Multinational business is becoming so important and dominating business in environment which necessitates the business students and business men to have good knowledge of the scope and trust of multinational business.
During the Post-World II era, advances in communications and transportation system brought people every where close together. In this shrinking world, it became easier to interact with others through trade, regardless of geographical origin, location or nationality. The political system that emerged from World War II also contributed to the establishment of trade relations between nations.
Today, the world economy is more integrated than even and nations are dependent on one another for many valuable and scarce resources. Just as the United States is dependent on Saudi Arabia and Nigeria for part of its oil, the Saudis are dependent on the us for computers, aircraft and military hardware, This growing interdependent necessitates the development of sound international business relations which in turn, will enhance the prospects for future international cooperation and understanding.
The magnitude of the impact of international firms on the us economy is not generally appreciated. It should be noted that the total US exports have passed $100 billion per year and that total foreign direct investment by U.S companies has also passed the $100 billion-mark. Also a large number of industries have a very significant percentage of their operations overseas.
Many countries all over the world, especially developing countries, have come to face the reality that the prospect for economic growth development is bleak for those who pursue isolationist policies. This is more so given the impact of technology in turning the world into a global village. But more germane to this is the impact being felt in a few hitherto developing countries of the Asian and pacific rim, whose economies grown by heaps and bounds because of the great influence of the injection of capital from abroad.
In these countries, which the entire world has come to know mainly as the Asian tigers, deliberate conscious efforts had been made by way of policy frame work to create the environments of economics, politics social and technology that tend to attract foreign investments be they direct or portfolio related. Today, it would most probably be safe to describe the market of Hong Kong, South Korea, Singapore, Taiwan, Malaysia and even Thailand having emerged, for they have remained at the very height of what is now known as the emerging markets of our world.
We have witnessed in recent times a significant increase in the amount of global capital flows. According to available statistics, recent cross-border investments hit a record of $1.2 billion in 1993. Concern with trend in cross-boarder investment has become important because of the role which foreign capital can play in promoting and sustaining development efforts, as experience has shown that a positive relationship exists between foreign capital inflow and increase in investment and growth in a variety of countries especially the developing ones. It is equally important to state that recognising the potency of foreign investment at transforming local economy, it is virtually impossible for any country to isolate itself from the impact of International developments in an integrated world economy. Little wonder then for the developing countries driving to attract foreign investors. The questions that need to be answered at this juncture are what is foreign investment and/or what is international business.
It is very important and should therefore be clarified at the outset that international business is not confined to doing business within foreign countries. In so far as the number of business people is concerned, it is only a small portion of the whole. International business includes all aspects of exporting and importing goods and services in addition to the operations of overseas offices. Manufacturing and processing plants, mining operations, and so on.
In view of the above explanation, a foreign investment can be defined simply as the purchase made by the residents of a particular country in another country of an asset in that country. It can also be looked at as the deposit of money by the residents of a country with a financial institution in the other country with an intention, in any of the two oases, to secure an income in the for a of interest, rent or dividend and possibly a capital gain on disposal, it can also be referred to as a cross border acquisition of asset, which can be physical in the form of a factory, building, machineries, etc. It could also be security, such as shares, stocks, bonds and debentures.
It is necessary to state however, that the focus of International financial Management has been on the Multinational Corporations (MNCs), since they are the dominant in international business. One might then ask, what is MNC? Some definition of a Multinational Corporation require that a minimum percentage (often thirty percent or more) at a firm’s business activities to be carried on outside its national borders. For the purpose of this text however, a firm doing business across its national borders is considered a multinational enterprise. There are several forms that Multinational corporations can take, prominent among them are Exporter, Licensing agreement, Joint Venture and fully owned foreign subsidiary.
International business operators would be able to perform better if they are familiar with the economy, politics, or culture of one or more foreign countries or if they have understanding of international politics,economics, finance or transportation. This includes wide variety of people who work in various capacities in different types of firms, yet never leave Nigeria. Their business is affected by competition from imports or utilises imported parts or services, they correspond with foreign firms, they meet and deal with visiting foreign business men or government officials; their work entails an understanding of the foreign sales or foreign operations of their company; they must make decisions that at fact, indirectly, the foreign sales or operations of their company; they must fully understand the environment in which their foreign operations are located in order to communicate, in the complete sense of the term, with the company’s overseas personnel.
There is an emphatic need for business people to have some knowledge of international business. Obviously, any firm that derives a sizable portion of its earnings from overseas operations must have among its managers people who are individuals is not restricted to those firms alone, because “every firm, whether located within the national borders or not, operates in an international environment. International political economic and social factors play a growing role in the affairs of American business, and it is only fair to restate that no major area of American business activity today is substantially unaffected by events and conditions occurring outside the United States.
Evolution of International Business
International Business had been in existence since time immemorial even right before the time of Christ, when merchants used to send their agents abroad to sell their goods. Among these were British Bast India company, a trading firm chartered in 1600 and a number of American colonial traders in the 1700s which established branches abroad. Some of the American foreign direct investment then, were the English plants established before the Civil War began. These plants were set up by Colt Fire Arms and Ford (Vulcanised rubber) but they failed after a few years of operations.
Singer Saving Machine was the first American firm that had a successful venture into foreign production by building a Scotch factory in 1868, Singer had become a world wide organisation with an outstanding foreign sales Organisation and several overseas manufacturing plants. Other firms soon followed, and by 19 4 at least 37 American companies had production facilities in two or more overseas locations. Later, many other national joined in the establishment of foreign venture. For example, in Europe the Unit ever (Dutch-English), Nestle (Swiss), Philips (Dutch) and Imperial Chemical (English), in various foreign countries of which Nigerian inclusive.
Many Nigerian banks have branches in various foreign countries, even in the recent time, the Nigerian Liquified Gas company has started its operations in Nigeria, Ghana and making efforts to extend this to other nations in Africa.
Factors Contributing to the Increase and Popularity of International Business
There are so many reasons which accounted for the multinational firms to become the object of much discussion and investigation recently. These will be highlighted by comparing the two periods i.e. international business firm of early 1900s and the present day multinational enterprises.
In the recent time, there is a rapid growth in both the size and the number of U.S. and foreign multinational firms in the last two decades. From the calculation of the Organisation for Economic Cooperation and Development (OEGD), the value of foreign direct investment was about $650 billion, six times the $105 billion for 1967. In the same period, U.S. foreign direct investment rose from $59 billion to approximately $230 billion. The survey carried out by the European community approximately 10,000 multinationals are in existence worldwide, 4534 of these are based in the European community and 2,970 in the United States.
This expansion has resulted into the increase of subsidiaries of multinational in many developed and developing nations which has affected their industrial and economic life positively. This is in sharp contrast to the one that existed, when the dominant economic interests were in the hands of local citizens.
Proper Monitoring from the Home Company (Headquarters)
The multinational firms of today are giving close monitoring and more controls are exercised by the headquarters which were not for earlier international company. Even though the subsidiaries are scattered over the globe, management in the home office coordinates and integrates their activities. Such control had been made possible by fast air travel and by the ability to rapidly transmit and analyse large amounts of information by means of the telephone, telex and computers.
Unlike the earlier days, when communication system was too slow and the main mode of transportation was by ship. These used to defeat the actions of home office to closely coordinate foreign operations and the local subsidiaries had to be given considerable independence. In addition to the above reasons, many firms in one country were unable to market their products in another due to the presence of tariff and non tariff trade barriers.
These conditions are changing nowadays, due to the formation of regional marketing groups such as the European community (EEC), European Free Trade Association, Economic of West African States (ECOWAS) and the improvements of transportation facilities. All these have made inter country sales much more feasible and closer central control became both possible and necessary.
Hostility of the Host Nations
Many host nation governments in the earlier days saw the establishment of foreign owned subsidiaries as threat and believed that they could purse objectives in conflict with their own, which may weaken national sovereignty.
For example, if government economic policy is to introduce a tight monetary policy in order to restrict the amount of capital available for industrial expansion, they feared that foreign-owned subsidiaries might upset their plans by bringing capital from abroad. If they attempted to raise taxes to reduce purchasing power, home office of these subsidiaries might shift production elsewhere and increase the unemployment rate.
As at that time the multinational enterprise was a new concept and its operations were not fully understood. By the early 1970s various organisations, national and supernational, were studying this new kind of business organisation. The United Nations established a Commission on Transnational Corporations and an information and Research centre at UN headquarters where government officials were trained on issues relating to Multinational Enterprise activities.
Nowadays many governments see international business as means of attracting foreign investments and to earn foreign exchange to finance their foreign transactions.