taylor & Francis. BOOTH, A. (1995). British economic development since 1945. Manchester, Manchester University Press. ANDERSON, M. (2000). States and nationalism in Europe since 1945. London, Routledge. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=60978 POLLARD, S. (1997). The international economy since 1945. London, Routledge. COHEN, S. D. (2007). Multinational corporations and foreign direct investment avoiding simplicity, embracing complexity. Oxford, Oxford University Press. http://site.ebrary.com/id/10220203. BILLET, B. L. (1991). Investment behavior of multinational corporations in developing areas: comparing the development assistance committee, Japanese, and American corporations. New Brunswick, N.J., U.S.A., Transaction Publishers. SANTANGELO, G. D. (2002). Innovation in multinational corporations in the information age: the experience of the European ICT industry. Cheltenham, U.K., Edward Elgar Pub. TOLENTINO, P. E. E. (2000). Multinational corporations emergence and evolution. London, Routledge. Read More