Question

Describe a multinational corporation and foreign direct investment (FDI).

Answer 1

Answer

A multinational corporation (MNC) or transnational corporation (TNC) is a big business house having head quarter in its own country and business operations in home country and beyond it. The overseas production and business operations by MNCs may start through greenfield investment, cross-border merger and acquisition (M&A) of companies, and joint venture production with the companies in the country where they enter.

The MNCs carry out their production abroad through vertical integration and horizontal integration. In vertical integration, the different stages of a production are done in different countries while in case of horizontal integration, the same operations of production are carried out in different countries. The entry of MNCs’ through greenfield investment raises the number of firms, creates new employment opportunities, and raises investment in the country where they enter. It brings a developmental effect in an economy if it encourages more domestic investment in the host country. The cross-border M&A is an easier way to enter a country compared to the greenfield mode of entry. It encourages inorganic growth, i.e expands the business through acquisition of companies.When the MNCs enter a country, they may seek the resource, market,efficiency, or strategic asset of that country. When the resource seeking, market seeking, efficiency seeking, and strategic asset seeking MNCs enter a country through M&A, they achieve their objectives faster and in easier way compared to the entry through greenfield investment, which takes more time and effort to initiate a project than the investment through M&A. In case of M&A, a firm merges with or acquires the share of an already existing firm. So adapting to a new culture and society is not a big issue for a firm when it enters a country through M&A. In case of greenfield investment, the firm needs time to get acquainted with people’s tastes and preferences, and the culture in a new country. The resource-seeking MNCs that seek skilled labor and other resources at cheaper rates, can achieve the resources in more comfortable way when they enter a country through M&A. When the strategic asset-seeking MNCs enter a country through M&A, they can easily strengthen their markets and spread their products through acquiring the brands of the acquired foreign firms and thus become more competitive. The market-seeking and efficiency-seeking MNC_S can establish their businesses efficiently and with less effort if they enter a country through M&A. These firms not only gain access to the resources of their partner firms, but they can also expand their businesses by sharing the already established markets of those firms.

Foreign Direct Investment (FDI) - The MNCs are important sources through which a country receives FDI. When a business entity like MNC, based in one country expands its business by creating new production facility through greenfield investment, or through merger and acquisition of the companies based in another country, the investment done by that business entity is called foreign direct investment (FDI). Besides the direct investment, when foreign companies or individuals purchase securities namely, stocks and bonds of companies situated in another country, the investment done by them is called foreign portfolio investment (FPI). The FDI can be inbound and outbound. When a country receives FDI, it is called inbound FDI and when a country invests in other country, it is called outbound FDI of that country. FDI brings new investment in the host country and by creating new investment, FDI not only augments the total investment, it also bridges the saving-investment gap in the host country. With the inflows of FDI, the host country is also benefited by global technological, managerial, and organisational skills that come through FDI.

Example : General Motors , Toyota , Hitachi , IBM

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