How critical is money to the functioning of economy and society - Essay Example

?Running Head: Money is Critical Money propels human beings towards making growth. Economy simply cannot function without money. Big takeovers happen because of money. Human beings work towards growth and development so that they can make more money. The Stock exchange purely functions because of money. It would be very difficult to imagine a society without the presence of money. There would be no incentive for those who work hard, currently people work hard so that they can earn more and support their families. Multinational enterprises function purely for money; these enterprises create so many jobs for people. Money is extremely critical when it comes to the functioning of both economy as well as the society. MNEs would simply stop functioning if money is not involved. The big takeovers would never happen if money is taken out of the equation. The King of Saudi Arabia has made billions of dollars just by taking over companies that have been underperforming. He is a major shareholder in Citibank. His sole incentive when it comes to investing is money. Money driven people would completely stop functioning if money is taken out of the equation. Earlier there was barter system which was really complicated but it enabled the society to function. People could swap important things with each other but these days the system has become really sophisticated. Each item has a price tag and if you have the money, you can buy it. Times have changed and so has the system. International finance and trade would completely be halted if money is removed from the equation. This will adversely affect each and everyone. There would be no jobs, this will in turn affect those who work for MNEs. Crime rate will increase when there are no jobs and the society will be impacted negatively, thus money is extremely critical when it comes to the functioning of the society as well as the economy. MNEs otherwise known as multinational enterprises and they are companies that have extended their markets or productions past their national boundaries to international boundaries. Most MNEs usually diversify in developing countries because there is a lot of untapped resources that have not been utilised for example human resource and other resources of production. MNEs have to develop several strategies if they have to be competitive in the global market. According to Dunning (2008), globalisation is a myth. Most people prefer to carry out business within their regional block because of the several advantages that come with globalisation such as limited restrictions to trade or limited tariffs. MNEs however accept the risks that come with globalisation and they expand their markets to other countries. Eiteman (1992) believes that Globalisation is not easy because not many host country enterprises will want competition from other firms especially firms with better products or services. MNEs therefore have to carry out a study of the host countries and evaluate the circumstances there before setting up businesses there. The MNEs have to consider factors such as political, social, economic and environmental factors so as to determine whether the market that they want to get into is effective and productive enough. The process of entering or penetrating an international market is a difficult one and MNEs have to be very careful. Entering a new market is like starting up without any sales force or any marketing infrastructure. MNEs therefore have to constantly develop strategies to compete in the global market and they have to keep constant check and keep changing them. MNEs have to ensure that they develop strategies that minimise the risk of the investment and that brings the most returns. MNEs that are emerging in developing countries have more work to do in order to ensure that they are competitive in the global market. This is because developing countries have less developed products that are hard to be accepted in the market. MNEs in these developing countries can use several strategies to compete in the market. One of the strategies is joint venture. Inkpen (2006) describes this as the process of two or more companies joining together assets and capital to form one large company. MNEs can carry out joint venture activities with large and reputable firms so that they can be competitive in the global market. The joint venture will help the MNEs to acquire new technology, gain entry to foreign markets, access distribution channels and conform to government regulations of many countries. Another strategy is licensing. This permits the MNEs to use the property of the licensor which in this case is a reputable firm in the economy or in the global market. Hitchner (2011) explains that the property licensed to the MNES is usually intangible such as patents or trademarks. Exporting is another strategy and this is the traditional way of being competitive in the global market. T helps the MNEs to reach the global markets and it has no investment in the foreign markets. Another strategy is foreign direct investment where the MNEs directly invest in assets in target country markets. There are however risks faced by MNEs in the global markets. One of the risks is government regulations. Most governments have regulations on trade and some might not allow the kind of products and services offered by enterprises. Another risk is rejection of the enterprise or the products offered by the enterprise. The locals may reject the services and products offered by the MNEs and they may suffer loses. Another risk is trade barriers. Most countries have barriers to trade such as high tariffs for multinationals and this may hinder business development There is usually a very big linkage between costs and availability of capital. Cost is a very critical issue for any company or for any firm or for any business person. Every firm usually tries to minimise its costs especially production and operating costs so that it can achieve maximum profits. Companies have to carry out cost analyses of all its operations so that it can reduce them. There is a direct link between costs and availability of capital in any organisation. Rugman (1996) defines cost as an amount that has to be paid so as to get something in return. According to Kibar(2008) cost is something of value, usually of monetary value that is given up in exchange of something else. Capital on the other hand is anything that is used towards production or for the production process. Capital can be monetary in value or it can be human resource or any other incentives towards production. The linkage between costs and availability of capital has different aspects. One of the aspects is the human resource capital availability. Human resource is the resource provided by the workers of the company or organisation. Most companies do not have the adequate human resources to carry out work business effectively. They continuously look for people with the qualifications to carry out their activities. The human capital availability is therefore usually a very pressing issue in many organisations. Kibar (2008) explains that by human capital people mean the knowledge, skills and expertise that comes with the labor force and is available within the firm or within a specific labor market. Cost comes in during remuneration and profitability. The company has to ensure that the costs incurred during production bring forth profits. The costs will also determine the availability of human capital. When the costs allocated towards remuneration are high, the company will pay out more salaries or larger salaries and this means that more people will be willing to work. Operation costs are another aspect of the relationship linkage between costs and availability of capital. When costs of operations are high then the companies will charge high costs as well for their products and services and hence the prices in the market will be high. This means that there will be little money remaining in the economy for capital as many people will direct their money towards other things like fulfilling their necessities. When there are high costs in the economy generally, everything will rise for example cost of products will rise and also the costs of borrowing. This is in fact the most serious effects of costs on availability of capital. Most companies get their capital from loans. If the borrowing costs are high then the amount of borrowing will reduce and so will the availability of capital,. Some companies also get their capital from issues of shares. If the costs of acquiring shares are high then most people will shy away from getting those shares and hence most companies will be left without capital or with little capital. Costs generally affect most things in the economy and especially the availability of capital. I can therefore conclude that there is a big linkage between costs and availability of capital and that cost is a very important element in the economy that has to be considered by all stakeholders in the economy. Market liquidity and segmentation usually has effects on the cost of capital. Landstrom (2009) defines market liquidity as the selling of an asset of the company without the price moving significantly or without incurring a great loss of value. Money is usually the most liquid asset and it can be used to perform several activities such as purchasing items. When the market is highly liquid, the costs of capital will be less because there is a lot of capital that is available. This therefore means that the more the liquid the market is, the more assets can be sold to generate money for use as capital hence the costs of capital will be reduced significantly. Segmentation also has a huge effect on the cost of capital. Bill (2009) describes segmentation as the division of the market into small sections that possess similar characteristics. Companies that carry out segmentation processes usually incur large costs of capital hence segmentation has a direct relationship with the cost of capital and it also affects it directly. Segmentation requires a lot of market research and analysis which costs a lot money and it also requires a lot of money in developing products that suit each segment and all these expenses and costs will go towards the costs of capital. Segmentation can therefore be said to have a direct effect on the costs of capital as a lot of capital will go towards the segmentation process. I can conclude that cost whether it is cost of capital or any other cost must be adequately considered by any serious company. References Dunning. J (2008) Multinational Enterprises And The Global Economy. New York: Edward Elgar Publishing Eiteman, A. (1992) Multinational business finance. California: University of California Pratt,S. (2010) Cost of Capital: Applications and Examples. Chicago: John Wiley and Sons Inkpen, A. (2006) trategy: Creating And Sustaining Advantage Across Borders. Oxford: Oxford University Press Hitchner, J. (2011) Financial Valuation, + Website: Applications and Models. Chicago: John Wiley and Sons Kibar, A (2008) Strategy, Structure, and Control of Multinational Enterprises in International Business Environments.Spain: GRIN Verlag publishing Landstrom, H. (2009) Handbook of Research on Venture Capital. New York: Edward Elgar Publishing Rugman, A.(1996) The Theory of Multinational Enterprises: The Selected Scientific Papers of Alan M. New York: Edward Elgar Publishing Read More