Multinational enterprises - Business Essay Example

All people are in need of something, there is no argument to that - Multinational enterprises introduction. That is the reason why the local market exists, to provide the goods and services that an individual, a household or a firm needs. These needs range from food, clothing, beverages, gadgets, shoes, and to almost anything that a person might think of. From these goods and services, it can be observed that there is a huge resemblance between the needs of a local economy to that of the foreign countries’. This is because needs are rather basic in nature that everybody ends up consuming them, regardless of race, location, tastes and preferences among others. With this, some powerful and able countries are engaging in multinational enterprises due to these similarities in wants and needs, thus, the world market is born. The world market is the world supply and demand of a good or a service that is bought and sold internationally (“World Market”).

As a result, multinational enterprises are born. A multinational enterprise, or simply MNE, is a venture that administers production establishments or delivers services to at least two countries. Large MNEs have capital resources that surpass those of most countries. Also, these multinational enterprises are powerful in terms of their foreign relations, and they are strong in their own local economies as well. MNE can also be defined as a company that engages in foreign direct investment (“Lecture 1: Multinational Enterprises”). Lastly, MNE is a firm that holds a significant part of the enterprise and operates in other countries.


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Debates have sprung on the issue of what the first MNE was. Some say that it is the Knights Templar, which was established in 1118, after it became a banking company in 1135. However, some argue that it is the British East India Company or the Dutch East India Company, which is regarded as the first proper multinational company.

As of today, these MNEs are more common than they were back then. Peter Drucker, business theorist, says that there were 7,258 known MNEs in 1969. At the dawn of the new millennium, there were at least 63,000 MNEs, spread out among the banking industry, telecommunication companies, energy, manufacturers, insurance firms, retailing, restaurant chains, consultancies, and other types of establishments. Most of these new MNEs are relatively small to medium size enterprises (Industry) in Europe, and in East Asia. The biggest MNEs though are still in the large economies. (PPI)

In relation to this, in order for a country to venture in multinational enterprising, it must have more than sufficient funds to invest in other countries. The FDI mentioned earlier is an asset that is given by a company from one country to another. These multinational enterprises that give capital to companies of foreign countries are said to have “controlling” interests in an enterprise in another country. However, this “control” does not necessarily mean a full take-over in the local management. Instead, MNEs only own the company’s shares, and does not necessarily concern itself on how the foreign country will manage their company; although, there are certain limitations to this autonomy. These bounds are set in order to ensure that the foreign country is taking good care of the MNE’s name and reputation. According to the International Monetary Fund (IMF), a direct control exists if the ownership share is at least 10%.

As described from the given definitions of MNE, it can be observed that there are plenty of countries involved. There is the home country of the multinational enterprise, and there are the foreign countries to which these MNEs could possibly invest. Due to these differences, an organization was formed in order to homogenize the goals of the parties, and to prevent further deviations, which can later cause problems in the local economies of the involved parties, and to the world economy as well. This organization that has a very immense responsibility is the OECD.

The OECD, or the Organization for Economic Cooperation and Development, was formed in order to provide certain policies that attempts to protect both the investor and the recipients of the investments, as well as to look after the international economy as a whole. OECD is not just concerned on the individual welfares of each economy, but also to the greater social welfare of the international economy. In addition, OECD promotes strategies designed to: (1) to attain the highest sustainable economic growth and employment possible, and a rising standard of living in its member countries, while maintaining financial stability, and thus to play a part to the improvement of the world economy; (2) to contribute to the economic expansion in member, as well as non-member, countries in the process of economic expansion; and (3) to contribute to the development of world trade on multiparty, fair basis in accordance with international obligations (OECD). At present the member countries of OECD, both founders and acquired, are Austria, Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States, Japan, Finland, Australia, New Zealand, Mexico, Czech Republic, Hungary, Poland, and Korea (OECD). It can be observed that these countries are amongst the richest and most influential ones. Moreover, these countries have the extra capital that they can use to invest in other countries. Furthermore, they are also the ones that have very powerful foreign relations. Due to these certain attributes, it is indeed upright for them to engage in multinational enterprising. Recall the requirements in engaging in MNEs and it can be seen that the said countries have met them.

Amongst the mentioned countries, only a few are leading the MNEs. These few countries are more often than not the ones that are categorized as large economies. As mentioned in the top 15 MNEs on UNCTAD or United Nations Conference on Trade and Development (“UNCTAD”)’s most recent list in 2003, five are based in the United States; nine MNEs in the United Kingdom, Germany, and France; and one MNE in Japan. 89 out of the top 100 MNEs are American, European, and Japanese firms; seven in Canada and Australia; one is the Hong Kong’s Hutchison Whampoa; the other is Singapore’s SingTel; also Mexico’s CEMEX; and finally Korea’s Samsung (“UNCTAD”). With these, there exists a high opportunity cost in preventing the fluctuation of each of the mentioned countries.

Aside from the investing company and the country to which it belongs, another major player in the multinational enterprising is the stakeholders. Stakeholders are defined as the individuals, groups, or organizations that are affected by and/or have an interest in a particular issue (“Stakeholders”). In this case, the issue that the stakeholders are concerned about is the costs and benefits of engaging in the multinational enterprises. Evidently, all stakeholders want to make sure that when they engage in MNEs, the benefits always outweigh the costs for it is the logical rationale for it. These benefits need not necessarily be in monetary terms or economic profit (Institute). Specifically, some of the major stakeholders in the MNE industry are the investing company, the foreign country to whom the company would invest, the residents of the foreign country that would serve as the consumers of the goods and services that the MNE will provide, and the firms that the MNE will compete against in the local industry.

Having defined what a multinational enterprise is, which countries are the leaders in the multinational enterprising industry, and who the stakeholders of the MNEs are, an impact assessment could already be done. An impact assessment is a study of the possible future effects of resource development on other resources and on social, economic and/or environmental conditions (“Impact Assessment”). This is a very critical and important procedure for it gives the internal and external evaluation of the multinational enterprise. Moreover, it identifies problems that may arise or that have risen upon the operation of the MNE. Also, an impact assessment is composed of possible solutions to the problem, and in turn, gives the advantages and disadvantages, termed as benefits and costs, of each solution that will eventually aid in unraveling the problem with the most efficient and effective solution.

MNE’s and their hosts: An ‘impact’ assessment

Perhaps the country that would best represent the overall situation of the multinational enterprises in the international market is the United States. This is because, as mentioned earlier, five of the top 15 MNEs are located in this country. In addition, the United States is one of the top three countries that constitute the bulk of all nations that are engaging in multinational enterprises. With this, no other country could best embody the costs and benefits of multinational enterprising other than the United States.

Point of View

The point of view of a Research Assistant from a prominent academe will be taken. This particular research assistant has research interest on multinational enterprises. This point of view was chosen because the major stakeholders are involved in the situation, and in turn may have biases when it comes to decision-making. Also, the research assistant will be an excellent choice for he has ample knowledge regarding the matter. Also, a research assistant has the capacity to see all the segments of the subject at hand being well-informed as he is.

Areas of Consideration

SWOT Analysis will be used to further understand the multinational enterprises. It would be helpful because it will provide information on all aspects of the MNEs; therefore an accurate cross-section regarding the matter will be at hand. SWOT Analysis is a method for assessing an establishment and its situation. The primary step in the planning stage that enables marketers to perceive the problems is the SWOT Analysis. It is a contraction for strengths, weaknesses, opportunities, and threats. Strengths and weaknesses are interior factors which are the enterprise’s ability. Opportunities and threats are external factors that are the external potentials instead. (Teacher)

Internal Situation

This will tackle the facts that are innate to the MNEs. It will provide the internal capabilities of the enterprise (“SWOT Analysis”).


These are the positive internal capabilities of the MNEs, particularly those from the United States since it is the country of choice. Since 1914, the U.S. already expanded overseas. This began even before the First World War. In 1970 on the other hand, American multinational enterprises already dominated the capitalist world economy. (Wilkins) These factors are just a few of the U.S.’s strengths because with this kind of reputation, it can easily attract FDI in their country.

FDI projects going into the USA in 2003 was 589, the second highest number after China (Consulting).


On the other hand, this section provides the negative internal capabilities of the U.S. MNEs. In 2004, there was a slight drop of FDI in the U.S. From 589 in 2003, it slightly dropped to 581 in 2004. Due to this slight drop in FDIs, USA became ranked third, with both China and India receives higher numbers of projects. The trend in 2005 is more alarming as the number of projects has dropped harshly, and should this trend continue for the remainder of the year, USA can expect to receive 225 fewer FDIs for the whole of 2005 than it did in 2004. (Consulting)

External Situation

The case facts that focus on the external possibilities are discussed in this section(“SWOT Analysis”).


These are the positive external possibilities of the U.S. MNEs. One of the opportunities of MNEs in the U.S. is the large foreign market. The United States would not have a hard time marketing their products because the world economy is fond of U.S. products. Even though there exist a number of MNEs from other countries, the United States still has the comparative advantage. This is due to their almost a century lead in the MNE market. Another opportunity would be the increase in population in other countries. This is because more consumers entail a greater demand for a certain good or service. Also, the increase in awareness of foreign countries towards the U.S. culture (i.e. more countries are more than willing to learn their language, culture, etc.) is also an opportunity.


On the other hand, the negative external possibilities will be discussed in this section. For instance, there are also certain threats to the MNEs in the United States. One of which is their constant campaign against terrorism. Though it has certain benefits, some of its potential market in the Middle East is turned off by its acts. Some people say that this is just a mere racial discrimination, and there is no need to threaten the security of these Middle Eastern countries. Another threat would be the racial discrimination that some Americans impose on other citizens other that the Middle Easterners. Some say that Americans have issues against some Asian nations as well. With this, greater potential markets are lost.

Statement of the Problem

How should the Multinational Enterprises (MNEs) in the United States be managed in such a way that it can prevent further decline in the Foreign Direct Investment (FDI)?


The objective of the study is to provide policy solutions or recommendations to provide measures of managing the MNEs in such a way that the FDI would not decline. Specifically, it aims to: (1) eliminate the problem with regards to the negative implications towards the actions of the U.S.; (2) assure that the terms of engagement between the home country and the host country are followed; (3) establish a good working relationship between the home and the host countries; (4) propose certain arrangements that will somehow balance the distribution of ownership/management; and (5) guarantee the exercise of authority of the persons holding the positions (i.e. manager from the home vs. the host country).

Alternative Courses of Action

Foreign Direct Investment (FDI)  is a company found in one country (the ‘home country’) that has possession of at least 10 percent of the shares of a company located in a foreign country (the ‘host country’) — this amount of shares is adequate to grant the home country firm substantial control privileges over the host country firm. FDIs are mostly wholly-owned or nearly wholly-owned assets. Other non-equity kinds of FDI include: delegating, management contracts, contracting, and licensing and product sharing. (“Foreign Direct Investment”)

With this, certain actions could be done in order to attract more FDI to a country, particularly the United States. Some of the solutions could be: (1) increase in the stock holdings of the home country; (2) profit sharing; and (3) avoidance of the negative outlook of other countries to the host country, which is the United States.

Increasing the stock holdings of the home country has certain advantages. One of which is the greater control of the home to the host country (“FDI”). With this, the home country is ensured that the host country will certainly abide to the terms and conditions that the home country will stipulate. Another advantage of this is that if the home country owns more, they are willing to invest more also. This is because they are ensured that they will make the most out of it, and they can enjoy the benefits that the host country will attain. Also, greater foreign ownership means a foreign interest has the power, direct or indirect, whether or not exercised, and whether or not exercisable through the ownership of a US company’s securities, by contractual arrangements or other means, to direct or decide matters affecting the management or operations of that company in a manner which may result in unauthorized access to classified information or may affect adversely the performance of classified contracts (“Foreign Ownership”). This greater percentage of foreign ownership is very much appealing to investors. Although there are quite plenty of benefits from this policy, there also exist some costs. One of these disadvantages is that the MNEs of the United States will always serve as the subordinate to the home country, which in turn will abide to the interest of the home country instead of theirs. As discussed in the earlier part of the coursework, there will always be differences in the countries’ interests. This double coincidence of wants (Ostroy and Starr) is very hard to achieve. Therefore, if the foreign country will have a greater share and thus will in turn have the greater say on decision-making, the U.S. might not work so hard enough because the majority of the benefits will be translated to the earnings of the home country instead of theirs. Another disadvantage is that if the home country has more control, it may not take into consideration the deviation of the United States to their country. For instance, there are certain matters that are handled differently due to cultural differences, among others. But if the host country will have little intervention, the workers of the host country might not be pleased.

The second alternative course of action, which is to exercise profit sharing, also has its benefits and costs. The benefit from of profit sharing is that it exemplifies that all of the parties, whether it is the home and the host country, are working collectively on the same group. The countries have the identical goals and are rewarded consistently to strengthen this shared service to customers and lack of competition with each other (Heathfield). On the other hand, the cost of this course of action is that individual countries cannot see and know the bearing of their own work and actions on the productivity of the whole multinational enterprise. Consequently, while countries benefit from receiving the profit sharing money, it gradually becomes more of an entitlement than a motivational factor. With profit sharing, countries receive the profit sharing money in spite of of their own performance or contribution.

Lastly, the third alternative course of action, which is to avoid the negative outlook of other countries to the United States, also has its costs and benefits. For instance, the home country will be more encouraged to invest in the United States because the host country would know that there will be a greater market for their products. This greater market will in turn translate to greater returns to investment, thus, a reversal to the liquidity trap (“Liquidity Trap”). In addition, a positive outlook to the United States not only means greater potential market or consumers, but also greater potential investors that will prevent the decline of FDIs. On the contrary, the cost of this alternative is that the Americans themselves would be the one who will not be pleased. This is because when the U.S. decided to sponsor the war against other countries, most of the citizens are in favor of it. If the country will decide to reverse their action against terrorism, the consumers in their own country will minimize, and the local economy would collapse.


The Research Assistant would decide that the best course of action to take is for the United States to increase the stock holdings of the home country. The rationale behind this is that the benefits would outweigh the costs. How? For example, the United States and the home country could negotiate on their terms of agreement. With this, the U.S. could include their interests on the agreement, so as the home country, therefore, achieving a compromise. Also, using this method, the social welfare would be achieved(“Social Welfare Function (SWF)”). Arriving at this social welfare means that not only the interests of the country are realized, but also that of the welfare of the society.

For this policy to be implemented, the first step would be for the United States to assess its own economy. They have to determine their own strengths, and find out what goods or services they have a comparative advantage to (Ehrenberg and Smith). Having assessed their own situation, the next step is to look for the country that has the capacity to finance the good or service that they are skilful at. Upon doing this, certain negotiations have to be made in order to come up with the final terms of agreement. This would be a long and tedious process for the home and host countries because they will always have a different goal — which is to have a greater ownership of the enterprise to them. But as mentioned earlier, the United States could give an ownership that is a bit higher to 10% which will make the investor happy. But before doing this move, the U.S. must ensure that their country would not be ruined in the sense that they will have very little returns. After arriving at a compromise, the two countries must ensure that the terms of agreement that they arrived at would always be followed so that both parties would not have a problem with the other, and this would also translate to lower fix and/or variable costs for the enterprise.


If the decision, which is to increase the foreign ownership, fails, then the United States could choose to implement a profit sharing instead. This choice is the second best alternative. This is because like the first course of action, this alternative entails a good appeal to investors and to the U.S. as well. Both parties will be encouraged to work hard because the profit is going to be shared amongst them.

For this to be implemented, the United States will have to follow the same procedures stated earlier, like the assessment of their own economy, and the scouting of foreign investors that is capable of financing the good or service that they are good at. The difference would be seen in the terms of agreement. As mentioned earlier, instead of compromising on the percentage of foreign ownership, their points will be basically about whom gets the larger share of profit, or would the profit sharing be a fixed amount or depends on the income that would be generated by the United States during a specified amount of time.


Consulting, OCO. “Attracting FDI to the Us: Challenges in a Global Economy.” 2005.

Ehrenberg and Smith. “Definition of Comparative Advantage.” 1996. 136.


“Foreign Direct Investment.”

“Foreign Ownership.”

Heathfield, Susan M. “Profit Sharing.”

“Impact Assessment.”

Industry, Enterprise and. “SME Definition.” 2005.

Institute, Ludwig von Mises. “Production: Entrepreneurship and Change.” 1982.

“Lecture 1: Multinational Enterprises.”

“Liquidity Trap.”

OECD. “The OECD Guidelines for Multinational Enterprises.” 2001. 67.

Ostroy and Starr. “The Double Coincidence of Wants.” 1990. 26.

PPI. “The World Has over 60,000 Multinational Companies.”

“Social Welfare Function (SWF).”


“SWOT Analysis.”

Teacher, Marketing. “SWOT Analysis: Lesson.” 2000.

“UNCTAD.” 1964.

Wilkins, Mira. “The Maturing of Multinational Enterprise: American Business Abroad from 1914 to 1970.” The Journal of Economic History 35.4 (1974): 3.

“World Market.”



A. Yearly Fund Inflows in the US

In recent years, the amount of investor money going into international equity funds has been increasing. The graph above shows the flow of new money into equity funds on a year by year basis. We can see that the percent of assets moving into international equity funds has risen from under 20% in 2003 to over 75% in 2006. Part of the reason for the increased flow of investor money into international funds is the strong performance of these funds relative to other asset styles over the past few years. In 2006, international funds returned 26% compared to 12% for domestic funds, according to Lipper.

Although international equity funds have been outperforming domestic U.S. equity funds recently, no one can be certain what direction the market will take in the future, as past trends are no guarantee of future results. It is important for investors to keep a long term focus, remain diversified, and not chase performance.


B. 1st Quarter Market Review

Capital markets finished the first quarter of 2007 with positive results. Bonds as measured by the Lehman Brothers Aggregate Bond Index rose 1.50% for the quarter and are up 6.59% for the trailing year. U.S. equities represented by the S&P 500 Index (larger capitalization stocks) and the Russell 3000 Index (broad stock market) also posted positive returns for both the quarter and 1-year periods. International equity markets represented by the MSCI EAFE Index made the largest gains over both periods, returning 4.15% for the quarter and 20.69% over the last year.


C. FDI Trends

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