The Current Global Financial Crisis (GPC) and its affect on Multinational Enterprises (mnes) Essay

            The Current Global Financial Crisis (GPC) and its affect on Multinational Enterprises (mnes)

        The global financial crisis that had remained in its unnoticeable dormancy surfaced with an upsurge and vengeance like anything ever seen before in the economic world. The crisis was there within the crust of the world economic order yet its significance and the unprecedented havoc it caused started in the mid 2007 and went on further through the whole year of 2008. It is still being speculated widely among the economists that the world recovery is still far off and the affects of the turmoil will take time to subside.

Background

The current Global Financial Crisis (GPC) had been there for quite some time and it started to reveal its ugly side starting with the sub prime crisis in the US. Indeed, the turmoil was the product of global credit boom sponsoring mortgages, real estates and over capacitating stock market which had no fundamentals to back up (Agarwal and Agarwal, 2009).  As the case in US financial institution including banks were always at their borrowing and lending spree and with the growth of the housing sector and the steady increase in the price of property it was quite appropriate for these financial institutions to lend more money to the needy. The conditions for lending was quite liberal for no doubt the cost of the properties were spiraling skyward and the institutions though that they would be able to sell off the mortgages if any bad loan was spotted and thus be able to recover their loan quite easily. Banks however also realized that the loans are actually tied for several years and in some cases a decade or more. Therefore, it was quite reasonable then for the banks to capitalize on their loans if these were turned into securities. The buyers for these securities came from almost anywhere as they knew that by purchasing these securities they would be eligible for regular payments from the mortgages. It sure was easy money. Securitization went off like nothing else before and banks found they were full of cash and started to lend even more even to most risky persons. More such securitization was made and more money flowed into the banks. With a lot of money at their disposal the banks started to give loans to the poor and that meant the sub prime and the most risky loan. The poor only had to self certify their property’s worth and the bank handed over the loans readily. Some banks which didn’t have much money of their own borrowed heavily from other banks and they too sold off their loans as security. This meant that there was enough liquidity in the system and the economy looked indeed robust and that meant there was no stopping of such a legitimate act. To compound the problem was the entry of the US State sponsored institutions like the Fannie Mae and Freddie Mac which gave fillip to the bankers and other financial institutions to lend more to the sub prime. On their part rather than lending directly to the poor the institutions supported yet another prolific use of funds by banks and financial institutions. The going was good so long as the real estate and housing properties showed an increase. In addition to food and clothing, housing is one of the key commodities that is produced, consumed and exchanged in the capitalist market like the US where all things are known to have a use and exchange value (Mendenhall, 2010). But things went bust when the real estate and housing sector showed sharp decline in value and the bank stopped their lending and confidence dropped everywhere among the people. Securitization was also one way of managing risks and the banks quickly tried to save their capital from vanishing. In the meantime, the hedge funds and derivative market instruments like the financial futures, credit default swaps that had remained low for a long period came out in full swing as yet another forms of risk reduction. The financial sector flourished with the futures and options being priced with the help of Black-Scholes model. A whole market in derivative was invented and people made more money and buying and selling of risks in the open market which lead to greed and gambling without watching for the market fundamentals. Although the derivatives market didn’t cause the crisis yet it accelerated the doom with relative ease. According to the author Frankel the severity of the current crisis which in many ways resembled the emerging market crisis of the 1990s has raised certain serious as to whether modern liberalized financial markets are more of a curse than a blessing (2009).

Current Global Financial Crisis and its Influence on MNEs

        Multinational Enterprises are on the whole facing innumerous problems resulting out of the global economic downturn. Due to liquidity crunch most of the organizations have resorted to cutting down their expenses significantly. These are in the forms of discarding overseas expansions, shutting down of operations both at home and abroad and also downsizing of workforce. This has resulted in a negative chain reaction to set in where the people spend even less for they were unemployed and less spending meant even lesser sales of products and services and less tax revenue and less government spending. Further, this has lead to uncertainty and confusion about the future and has lead to social unrest in many parts of the world which again resulted in several viable multinational companies from engaging in newer investments in these areas. This has brought poverty and changes in government and has lead to social instability and poor health of the society in general.

          However, when one perceives the backlash of the economic crisis which has its roots in the US and the West, the emerging economies are quite well insulated and thereby there is scope either way for the MNEs to invest a sizeable portion of their money in these countries and these economies partially cushioning the after affects of the global economic fiasco. One of the chief reasons for MNEs in doing so is to spread the risk of the global turmoil and the best way is to invest in economies relatively safe and underdeveloped. Again, the emerging economies by the virtue of their being a newly opened economy like that of India and China has not experienced the negative affects of the American and Western financial instruments and the likelihood of the damage percolating into their almost controlled financial system was rather difficult. Although there has been a ripple of effects even in these economies which showed lesser growth forecasts these were by and large unaffected by the crisis and in the long term would show continued all round performance and should act as the future models of growth. It has been seen by the information and data provided by the United Nations Conference on Trade and Development (UNCTAD) that the Indian economy which ranked third in global foreign investments for the year 2010, has attracted FDI flow of US $1.74 billion. This was a net increase of 60% over the last year quite a remarkable achievement considering the fact that the developed nations are still reeling after the economic chaos. The Japan Bank of International Cooperation stated that the first China and then second India ranked as the most promising investment area for their investors and so also that of the world. In fact as per China’s commerce ministry China attracted US $8.13 billion in FDI flows in the year 2010 which is an increase of 7.8% from January 2009.

       From the above we can perceive that MNEs around the world have found a nice haven to weather off the shock waves and to pursue their growth strategies into the future by investing in these countries. These are the influences that have generated the positive side of response yet there are also the negative aspects of such foreign direct investment. For one the MNEs are usually seen by the governments and the public as a curse due to the nature of operations which has lead to the economic crisis plaguing the US and the West. They are regarded in general as the root cause of the financial tragedy and in order to save their neck and generate more such quick money without the need for much of rules and ethics they have begun to haunt the developing nations. This argument may sound rather naïve, but on second thoughts with many MNEs exhibiting such attitudes in other countries shows that the reason for their being extremely opportunistic still remains. The basis of this argument may how found their way to the domestic companies which have reason to see them as a threat with their way of operation and huge capital and technology. Their argument found support in some multinationals which rather than carry on their business with certain social responsibilities have made matters worse by their reckless acts of profiteering.

       One such case is that of the Coco Cola Company in India which made use of the valuable ground water that the villagers living around its vicinity were starved of drinking water. This obviously has political repercussions and in many instances people vent their feelings through protests and violent blockades. Another case is the case with large retail giants like the Wall Mart opening their stores in countries like India and China whereby a large number of domestic retailers and wholesalers think they would have to down their shutters. These cases may seem trivial to many yet they no doubt carry much of the negative aspects of MNEs operating away from its own home soil. The biggest problem that MNEs face in such instance is one of political with ruining their very chance of making it big in these countries. In other words, there is always a threat of social upheaval and changes in government due to these very reasons. On the other hand, if the MNEs conduct their business taking into consideration their own social responsibilities they have better chance to survive and enhance their goodwill in the community. In most instances the large MNEs are seen as a source of technological assets, huge flow of capital and a good bet for fund starved or closed domestic units. Besides, there is a general perception that MNEs as foreign direct investment is better than portfolio investors as they have a big hand in the financial crisis. The MNEs on their side too should make necessary changes in the internalization procedures while operating overseas as this would only then lead to proper assimilation of the workforce belonging to different cultures. This is one of the foremost requirements which not only makes them acceptable to the government and the society, but allows them to grow without much fear of reprisals.

Literature Review

        Although the operational modes of MNEs may vary and needn’t be confined to a particular region or country of the world yet excess and greed which are the root cause of the financial crisis may even pour out in one way or the other into the domestic market as well if proper controls are not implemented. These controls ought to be undertaken both by the respective countries and the MNEs too. The literature from different academics and scholars have suggested the need for a comprehensive view of the operations carried out by MNEs and may be the sole reason for their existence and profitable future. This is mainly political risk which the companies would have to avoid if they are to continue through the road to prosperity. According to the author Gao Yonggiang, the prescription for MNEs is to treat such political risks which may include both avoiding and retreating from a host country to insurance agents on the basis of a risk assessment (2009). Again, a firm may try to mitigate risks by implementing innovation strategy and proper training of its manpower. Once the firm has decided on an innovation strategy, it then assimilates all enabling inputs with the appropriate mix of qualified workforce, capital goods investments and training of manpower (Nicholson, 2009). This would ensure its success in the long run. It is seen that trade is not the cause of the crisis and that good policies could become part of the solution by allowing unused resources to be exported (Pascal, 2009). This could be in any form and both the developed nations and the emerging economies benefit out of it. Besides, it is seen that huge job losses and deflation risks have raised political pressures around the world to implement strong stimulus measures to mitigate their affects on firms and workers (Petkovski, 2009). In fact, this augurs well for those MNEs who are originating in the emerging markets where stimulus package can partly revive the economies making their exports more attractive. Traditional MNEs are losing their dominance in technology and design and this means the emerging economy’s MNEs is catching up (Van, 2009). If the stimulus package is not dealt out then a lot of misery would result. In fact the financial and monetary pressures of the US and EU will pave way for more inflation, more currency devaluation and more unemployment and lower prices for export commodities of the developing and poor countries (Prabhakar, 2009). Thus, the stimulus package to a large extent is a necessity for the process to sustain global capitalism. If global capitalism is to be made more democratically inclusive and economically sustainable, a more holistic approach to development is needed and this should include social, moral and environmental dimensions and these should be regarded as economic (Dunning, 2003). The fact has been echoed by Gokay who states that the recent crisis is an expression of the structural changes which are deeply rooted in contradictions and has emerged in the global system in the last 30 years (2009). Hence, to a large extent the MNEs operating in a host country especially in an emerging economy should during the period of vulnerability have a good risk management in place. This not only makes them stronger to weather any adversities, but affectively checks them from uncontrolled profiteering, unethical practices and abusive use of power. For organizations experiencing reductions in resources due to financial strain and thus creating vulnerability risk management practices are becoming more critical in order to ensure that no catastrophes occur (Pfinisgraff, 2009).

Methodology

The proposed methodology for further researching the topic is both qualitative and quantitative data. For the qualitative research various academic journals, books by scholars and economists could be studied and even from different websites. The quantitative data on the other hand can be had from the questionnaires prepared for the purpose where the participants would be asked to tick the answers against those questions already prepared by the researcher. There is no doubt that the research is quite lacking in many ways due to paucity of information in this particular area of study. Although it is an area which has to be given due importance like all other the existing data is quite insufficient to bring justice to such a well defined area. However, for all future researches in this field there will be need to prove the availability of proper information for which an extensive quantitative data from a host of MNEs which includes top level managers, CEOs, Government officials and other high ranking officials of the community.

                                             Reference List

Agarwal J D and Agarwal Aman (2009). Global Financial Turmoil, India and the

          World Economy. Global dis-equilibrium & Recession. Crossroads Foreign

           Policy.

Dunning H. John (2003). Making Globalization Good. The Moral Challenges of Global

          Capitalism. Towards a New Paradigm of Development. 4, 76. Oxford, England.

           Oxford University Press.

Frankel A. Jeffrey (2009). The Global Financial Crisis: A selective review of recent

           Research in the International finance and Macroeconomic Program. Re-examining

           Financial Liberalization. NBER Reporter.

Gokay Bulent (2009). The 2008 World Economic Crisis: Global Shifts and Fault Lines.

           Systemic Crisis. [Online]. (Updated 15 Feb, 2009). Available at:

           www.globalresearch.ca/index.php?context=va&aid=12283.

Gao Yonggiang (2009). Managing Political Risk in Cross-National Investment: A

           Stakeholder View. Literature Review. Singapore Management Review.

Pascal Larry (2009). Trade the World Organization and the global Economic Crisis.

            Avenues for Possible Solutions. Crossroads Foreign Policy Journal.

Mendenhall Ruby (2010). The Political economy of Black Housing: From the Housing

            Crisis of the great migrations to the sub prime mortgage crisis. Political Economy.

            The Black Scholar.

Nicholson Peter (2009). Innovation and Business Strategy: Why Canada Falls Short.

          The Central Role of Business Strategy. International Productivity Monitor.

Pfinisgraff Marty (2009). Bolstering Your Risk Defense. The Way Forward. Risk

          Management.

Petkovski Mikhail (2009). The Nature of the Current Crisis and How to Deal with

         It. The Economic Policy Response. Crossroads Foreign Policy Journal.

Prabhakar A C (2009). The First Global Economic Crisis in the 21st Century.  A

         Practical Solution of the Current Ills is Possible. Political Economy Journal

         Of India.

Van Agtmael Antoine (2009). The Emerging Markets Century Revisited. Rise of

         The Emerging Multinational. Indian Journal of Industrial Relations.