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Economics of Multinational Enterprise - Assignment Example

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This paper will begin with the statement that in efforts to expand their operations and attain a sustainable profit, multinationals (MNEs) are faced with various risk factors, for example, stiff competition, product failure in new market and obstacles during registration among others…
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Economics of Multinational Enterprise
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? 10th December Economics of multinational enterprise Question In efforts to expand their operations and attain a sustainable profits, multinationals (MNEs) are faced with various risk factors for example stiff competition, product failure in new market and obstacles during registration among others. One of biggest risk is the potential volatility of exchange rates. This implies the unpredicted change on the exchange rates of the currencies between two or more countries. Due to the recent economic downturn that has resulted to inflation and hyperinflation in developed and developing countries, the operations of MNEs have significantly been affected (Steven 11). Thus there is need for the firms to emulate affective methods to alleviate the risk of volatility of exchange rates. One of the ways of addressing the risks is by use of operational hedging. This entails introducing a significant degree of flexible in the main operations of a firm. These include the supply chain, channels of distribution, financial positions and marketing activities (Aghion et al 35). The objective of this strategy is to create adaptable operations that can rapidly respond to any change on the currency movement. This ensures that the fluctuations that may affect the revenues and the costs are offset. Firms can increase their profits through hedging by adopting various strategies. First, they can source materials thus lowering the costs of transportation resulting to increased profits. Another imperative way that the MNEs can adopt is use of currency invoicing. This implies that the firm can choose a particular denomination that ensures the firms prices as well as those of the competitors are affected by the exchange rate in the same way. This implies that for any firm to retain a competitive position in the market and attain sustainable profits, it can price its products using a volatile currency as long as the competitors use the same price. According to Grassman’s Law, MNEs should use a vehicle currency by considering their stability, low transaction cost and liquidity. Based on the three aspects, the US dollar has been used as a vehicle currency for a long time by most of the Multinational Enterprises. Question 2 In their efforts to enter the emerging economies, majority of MNEs undergo challenges that are associated with legal process, legislative issues as well as technological factors. As a result the investment flows from the rich countries to the poor countries are adversely affected. However, by initiating strategic economic policies, the investment flows can have similar effects to those of the free trade. One of the strategies that the host countries should emulate is to ensure that the home currency does not depreciate. In this way, the MNE will purchase their assets just the same price as the firms participating in the free trade thus motivating the foreign companies to invest more in the host country. As host countries seek to benefit from the investment inflows brought about by the MNEs, they should ensure that double taxation is eliminated. In this way, the foreign companies will be motivated to invest in poor countries based on the low taxation that will leave them with more funds to invest in the poor or countries with emerging economies. Similarly, the MNEs investment flows can be made to accelerate by adopting well agreed bilateral investment treaties (BITs) (Blonigen and Head 57). Such treaties include making mutually agreed treaties on reducing the withholding taxes of the MNEs investing in the host countries. Based on their implication in creating employment in the poor countries, MNEs are essential in improving the economy of any country. Another way to enhance and accelerate MNEs investment flows is by providing subsidies to the investors. For example, the government should offer reduced prices especially to the companies that are using local raw materials. In this way, the foreign companies will make increased revenues that they will use for investment and saving purposes. Similarly, the government that is focused at benefiting from MNEs investment from rich countries should provide a subsidy in the form of technical assistance in order to improve the productivity of the firms. As a result such firms will expand their investment in poor countries resulting to more job opportunities and increase on the level of GDP. Question 3 One of the demerits of the less developed countries (LDCs) is that they lack adequate resources to assist in investment. In this way, the MNEs that are focused at investing in these countries have to incur high costs of exporting their material from their home countries to the host countries. Immediately after the WWII, the LDCs underwent extreme poverty based on the inadequate use of the resources due to the war. The political instability led to a slag in the trade and economic activities especially in the African region. Similarly, LDCs were characterized by poor leadership styles that hindered the introduction of foreign products in their countries. Even though the level of poverty was causing a lot of problems to their citizens, the leaders were not ready to support the MNEs who would increase their investments in the host country thus creating more job opportunities and reducing the level of poverty. As the result of realizing the impact of the low level of investment on their countries, some nations took an initiative to join the Beijing Consensus. Beijing Consensus was an economic model that advocated for market-friendly policies. The consensus led to the emergence of larger LDCs also referred to as Emerging Markets (EMs). Having been initiated by World Bank, US Treasury and IMF, the Beijing Consensus significantly improved the trade and economic aspects of the countries that joined thus becoming the developing countries. Question 4 FedEx Corporation originally referred to as FDX is a US based firm that was incorporated in 1997. With its headquarters based in Memphis Tennessee, the company acquired the Caliber System Incorporation in 1998. Following the acquiring of the company, FedEx expanded its brand portfolio to include logistics and technology solutions, ground services, provision of shipping services among others. In order to enhance its performance in the local and global market, FedEx organizes its activities into various operating units. These include FedEx Express, FedEx Ground, FedEx SmartPost and FedEx Office. The company changed its name into FedEx in 1980 following by the re-branding of all the firm subsidiaries. In this way, the company benefited from a strong brand image that made it to effectively deal with the stiff competition in the logistics industry. An example of the rebranding strategy was the combination of Caliber Technology and Caliber Logistics to form the FedEx Global Logistics. Other companies were acquired by FedEx in 2004 includes Kinko’s Inc and Parcel Direct. Through the leadership of David Rebholz, the former CEO, FedEx offered quality brands that have always met the expectations of the consumers. This has resulted to increased company revenue to approximately US$ 42 billion per year. David retired on May 2013 and Henry Maier took over as the CEO. One of the key aspects that have contributed to the success of FedEx is through strengthening its products and marketing strategies. Based on its acquisition strategies of the companies within its industry, the company has been able to use the avenues used by the acquired firms to market their products and services. Similarly, FedEx has undertaken a strong advertisement campaign that has resulted to effective positioning of its brands thus creating a strong positive product-consumer relationship. General Electric (GE) Company was formed in 1892 after the merger between Thomson-Houston Electric and Edison General Electric Company. In its effort to expand its capital bases and increase the shareholders returns, the company joined the Dow Jones Industrial Average. The company major services include computing services and power generation, oil, aviation, gas, healthcare, locomotives and electric motors among others. With its headquarters based in Fairfield in US, the General Electric Company just like the FedEx heavily relied on acquisition strategies with an objective of expanding its market as well as improving its financial position. Examples of the companies that GE acquired includes Radio Corporation of America, Kidder, Peabody & Company, Enron Wind, Universal Pictures, Smiths Aerospace and most recently the Lufkin Industries whish was acquired for $2.98 billion. Under the leadership of Jeffrey Immelt, the CEO, the company has been able to make sustainable profits and increased revenue. For example in 2012, the company attained total revenue of US$ 147.359 billion while the company net income stood at US$ 13.641 billion. One of the major factors that contributed to the success of General Electric is the use of skilled middle managers who acts as the linkage between the management and the employees. Despite the use of hierarchal system in its organizational structure, the company highly values its employees making them to feel part and parcel of the whole company leading to their sustainable productivity. Additionally, GE aims at creating a strong relationship with the community and the customers. This is evident by its extensive use of environmental conservation methods which have made the company to continue enjoying high sales and revenue. Works Cited Aghion et al. Exchange rate volatility and productivity growth: The role of financial development. Journal of Monetary Economics, Elsevier, vol. 56(4), pages 494-513. Blonigen, B and Head, K. Estimating the Knowledge-Capital Model of the Multinational Enterprise: Comment. American Economic Review, 93(3), June 2003, pp. 980-94. Steven, S. Economics: Principles in action. New Jersey: Pearson Prentice Hall, 2003. Print. Read More
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