Globalisation, the World Economy,MNEs and Emerging markets Essay

Globalisation, the World Economy,MNEs and Emerging markets - Essay Example The policymakers influenced the regulatory regime under which both MNCs and local business partners operate. They focused in understanding how operation of multinational firms affects the economic development and nationwide wellbeing. The anticipation that FDI will benefit the local economy has motivated many governments to present striking incentive packages to attract investors. The underlying principle was that the social repayment of incoming FDI would surpass the personal benefits of FDI and investors would take into account only the latter when deciding over investment locations. The policy debate requires scientific evidence on how and to what extent, FDI will impact the local surroundings. The impact of MNCs on host countries was still not well understood, despite having the policy relevance. (Bhagwati, 2004; Bartlett et al. 2004) This paper will take into account one particular emerging economy and find out the factors that play crucial role in attracting MNCs towards it. Fo r this paper China has been chosen. Key factors that make the emerging market attractive to MNEs: China has a number of advantages that are country specific and are believed to be the major factors that work behind attracting FDI to the country. According to the researchers (Swain and Wang, 1995, Liu et al, 1997, Zhang, 2002) the factors that make the emerging market attractive to MNEs identified by FDI theories can be classified into three categories – Micro, Macro and Strategic factors The Micro factors relate to the advantages related to ownership of including product differentiation and the firm size. The Macro factors stress on the market dimension and the expansion of the host country, which is determined by GDP, GDP per capita, GNP or GNP per capita, as rapid economic expansion may generate large home markets and businesses. Other macro factors are taxes, political risk, rates of exchange, and so on. (Dicken, 2007) The Strategic factors relate to long-term determinants such as efforts to protect existing foreign markets, to spread out activities of firms, to uphold a grip in the host nation and to balance another type of investment. Since 1980, the GDP of China has grown between 8-9% per year. Researches were evident that the market size determined by GDP, GDP per capita, GNP, or GNP per capita has a major consequence on inward FDI. Speedy economic augmentation has created huge domestic markets and business prospects for foreign firms to invest in China. Swain and Zhang (1997) analyzed the data of FDI in China for the period of 1978-92 and have used GDP and real GDP growth rate. Liu et al (1997) using GDP, GDP growth, wages, reached to the conclusion that the size of market s the fourth most significant economic determinant for the pledged FDI in China. Their empirical results showed that the rate of growth of real GDP was significantly related to attracting MNEs in China. The direct and positive relationship between market size and inward FDI is also found by Zhang (2000) and Wei and Liu (2001) who showed that both US and Hong Kong MNEs were attracted by the large market size of China. This reflected the market-seeking motive of foreign firms to shift their focus from mainly export-oriented investments towards the Chinese markets. Therefore, most results of the empirical researches agreed with each other that market size was