«How Can We Account for the Rise and Growing Role of Multinational Enterprises from the Asia Pacific in the Global Economy» Essay Sample

How Can We Account for the Rise and Growing Role of Multinational Enterprises from the Asia Pacific in the Global Economy

Introduction

The impact of inward and outward foreign direct investment (FDI) on China, India, Taiwan and Singapore’s economic growth and prominence in the global economy has become a subject of academic debate. According to Buckley et al. (2010), the impact of the FDI is largely attributed to the internationalisation of multinational enterprises in the Asian economies. The growing role of MNEs for the Asia Pacific region corresponds to the adoption of innovative management and operational skills in the region, and strategic expansion beyond the national borders. Consistent with Collinson and Rugman (2007), there is a strong match between the management and performance of MNEs in Asian Pacific, North America, and Europe. Besides globalisation, the path to success of Asian Pacific MNEs is marked with internalisation theory as explained by Dunning’s OLI paradigm (Dunning & Lundan 2008).

The current research investigates the rise and growing role of MNEs from the Asia Pacific in the global economy. In the same context, it explores the commonality between Dragon Multinationals and other MNEs in the EU and North America. The increasing importance of the Asian MNEs is accounted through four key themes: globalisation processes and significance of Asia Pacific region; drivers of internalisation of the MNEs; strategies of the MNEs; and the impact of inward and outward FDI. The themes are discussed with the aid of various theories and resources. Despite the variation in viewpoints, a wide-ranging account of the rise and growing role of Asian pacific MNEs is developed.

Globalisation Processes and the Competiveness of the Asian Pacific Economies in terms of Foreign Direct Investment (FDI)

There are numerous interpretations of the phenomenon of globalisation; however, the term generally refers to a process propelled by economic forces. Some of the immediate causes of globalisation include international trade, reorganisation of production, and the integration of various financial markets. It follows that globalisation is not a uniform process across all markets. Therefore, multinational enterprises formulate strategies that influence their global presence and profitability. In line with the globalisation of production, the consumption of goods and services from internationalised firms has increased in Asia Pacific region. Thus, many researchers allocated attention to the globalisation of consumption  (Dunning 2006; Bruche 2013; Scheide 2003). Globalization and technological developments have shifted power to consumers and suppliers. Today, consumers are more informed and take part in product design. In response, Asia Pacific MNEs have invested in online sales platforms, as well as digitalized global supply chain chains. Additionally, the firms have increasingly invested in green logistics and reverse logistics. Following the aforementioned observations, Asian MNEs have more power, which is a subject to the fact that they enjoy a large market in India and China. Globalisation represents one of the most significant aspects of the present day international business. However, the shift towards bloc formation and regionalisation is increasingly evident. A review on regional integration depicts that while regionalism protects the firms, industries and countries against the worst effects of globalisation, it also unites firms and encourages FDI.

Unquestionably, globalisation is not only reorganising economic power at the world level, but also at firm, industry and national levels. As Asian firms transfer part of their domestic production processes to other economies, knowledge, capital, and technology gain importance as compared to land as factor of production and source of firm and national power. Therefore, the function of conservative Asian governments is redefined. Collinson and Rugman (2007) note that most Asian Pacific MNEs follow regional rather than global strategies. In other words, the rise and predominance of the MNEs can be attributed to their hybrid of global and local strategies (Baroto, Bin Abdullah & Lai Wan 2012; Wang & Lee 2007). The strategy distinguishes firm-specific advantages (FSAs) from country specific advantages (CSAs). Collinson and Rugman (2007) effectively use FSAs and CSAs to show that Asian Pacific MNEs are largely home-based. Consequently, the MNEs have a large portion of their market in the Asia Pacific region. The observation is true with Toyota Motor Corporation, LG Electronics, Samsung, Haier, Hyundai and Sinopec among others. One of the exceptions is Flextronics of Singapore which has invested largely beyond Asia Pacific region, but it is yet to completely move beyond the region.

Cui and Fuming (2010) examined ownership decision of Chinese outward FDI (OFDI), with a focus on the choices between a joint venture and a wholly owned subsidiary entry mode. The findings in their literature review and a case study of China indicated that Chinese MNEs have unique OFDI characteristics. One of the outstanding resource-based features is that the OFDI of Chinese MNEs is asset exploiting and augmenting. In the same line, both strategic intents and transaction costs have a significant impact on the ownership of FDI. In terms of business management, Chinese MNEs tend to adjust their overseas market entry strategies to gain normative and regulative organisational legitimacy in host countries (Cui & Jiang 2010; Yang 2005; Wong 2003). Furthermore, Chinese MNEs are required to comply with the rules and regulations set by the host government. Observably, the Chinese government has an immense influence on the FDI ownership decisions of Chinese MNEs. The rules serve as restrictions and incentives to the MNEs. The scenario is also similar in Japan, Taiwan and Korea, where the respective governments have a great influence on the OFDI ownership decisions of their MNEs (Collinson & Rugman 2007).

The rise and growing role of Dragon Multinationals can also be attributed to swelling adoption of wholly-owned foreign investments, which are displacing joint ventures as the prime mode of overseas market entry (Buckley et al. 2009). Changes in the FDI drivers are visible in international markets seeking foreign direct investment (Wang 2002). In the same respect, offensive and defensive FDI are increasingly replacing trade-based investment activities. Furthermore, Dragon Multinationals are gaining competitive advantages in beyond their native countries due to the improved access to foreign owned brands, technologies and distribution chnnels. For example, Lenovo Group Ltd acquired IBM PC Business to improve its market share and benefit from the economies of scale (Rui & Yip 2008). As much as some of the European and American competitors strive to follow some of the MNEs competencies, Asia Pacific MNEs have managed to constantly upgrade their products. Some of the competitors include Apple, Blackberry, Cisco Systems, Dell, GM, Ford, IBM, and many others.

Drivers of Foreign Production

The motives for Asia Pacific MNEs to engage in foreign production include market discovery, natural resources allocation, strategic asset search and efficiency seeking. Natural resource seeking foreign direct investment is justified by the facts that most raw materials are location specific. China and Japan invest in foreign markets to guarantee regular and affordable supply of natural resources to their foreign subsidiaries. Marketing seeking matches the FDI that intends to supply the local markets in the neighbouring economies. For example, Samsung and Toyota expand to new locations following the success of exports in the regions. Some of the drivers behind market seeking FDI include government regulation and transportation costs. In the same line, strategic reasons may be linked to the aforementioned type of foreign investment. Some strategic examples include power electronics-based MNE that follow its clients in their new markets, reduction of transaction costs, and the need to localise products to adapt to the regional tastes and preferences. One of the forms of efficiency seeking FDI is an MNE aiming to improve its cost efficiency by transferring production to low labour cost locations like Philippines and India. The strategic move is common in industries, where either semi-skilled or unskilled labour is an integral part of the overall production costs. The examples include United States and European multinationals investing in Latin America and India. Lastly, strategic seeking FDI is the most evident motive of foreign investment in the Asia Pacific region. Asia Pacific MNEs have continued to use foreign production to obtain strategic tangible and intangible assets that are critical to their long-term strategies and are lacking in the native countries. The differentiating aspect of the motive is that MNEs tend to use it as a means of developing O-advantages that will fortify their expansion locally and abroad.

Asian Pacific MNEs are characterised by innovative strategic management and accelerated internationalisation (Carr & Pudelko 2006; Iles, Chuai & Preece 2010; Mathews 2006). Arregle et al. (2013) explored the significance of region or location to the success of Asian firms. In agreement with Dunning (2006), Arregle et al. (2013), the author noted that the internationalization drivers of the MNEs is attributed to pull factors linked to overseas markets that seek FDI. The presence of Japanese firm in China and India is motivated by the availability of skill-intensive service industries. The service-oriented industries in the Asia Pacific economies create competitive advantages that are exploitable through internalized operations. CSAs serve as the source of FSAs in R&D, as well as in the development of the pool of affordable human capital as internationally transferable technologist and strategic managers (Arregle et al. 2013). Low wages in India, Malaysia and Taiwan, as well as high productivity of employee in the countries serve as the basis of international expansion of MNEs (April & Chun 2005; Edwards & Rees 2011). The outward FDI in the mentioned economies also contribute to the rise and prominence of the Dragon Multinationals (Mathews 2006). In China, cheap capital plays a critical role in the expansion of MNEs. It should be noted that Japanese firms, such as Panasonic and Toshiba, halted production in China due to increasing cost of labour.

Success and Strategies of Asian Pacific MNEs

The success of Asia Pacific MNEs is also linked to the fact that they have a strong subsidiary control and supply chain management networks (Conklin 2011). Subsidiary control is the strength of the connection between and multinational’s headquarters and its subsidiary in a foreign country. Theoretically, subsidiary control captures the effectiveness and efficiency flow as well as the degree, to which the headquarters of an MNE can dictate the strategic and operational decision of the foreign-based subsidiaries. Arguably, the strong subsidiary control of Asia Pacific MNEs increases their capability and drive to respond in the host economy. Toyota’s strong subsidiary control in Japan and the United States gives it an advantage in terms of being able to react to the market dynamics of the host countries. Further, effective supply chain management and greater subsidiary control gives the Asia Pacific MNEs more levers to influence their subsidiaries’ competitive strategy.

Hasegawa and Noronha (2012) explored the corporate strategy of Asian MNEs with the focus on automobile and electronics industry. The authors extensively investigated the aspects of Japanese, Chinese and Indian subsidiaries in terms of strategy, performance and size. One of the findings was that the FDI of Asia Pacific MNEs is closely linked to innovative strategic management and the recognition of corporate social responsibility (CSR) by Dragon Multinationals (April & Chun 2005; Belal & Cooper 2011). Strategic management entails the analysis, formulation, and implementation of strategies designed to create or sustain competitive advantages (Thompson 2010). Asian Pacific MNEs exploit their internal resources to stay competitive, but consider both internal and external environmental factors to achieve and sustain their position in the industries they operate. One of the key attributes of strategic management is that it takes into account the ideas and opinions of multiple stakeholders in decision making. Stakeholders include consumers, employees, suppliers, investors, partners and the management.

Globalization and technological changes are some of the factors in the MNEs’ external environments that shape their strategies (Hasegawa & Noronha 2012). Since the changes make the Asian Pacicfic business landscape more competitive than ever (Volberda et al. 2011), Dragon Multinationals have been forced to embrace internationalization and invest in research and development to create more innovative devices  (Buckley et al. 2010; Cox 2011). In view of the fact that the automotive and electronics industries are marked by fast ttechnological advances, the ability of  Asian Pacific MNEs to sustain their competitive advantages depends upon their ability to develop innovative technologies (Teece 2014); expand their product range; and the skill to enhance the performance of the existing products or technologies (Augier & Teece 2007); and through acquisition of the third-party technology, R&D and licensing of intellectual property.

Buckley and Horn (2009) examined Japanese MNEs in China from different sectors, including automobiles, consumer good and retailing. From the research, it was evident that all the firms studied adapted their business model to suit the Chinese business environment. The approach is an apt example of flexibility and a competitive aspect of Dragon Multinationals in terms of strategic management. Toyota had to evolve its international marketing strategies to stay competitive. In the same respect, Buckley and Horn (2009) noted that the success of Japanese multinational enterprises in China and other foreign markets is attributed to the diffusion of some aspects to from North America and Europe to Asia Pacific region. Some of the diffused success areas include FDI ownership; organisational capabilities; R&D; aggressive growth strategies; effective HRM; and long-term orientation (Buckley & Horn 2009; Iles, Chuai & Preece 2010; Cui & Jiang 2010; Teece 2014).

Specialisation of Asian pacific MNEs at the industry level is one of the reasons behind the region growing role in improving the global share of their exports. Japanese and Chinese MNEs also enjoy a mature financial environment at home. Financial reform and support is a key driver of competitiveness and is a motivation of internationalisation. The investment of new entrants, especially foreign MNEs, in the Chinese and Japanese companies has fostered the integration of the local stock markets with the key world stock exchanges. Other success factors include information processing capabilities and identification of consumer needs. Market segmentation and positioning strategies in China are also fine-tuned across different sectors. The approach implies that Asia Pacific MNEs tailor their strategies to suit the market they operate. The observation compliments the assertion that Asia pacific MNEs are adaptive business entities, making them predominant in the global economy. Beyond their home countries, the multinational enterprises are conscious of social-cultural and political differences. Therefore, the management of the enterprises is capable of meeting consumer needs and addressing the dynamic of the identified needs irrespective of the location. In summary, Asia Pacific MNEs are not Western or Confucian in their approach to foreign market, but are flexible, pragmatic and realistic.

The Impact of Inward FDI on OFDI and Competitiveness of the MNEs

Typically, MNEs are both horizontally and vertically integrated. Internalisation tends to occur when the benefits of venturing into the new markets do not outweigh the cost of coordination, control and communication (Conklin 2011). The internalisation theory emerged from the concept of market failure. Some MNE transactions efficiently performed within the firm as compared to the market. Some of the business imperfections that have pushed Asia Pacific MNEs to internalise include unstable bargaining position produced by bilateral monopoly; the need for discriminatory pricing to efficiently exploit market power; involvement of the public goods; and the need to coordinate resources over a long period. Dunning’s eclectic (OLI) paradigm evolved from the dissatisfaction with the internalisation theory, the product-life cycle theory and the Hymer-Kindleberger approach to FDI. The three theories were considered to be the partial explanation of FDI or international production. Based on the conclusions, Dunning integrated the three theories into the eclectic model, which gives detailed explanation of the pattern and extent of international production (Dunning & Lundan 2008). According to Dunning’s paradigm, Asian Pacific MNEs engages in FDI if they satisfy the following conditions:

  1. they possess net ownership (O) advantages relative to firms from other economies;
  2. there are location (L) advantages in exploiting their O-advantages in the foreign country rather than in their native countries; and
  3. it is profitable to internalise the benefits instead of using the market to transfer them to foreign entities.

Asia Pacific MNEs fit in Dunning’s OLI model in the sense that FDI serves as a substitute for exportation. Given that FDI can influence the terms of cross-border trade, it can change the configuration of specialisation. Any disequilibrium in the factors of production or prices across the trading countries can be corrected by the movement of goods. One of the issues that rise from Asian Pacific MNEs is the degree, to which prior inward FDI has fostered outward FDI. With the exception of Japan, most Asian firms expanded to become multinational enterprise as result of inward investment by global giants from North America and Europe (Buckley et al. 2010). Korea and Taiwan have similar patterns to Japan. In contrast, inward FDI is high in Philippines, Malaysia and China. The Chinese business landscape is more restrictive than in Japan; thus, the direct participation of MNE in FDI is largely done through joint ventures. Chinese MNEs have been known to use acquisitions to attain their goals, such as reducing institutional constraints and acquiring strategic capabilities (Augier & Teece 2007; Buckley et al. 2009; Rui & Yip 2008).

Conclusion

The rise and growing role of MNEs for the Asia Pacific region can be attributed to the adoption of innovative strategic management and organisational skills. Evidently, there is a strong connection between the management and performance of Asian Pacific MNEs. The researches included in the paper explored Asian Pacific multinational enterprises in the context of globalisation, the shifts toward the regionalisation of Asia Pacific region, and the rise of essential national economic giants, including India and China, as well as succeeding Japan in their growth to prominence in the global economy. Asia Pacific MNEs are adaptive in terms of strategic management; hence, they are different from Western regions and their counterparts in the EU and North America. Their success can also be attributed to their realistic, pragmatic and flexible nature of doing business.

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