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International Business Environment

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International business is described as the collectively commercial transactions, carried out in more than one country.  Usually, government companies involve in business transaction across the boundaries for political reasons and the private companies for profit reasons. International business involves all the activities, carried out by public and private sectors across the borders. The economic transaction resources include capital, people as well as skills, necessary for production of goods and services. Many companies, involving in international companies, are referred as the multinational corporations. These are the companies that carry out business worldwide and they have their companies, located in more than one region. The international business operation depends on the objectives of the company. The global pattern of foreign direct investment from 2000-2011 have changed because the business operations have been affected by physical, societal and the competitive environmental factors.

The average annual FDI inflows on FDI in Africa doubled and increased significantly from 2000 to 2003. The global FDI flows in African regions increased for about 6 per cent.  Among the developing nations, Africa’s FDI inflows from 2000 to 2003 increased, but it later reduced in 2004 to less than 9 % from 20% (UNCTAD 2008, p.109). From 2000 to 2003, FDI inflows accounted for one fifth per cent of the capital flow to African. In the developing nations, African continent has been lagging behind. However, the FDI is one of the most international dynamic resource flows for developing nations. The FDI is fundamental because of its intangible and tangible assets. This is because the firms deploying them are significant players of FDI flows in the global economy. The considerable evidence is that FDI affects growth and development, thus, complementing investments in the domestic market. Like many other developing countries, Africa requires substantial external resources inflows in order to eliminate the current economic crisis, which contributes to its increased poverty level.

The international investment crisis started in 2004 but the year 2008 marked the end of this crisis because of the growth cycle. According to Cantwell, Dunning and Lundan (2010, p. 468), the FDI reached a remarkable record of $ 1.8 trillion during the year 2007. This was because of the ongoing global economic and financial crisis. This crisis affected many multinational companies, especially the International World Banks. Therefore, the FDI flows declined more than twenty the year 2008, making many multinational corporations to experience losses. The table 1 below indicates the FDI inflows by group of economies from 200 to 2008. The FDI flow decrease was experienced in 2009 due to transactional corporation crisis consequences and this affected the investment expenditures. This unfolded in the year 2010, when the private and public companies operating business worldwide started to experience a bigger loss in business transactions (Bergstrand and Egger 2007, p. 290).

(Billions of dollars)

Regions

2000

2001

2002

2003

2004

2005

2006

2007

2009

Developed economies

Developing economies

Transition economies

1400

200

200

1200

200

200

800

300

200

600

400

150

1000

400

150

1200

300

400

1400

300

500

1600

500

600

1800

600

800

Source: UNCTAD, based on EDI database (www. Unctad.org/fdi statistics)

Additionally, the global decreases in FDI in 2008 to 2009 were initiated by two major factors, which affected the domestic and international investment. First, the firms were unable to invest due to reduction in financial resources accessibility both internally and externally. This led to corporate profit reductions because of the lower availability as well as higher financial cost of borrowing fund for carrying out transactions effectively. The financial and economic crisis made the International Monetary Funds to regulate financial accessibility in an attempt to curb this crisis (Antoncic, Cardon and Hirsch 2004, p.181).  Secondly, the economic prospects affected negatively the propensity to invest, especially in the developed nations. This is because many of the developed nations were hit by severe economic depression. In earlier 2009, many companies were forced to restrict their costs investment programs because of the two factors. This was done in order to enable the companies to be more flexible to any further decline in the business environment. The two factors impacted the FDI types such as the market, efficiency and resource seekers, though with varied magnitudes and locations.

The FDI impacted particularly the cross border mergers as well as the acquisitions. The impact was severe, especially in 2008, where there was sharp decline, compared to other years behind. This led to a kind of divestments and restructuring, rising wave in the business environment. Although the international Greenfield investments were less impacted in 2009, most of the projects were cancelled and some of them were postponed. Moreover, the FDI impacts were different because they depended on the regions and each sector. The developed countries were much more affected than the developing countries due to a decline in the 2008 FDI inflows. This was because of the sluggish market visions. Although, the flows into the developing nations in 2008 continued to increase, it was, however, much lower than the years before. In 2009, the FDI inflows declined in multinational sectors. This was because of the pull-back in efficiency as well as in FDI resource seeking, which aimed to export their products to advanced economies (Hajkova, Nicoletti, Vartia, and Yoo 2006, p. 110). The FDI market seeking intended at servicing domestic markers with development prospects but they receded.

Among the industries, the most significant FDI flows that have been affected up to the year 2011 were the financial service, intermediate and consumptions goods as well as the automotive industries. Other industries that have been affected by slowdown in the global economy include the aircraft, steel industries and the transport sector.  However, the crisis is still expanding to other activities, arraying from the primary to non-financial sectors. The short term current economic recession on worldwide FDI prospects have created the negative impacts on the economy.  The present crisis, which is a result of the exceptional magnitude, could lead to structural changes in the global economy. This is because some factors, favorable for FDI growth, are still working and some of them are associated with the crisis itself. Some driving forces will sooner or later trigger the new FDI flows. These include investment opportunities due to cheap prices of assets, large financial amounts. Industrial restructure and availability of financial resources in merging nations will trigger the FDI flows. Additionally, high expansion rate of new activities such as internalization of industries and environmental allied industries will too trigger the FDI flows (Buckley and Ghauri 2004, p. 87).

In 2008, the FDI inflows declined to more than 20 per cent in major economies, thus, contributing to economic slowdown, rigid credit conditions and economic profit reductions in multinational corporations. Many companies decided to lay off their workers, curtailed production and reduced their capital expenditures. However, all of these had implications on the FDI inflows. According to Sethi, Guisinger, Phelan and Berg (2003, p. 320), the UNCTAD and world FDI flows preliminarily estimated that by 2008, the FDI would decline by 21 per cent. This is because of the sharp step-back of other things that were anticipated during the quarter of the year. The table 2 below indicates the FDI growth prospects of 2009 t0 2011 compared with that of 2008. The recent IMF forecast on world economic outlook anticipated that the economic output in 2009 expanded by 2.2 per cent from November 2008 as compared to October projection of the same year, whereby the output was 1.5 per cent (Vygodina 2006, p. 220). The United Nations are more pessimistic on the global economic prospects. This is because they predicted that the FDI inflows would increase with a skimpy one per cent growth in the global economy.  

Table 2: Global FDI prospects (per cent of responses)

FDI growth prospects

(compared with 2008)

Increase

Remain the same

Decrease

2009

2010

2011

22

33

50

20

26

31

58

41

19

The present FDI economic crisis is different from that of the previous. For instance, when comparing the economic crisis of 2000 to 2004, it is different from that of 2007 to the present, which originated from the developing nations. This led to a negative impact on the FDI inflows as indicated in table 3 below. In contrast, the present economic crisis originated from the developed nations, thus, spreading to developing nations (Publishing, 2005). The crisis that hit the developed nations varies in severity degree among the nations. Thus, the crisis has varied consequences on the FDI inflows in geographical locations. The preliminary data revealed that the protracted and the deepening crisis of 2008 affected many financial institutions. Nevertheless, the liquidity crisis in the monetary banks and debt markets affected the FDI flows (UNCTAD 2008, p. 112).   This led to a decline in the inward flow, especially in countries such as Finland, Italy and Germany, compared to FDI inflows in 2006, which was somehow higher than in 2008. The FDI decline in the United States and United Kingdom led to severe crisis that contributed to limited financial investments.

Table 3: World FDI inflow prospects

Regions

2007

2008

2009

2010

2011

IMF: World

Advanced economies

Emerging economies

World Bank

Developing countries

United Nations

Developed economies

Transition economies

Developing economies

5

2.6

8.0

3.7

7.9

3.8

2.5

8.3

7.2

3.7

1.4

6.6

2.5

6.3

2.5

1.2

6.9

5.9

2.2

-0.3

5.1

0.9

4.5

1.0(baseline)

-0.5(baseline)

4.8(baseline)

4.6 (baseline)

-

-

3.0

0.3

6.1

-

-

-

-

-

-

2.0

0.2

5.5

-

-

-

-

Source: IMF, World Bank and United Nations

However, there are signs of change but this depends on the sequence of uncertain factors. These factors can lead to change of FDI flows including the economic and financial speed up to a recovery state, effective public policies. These policies will address the causes of the current crisis, thus, looking for solutions to overcome them. Moreover, many companies made plans to scale back the high perceived risk levels and uncertainties in order to reduce economic crisis. Companies in advanced economies are restraining in launching new projects, which aim at increasing the capacity for market oriented production. Other companies are committed to increase production capacity in developing nations. However, this will weaken the external demand in developed nations, thus, contributing to a decrease in commodities and prices for energy.

Heckscher-Ohlin Model

Moreover, due to decreased commodities, many companies have tried to employ models that are labor saving and capital using products that provides high income. Many products manufactured undergo product life-cycle because of its comparative advantage. The economic theory of product life-cycle was developed by Raymond Vernon due to failure of Heckscher-Ohlin model. The later model failed to explain the observed international trade pattern. According to Buckley and Ghauri (2004, p. 89), Heckscher-Ohlin model suggests that in product life cycle, products evolve from the place, in which they were invented. For instance, personal computers are some of the products in the United States that undergo product life cycle. These products are produced and consumed within the production area, thus, no export trade occurs. This model is seen as a comparative advantage because product production changes from innovation in developed nations to developing countries.

The OLI-Framework

Another model being employed is electric paradigm, which is an economic theory, which is also well-known as the OLI-framework. This model was invented by John Dunning and became an internalized model, which was commonly used in the international trade. The OLI model is based on the transaction cost theory. According to Sedoglavich, Hill and Field (2008, p. 56), the transaction cost requires that the transactions should be made within the organizations in case the internal costs are lower than the free market. John Dunning added that three factors such as ownership, location and internalization advantages are significant in this theory, thus, the theory was shortened as the OLI paradigm  (Sedoglavich, Hill and Field (2008, p. 89). However, Locational advantage is considered as the fundamental factor for multinational corporations, carrying out their transactions across the globe. The area, whereby an industry is located for transacting activities, is taken into consideration for market seekers. Industries that need to use their own competitive advantage prefer areas that favor presence of foreign location. Thus, firms may choose to expand or exploit their ownership advantage though engaging in FDI business. Therefore, the Locational advantage is considered essential in the FDI because industries located or constructed abroad can benefit from the capital intensiveness.

In addition, under the location advantage, companies are required to use foreign factors in connection with their native firm location advantage to enable them perform business successfully. Thus, the location advantage is the key for determining the location for a successful multinational corporation. The location advantage can be separated into three areas. One of them is the economic advantage, which calls for quantity and quality factors of production. The economic advantage takes into consideration the market size, transport costs and the scope, thus, advantageous in FDI. Another factor it considers is political advantage. This is whereby the firms, carrying out business in the international market, take into consideration the favorable climate for carrying out transactions efficiently. The companies, carrying out business internationally, consider the favorable government policies that will influence the inward FDI investment flows. Lastly, the social-cultural advantages, which include the language, cultural diversities and attitude towards foreigners, are taken into considerations, when choosing industrial location for transacting activities.

Porter’s Diamond Model

The last model, which is comparative advantage, is the Porter’s Diamond model, which is a framework pattern, used in industrialized nations. The model was developed by Michael Porter and it focuses on the competitive sources from the national context. The model is used in analyzing the ability of the industries if they can function in the international market.  Moreover, it analyses the ability of the national market to compete favorably in the international market. The model recognizes the demand and factor conditions, it also recognizes strategies, used in the firm, its structure and rivalry that a company should use in analyzing the viability of the country’s competitiveness in the international market. The model determines if the demand as well as the factors of production is required in a business environment. Some of the pillars of his model takes into considerations the strategies and tries to highlight the competitive advantage areas and weaknesses. Thus, it tries to access the suitability for particular condition necessary for successive foreign business performance (Brooks and Weatherston 2010, p. 89).

Factors Affecting the FDI

There are ranges of factors that can affect the FDI. One of the factors is cost and this affects the profits, especially when the production cost is high. It is quite clear that the FDI brings out costs as well as benefits. However, this must be evaluated well, especially when making decisions on the best policy approach to be used in transacting activities. For instance, in case the production cost of manufacturing commodities in an industry is high, an industry may encounter losses, when carrying out business activities across the borders. This is especially the transportation costs and other costs, required in machinery maintenance or high cost of hiring expatriate to operate technical machine in the companies. Most companies in Africa experience high cost of production because of increased cost for machinery maintenance and hiring external expatriates for operating technical machineries.

Another factor, affecting the FDI inflows, is the political risks. Poor political climate and unfavorable government policies affect the FDI inflows negatively. For instance, many developing nations are lagging behind in terms of economic activities. This is because of the unfavorable political conditions that scare the potential investors away. Many International Monetary Funds that provide financial aid to countries, carrying out business across the globe, are situated in developed nation. The few are in developing nations because of the poor political environment, especially the political instabilities, thus, affecting the FDI flows. This is because the foreign direct investors appreciate protectionism and providing adequate security to their investments.   Moreover, the ever political crisis, associated with clashes for political powers, has affected the FDI inflows (Davies and Kristjaansdoottir 2010, p. 51).  This is because the ever increasing clashes within the developing nations, especially Africa, have hindered the potential investors from locating many multinational corporations within the nation.

Cultural factors may affect the FDI inflows. The cultural factors may hinder better performance of foreign industries. An industry, participating in foreign market, should ensure that they understand the cultural beliefs of people in the foreign market. This is essential because it helps a company to carry out transactions effectively. However, lack of cultural understanding may hinder the performance of business, thus, contributing to poor output. Moreover, it is vital to understand the language of a particular culture, in which the business is located (McDonald, Tsagdis and Huang, 2006, 526). This is because language barrier is one of the greatest hindrances in better performance of the business across the globe.

Competitive factors are the major problem of better performance in the foreign market. Due to technological expansion, especially in communication and transportation sector, many companies are now competing favorably. Therefore, poor technological development may impact the FDI inflow. This is because innovative commodities of high quality will thrive in the market. Thus, the domestic market is working hard to produce innovative products, thus, creating competition with foreign market. This forces the foreign industries to reduce cost in order to earn more customers. Thus, the competition scares away the potential investor or makes them to withdraw from the market. This is because of the fear of making lower profits, thus, a hindrance to FDI inflows (Bora 2001, p. 220)

Lastly, governmental regulations affect the FDI policies. The government policies in developing countries as well as heavy taxes, imposed on foreign activities, transacted within the developing nations, put away the potential investors. Moreover, the government does not provide adequate incentives to the foreign investors, thus, hindering them in transacting business within the developing regions. Sanderson and Kentor (2008, p. 521) points out favorable government policies that attract more investors to a country, hence, contributing to increased FDI inflows. However, if these policies are not conducive, the investors would be forced to look for a better location, which is conducive. Moreover, imposing heavy duties on the foreign commodities and lack of incentive provision to the potential investors affects FDI negatively.

The federal government in the United States recently announced that some policies will be changed in order to enable the multinational firms to compete favorably in the foreign market. The social policies for host governments and their ability to attract foreign investment would be applied in the new institutional economies. The new set of data would be used to explore the direct as well as the indirect non-governmental organization’s roles in the business sector. Non-governmental organizations are non profit oriented and non voluntary organized groups that work within the local, national and the international levels. The US government declared to work with the non-governmental organizations in serving the interests of the societies. They focus on the advocacy, operational efforts on social, economic and political goals. This is done in order to ensure that the environment is protected, thus, making it conducive for attracting the potential foreign investors.

Conclusion

In conclusion, the global pattern of foreign direct investment from 2000-2011 have changed. This is because the business operations have been affected by physical, societal and the competitive environmental factors, thus, making the environment unfavorable for potential investors. This is because of the increased economic crisis that hit the developed nations and then spread to the developing nations, especially that of 2007. The FDI impacted particularly the cross border mergers as well as the acquisitions. There are ranges of factors that can affect the FDI such as cost factors, political risks, cultural and competitive factors. However, many international companies employed competitive models such as the Porter’s Diamond model, Heckscher-Ohlin model and OLI model. Lastly, the federal government of US changed some policies in order to enable foreign markets to compete favorably in the international market.

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