Change is
the new constant.
Perhaps the
most significant changes are those concerning technological innovation,
political attitudes and economic policies. For example, transportation and
automation enabled reliable long-distance trade, the global depression in 1929
propelled a move to inward-looking polices by many governments, and the
lowering of tariff barriers and the increase in international trade after the
end of World War II (Brooks, Weatherston & Wilkinson, 2010). Such changes have enabled
globalization to flourish; thus opening up the possibility of a more manageable
world where distance is no longer a concern in business (Brooks, Weatherston
& Wilkinson, 2010).
The new
international business environment is causing the path to market expansion to
change. Of significance is the enablement of Foreign Direct Investment (FDI). Most
interesting effects are seen in developing countries, who are now becoming
investors! In 2011, developing and emerging countries invested $457 billion
abroad; equivalent of roughly one-third outward FDI of advanced economies!
(Stiftung, 2013) Interestingly, cross-border investments were drivers of global
economic integration long before globalization was synonymous with
international division of labor, however the speed of the global division of
labor has accelerated at a rapid pace; "the global map of cross border
investment flows has changed" (Stiftung, 2013).
Perceptions
have changed as well. In the 1960's, the prevailing explanation of
international capital movement relied on a neoclassical trade and financial
theory of portfolio flows, capital was assumed to be transacted between the
buyer and seller; offering no role for the MNE (Dunning & Rugman, 1985).
There was no separate theory on foreign direct investments (FDI), until Stephen
Hymer's seminal dissertation (Dunning & Rugman, 1985). Hymer's approach
focused on the MNE as the institution for international production as opposed
to international trade. Such an approach extended territorial horizons abroad;
thus opening the door for the acceptance of the concept of FDI (Dunning & Rugman,
1985). Take a look at appendix 1 to see
how the promotion of FDI has skyrocketed from 1992-2008.
But the
changes in the direction of investment flows and new players pose much risk. Lee
suggests that FDI does not always return the profits imagined and often (especially
when dealing with developing nations) profits will be achieved only on a
long-term horizon (Lee, 2013). Other disadvantages include the overestimation
of profits and poor investment decisions (Lee, 2013). Research also suggests
that "long term growth associated with FDI is seen primarily within
countries where human capital, financial markets and infrastructure show
comparatively high levels of development (Stiftung, 2013).
Swift
changes are causing MNE's to consistently seek opportunities to gain market
share in the new global playground and in the case of technology regarding the
Monopolistic Advantage Theory, there is
a major benefit of control established by FDI.
This is due, among many elements, to oligopolistic industries possessing
technological, marketing, finance and other advantages over indigenous firms (Ball
et al., 2013, p. 83). “Such investment brings with it not only resources, but
technology, access to markets, and (hopefully) valuable training, an
improvement in human capital (Stiftung, 2013)." One example is the Japanese
electronic manufacturing firms entry into the United States during the period
1976–1989. Japan had a strong
competitive advantage over local firms to reduce the hazard of failure (Chang,
1995).
The biggest
risks are those fueled by our perceptions; interestingly perceptions are all
over the place when it comes to FDI! In the 1970's FDI was seen as a monster
and 2 decades later as the savior, only to return back to hostility with globalization;
critics blamed "all encroaching multinationals for crowding out local
business and undermining government autonomy (Stiftung, 2013)." Perhaps it
is also perception that is the driving force for the rising levels of
protectionism. Maybe it is as simple as focusing on understanding each nations
position, embracing change of perspective from our own to putting ourselves in
the other persons shoes, both on a cultural level as well as a business needs
level when it comes to FDI? Perhaps creating necessary conditions and
perceptions where countries see business efforts in a positive win-win light
(team effort) as opposed to feeling under attack, would help to facilitate
direct investment flows. What are your thoughts?
How would you accomplish such a feat? Is it at all possible, in a society
driven by so many stigmas? Maybe we just
need to "market the idea of FDI better-what approach would you take? Are
previous successes and failures of FDI attempts even a valid reference point in
a global marketplace where change is the new constant?
Looking forward to your input.
-Joanna
Pawlowska
References:
Ball, D.A.,
Geringer, J.M., McNett, J. M. & Minor, M.S. (2010). International Business:
The Challenge of Global Competition. New York: McGraw-Hill.
Brooks, I.,
Weatherston, J., & Wilkinson, G. (2010). The international business
environment: challenges and changes. Pearson Education Limited.
Chang, S. J.
(1995). International expansion strategy of Japanese firms: Capability building
through sequential entry. Academy of Management journal, 38(2), 383-407.
Dunning, J.
H., & Rugman, A. M. (1985). The influence of Hymer's dissertation on the
theory of foreign direct investment. The American Economic Review, 75(2),
228-232.
Lee, J. W.
(2013). Week 1 Compiled Lecture Notes [PDF document]. Retrieved from
https://onlinecampus.bu.edu/bbcswebdav/pid-1677288-dt-content-rid-5117630_1/courses/13fallmetad655_ol/Week01/metad655_W1.html
Stiftung, B.
(2013). Shaping globalization: New trends in foreign direct investment. Germany:
Bertelsmann Foundation.
