Question

What is a recent development in the evolution of multinational enterprises and how does that development affect globalization? Also, MNEs try to maximize profits. How could MNEs maximize profits and minimize profit volatility at the same time? 300 words minimum and in full and complete sentences.

Answer 1

POLICY IMPLICATIONS AND CONCLUSIONS

Globalisation has fundamentally changed economic realities. Thirty years ago, a

general approach towards understanding the bargaining relationship between countries and

MNEs made a good deal of sense. This, we believe, is no longer the case. One of the primary

effects of globalisation has been a reconfiguration of countries into three groups: the least

developed countries which have 'fallen-behind', the catching up developing countries, and the

developed or 'converged' countries. The process whereby this has happened is a complex one.

We have tried to outline some of the dynamics and what it has meant for the relationship

between MNEs and developing country governments, and particularly to those of the 'falling

behind' countries. We have explained how changes in L and O advantages, due to

globalisation, have influenced the nature and context of MNE-government relations, and why

a distinction can and should be made between these groups of countries.

Over the last two decades, the opportunity costs of FDI for both host country

governments and MNEs have significantly changed. From a MNE perspective, globalisation

has considerably influenced the nature and composition of the core competences of firms. In

particular, these are more mobile, knowledge-intensive and geographically dispersed than

they used to be. Moreover, MNEs are increasingly seeking to consolidate or advance their

global competitive positions, by rationalising their cross-border value-added activities. Inter

alia, this is shown by the continuing rise in intra-firm trade. This has been

helped, in no small measure, by the reduction in their cross-border transaction and

coordination costs which itself has been fostered by trade and investment liberalisation.

In pursuing these objectives, MNEs - and particularly those within the knowledge-

intensive sectors - are being forced to give more attention to the availability and quality of the

largely L-specific created assets of alternative investment sites. Indeed, choosing a 'right'

portfolio of locations for their value added activities is a competitive advantage in its own

right. Michael Porter has gone as far as to say that 'anything can be moved or sourced from a

distance is no longer a competitive advantage' and that 'the true advantages today are things

which are sticky, that is not easily moveable'. Moreover, it is important to

note that not all industries have become equally mobile or globalised. As Stopford (1997)

notes, while the optimum size of production may have risen in some industries, making global

integration desirable, in other cases, new technologies have reduced the minimum efficient

scale. This has meant that MNEs (particularly in industries where external economies

through spatial linkages are critical) are becoming more embedded in local and regional

milieus than was previously the case, and, in consequence, they have become less mobile.

From the perspective of a national government perspective, exogenous and

endogenous changes in the global economic and political environment have necessitated a

reappraisal of the benefits of openness. Indeed, over the last two decades, there has been an

ideological shift away from the traditional inward-looking import-substituting model adopted

by many developing countries, where the state was perceived to be the primary force behind

the creation, utilisation and dissemination of knowledge. At the same time,

although the change in policy orientation and the subsequent privatisation of state-owned enterprises has reduced the interventionist role of governments, their role as market facilitator

and provider of complementary created asset-based location-specific advantages has become

more critical.

Industrial development options for the least developed countries hinge increasingly on

leveraging foreign investment as a means of promoting technological upgrading. This requires

that countries should attract the right kind of FDI. Specifically, these countries need to shift

the emphasis of their inward FDI away from resource-seeking activities to market seeking and

other asset-exploiting activities. Breaking away from natural asset based activity and

encouraging MNEs to invest in higher value adding activities can only be achieved by

improving their country-specific L advantages. A certain level of immobile created assets, is

an essential catalyst to the attraction of mobile investment. Even more so is the presence of

domestic firms with the technological capabilities to absorb the spillovers pertaining from the

activities of these firms. Governments have - sometimes passively - resorted to attract

inbound investment in two major ways, neither of which has necessarily improved their L advantages.The first has been to step up, or offer a new range of fiscal and other incentives. But to simply offer incentives is no substitute for the development of created assets which may be beneficial to the domestic sector as well. Indeed, such incentives offered in isolation of other L advantages are not effective, although they may have an effect if they

persist over time. At the same time, there is a danger that, due to the increased competition to

attract MNEs, governments may give away more than the potential benefits that accrue from

the MNE activity. This is all the more so, since governments of developing

countries (or regions within these countries) are increasingly competing with less prosperous

regions in industrialised countries and with those of the former centrally planned economies,whose infrastructure tends to be far superior, and pockets much deeper than that of most developing countries. Given the costs of providing these incentives, and the profusion of locations offering them there is a danger, that, in an attempt to attract new ‘desirable’ investors, not only may net benefits to countries become negative, but the new investors may be treated preferentially relative to existing (and embedded) firms. The limited resources of developing countries means that this does not represent a desirable long-term option.A second passive option that countries have taken - often as a condition for debt relief

or rescheduling - have been the World Bank-administered structural adjustment programmes, which have tended to focus on the sudden and wholesale liberalisation of markets, and other macroeconomic cures. The success of these programmes has been mixed at best, as is now acknowledged by the chief economist of the World Bank, Joe Stiglitz. He has said that world bank policies have hitherto been too much emphasis on macroeconomic stabilisation at the expense of institution building. In a seminal paper, Rodríguez and Rodrik (1999) have

argued that open trade policies– such as lower tariff and non-tariff barriers – by themselves

are not a primary determinant of economic growth. They demonstrate that, until a certain

point, growth may actually be enhanced by barriers to trade, especially when countries are

technological laggards and have a comparative advantages in on-dynamic sectors.