Porter’s Five Forces
International Business (C11IB1) How has the global financial crisis impacted upon MNCs? Name: Kanam Liu Reg number: 095922098 Module lecturer: Dr Colin Turner Date: 19th October 2012 Introduction Since world trade began and the economy grows quickly, Multinational Corporations (MNCs) are playing a very important role in the global economy in the last few decades. They produce and allocate goods and services for different nations, also help to share ideas, technology and increase innovations throughout the world.
Nowadays, there are more than 82,000 MNCs and around 810,000 affiliates operating all over the world and 500 biggest corporations controlled 70 per cent of the international trade, they are very powerful of influencing in both economy and political way. (Share The World’s Resources, 2012) They operate productive assets in more than one country; they normally based their headquarters in a single country (mostly in US, Western Europe and Japan) and invest their facilities which are located in other countries. Ovidius University, 2010) In order to see how global financial crisis will put an impact on these MNCs, we first need to establish the key factors which caused the global financial crisis. Background of the global financial crisis Financial crises happen very often but when it comes, people are still very surprised and are not prepared. Crises happens almost every 10 years from 19th century, the most important financial crises are the Great Depression in 1929, Asian Crisis in 1997, crisis in Argentina during 2001-2002 and the current financial crisis started from 2007.
According to the Reinhart and Rogoff (2008), they indicated that crises were usually led by credit booms and real estate bubbles; it result to fall in house pricing and output, increase unemployment and government debt. I am going to focus on the recent financial crisis (2007-2009) since economists think it was the most serious financial crisis after the Great Depression. This time is different compared to the previous crises because it is affected globally and causes a significant decrease in economic activities.
There are a few factors causing the current crisis: firstly, the central bank used the low interest rate policies; secondly, the Asian central banks needed to reach the lax credit requirements by buying debt securities; thirdly, the rapid increased in the housing demand in the US and others nations. In addition, the demand by poor credit rating borrowers increased significantly, there was a high incentive to lend to those high risk borrowers. Therefore, when the house prices started to drop in 2006, it affected the subprime mortgages to be downgraded.
Afterwards, the inter-bank lending dried up and central banks needed to inject liquidity into the market. The real effect began when Lehman Bros failed and majority of institutions were affected; inflation, unemployment and falling economic activity started to appear. How global financial crisis affect MNCs Many companies were surprised by how fast the mortgage crisis led to crash of the whole financial system, it was hard for them to keep and predict the information since the situation was changing in a day to day bases.
Most of the MNCs were financed by large financial institutions, but since investors withdrew their money from the financial market and liquidity dried up, there was so much uncertainty and risk involved assessing the market. Bank distress led to businesses even harder to raise funding, so many MNCs changed their investment plan. They have been cancelled or slowed down the foreign investment projects and the performance of the ongiong project was declined, some of the MNCs got fewer orders from overseas because of the downturn business cycle.
Furthermore, MNCs experienced liquidity problems, capital outflows from the financial markets; this will increase the uncertainty to invest in new projects. (Butt, 2010) Some MNCs are planning to change their strategies, concentrate more on clients in developing countries because they can have lowered production cost, gain greater foreign market shares and higher investment return. (People’s Daily Online, 2009) Impact on MNCs’ finance Since the banking crisis began, banks tighten their lending; some of the MNCs withdrew parts of the revenue or cash reserves in China or other developing ountries to their troubled parent companies. As a result China’s FDI inflows decreased by around 17 per cent in the first half of 2009; Russia’s FDI fell by more than 50 per cent in the first quarter 2009. (News, 2009) Problems were more serious in the US and Europe, MNCs in these countries were more difficult to access credit from financial institutions as the inter-bank network was damaged by the global financial crisis. In addition, most of the banks in developing countries relied on funding from banks in the developed countries.
However, since the financial crisis started, they were even harder to get subsidies from those institutions and it affected MNCs’ operation in these countries because of the restriction of getting loans. Many of the MNCs could not resolve their liquidity problem fast enough because of the short of cash reserve and difficulties of borrowing from banks. As a result, they suffered from the financial crisis; the best example of this problem will be AIG. The credit default swaps (CDS) almost led to AIG bankruptcy and damaged the global financial system. This was a very risky business; however, the company was treating it as safe.
The profit margin was 83% and the portfolio of CDS was over 500 billion in 2007. Although, when the real estate bubble popped, AIG suddenly needed to pay out the securities which it had insured and began to make losses. After the losses became more significant, it found out that it could not increase funding fast enough to cover their losses. Therefore, AIG shot up from $20 billion to more than $80 billion. (Share the World’s Resources, 2012) Change in employment rate There was lots of news about the increasing in unemployment rate in different countries especially in Europe and the US after the global financial crisis started.
Many MNCs wanted to reserve more capital in order to resist the financial crisis; they reduced the number of workers or using different methods to cut the production cost. Now, I am going to list out some examples and data to show these methods that companies used to reduce costs. Table 1: Job losses & gains in MNCs in Ireland (full time employment), 2000- 2009 | |2000 |2001 | |Aldi 650 Jobs |Dell 1900 Jobs Hewlett Packard -133/ +500 | |IKEA 500 Jobs |SR Technics 1100 Jobs |IBM -120/ +100 | |Hewlett Packard 500 jobs |Intel 300 Jobs |Option Wireless -150/ +145 | |IVAX Phara 165 Jobs |Hibernian 600 Jobs |Pfizer -180/ +100 | |Pfizer 100 Jobs |Tyco 320 Jobs | | |IBM 100 Jobs |Waterford Crystal 250 Jobs | | Source: Gunnigle, et al. As the figures from above, table 1 showed the growth of employment remained stable from 2001 to 2008 but dropped significantly in 2009 and during the crisis full time employment rate fell by 9. 8 per cent in MNCs.
Table 2 pointed out that MNCs were having a big restructuring within the organisation in different sectors, it is one of the important effect from the global financial crisis. (Gunnigle, et al. , n. d. ) In addition, because the dropping of handset price and sales which was hit by the spread of global financial crisis. Nokia announced to cut 1700 jobs in 2007 to balance their losses. (Kioskea, 2008) In the recent year, it announced again that will lay off 10,000 jobs worldwide and stop R projects in Germany and Canada (Guardin, 2012). The US and Europe were the most affected area by the global financial crisis. For the US MNCs, the employment rate decreased by 4. 1% to 31. million workers over the world and the job cuts were heavier in home than overseas. (Business, 2011) In Europe, the European banks’ employees such as UBS and Dutsche Bank, they were threatened they would lose their job because of the recession and the problem were more serious in those banks which had close relationship with the US banks. Moreover, since the banking crisis started and Eurozone was the major market for the US businesses to provide direct funding. (ABC News, n. d. ) Apart from cutting jobs, some MNCs also launched different methods to reduce their costs. According to the data in Gunnigle’s paper, it showed that average working hours per week dropped 3. 3 per cent in 2009.
For example, Waterford Crystal, it closed the plant for three weeks; Bausch and Lorrb, its employees took unpaid leaves for one week per month for six months. The other method to cut cost is freezing pay such as Irish Life and Permanent, it reduced bonuses significantly including cut all the bonuses for chief executive, directors and senior managers, also reduced 75 per cent bonuses to all staffs. (Gunnigle, et al. , n. d. ) Change in sales and export When the financial crisis started, MNCs tried to cut costs to cover their losses. People’s income decreased, so demand and export fell, economies began to shrink and it was hard for companies to pay back their debts.
Ford recorded it got 306 billion dollars losses in Europe, therefore, less profits to invest in other countries or products (The New Youk Times, n. d. ). Moreover, in 2008, Carrefour Romania reported sales decreased in all European markets and there were an increase in MNCs stated their losses after the financial crisis. Impact on currencies and debt The Euro crisis had a great impact in the global economy and affects many of the MNCs. Since Europe is the biggest trading partner to the US, over 20 per cent of the US exports go to Europe. Therefore, European banks have a close link with the US banks, when the European banks were affected by the currency crisis, they were exposed to bad debt problem.
Many MNCs based their headquarters in Spain since the labour is cheaper, but the fluctuation of the currency put an impact on the export and import prices. (Business Insider, 2012) Export became cheaper and import became more expensive and the increasing uncertainty of the change in currency, it made MNCs more difficult to pay back loans or borrowing in foreign currency to reinvest. As a result, companies reduced their investment to lower their financial risk. For example, Prakiker’s sales decreased by 15. 6% as the currency depreciation related to the Euro. (Ovidius University, 2010) Other related effects to MNCs The additional impacts to MNCs were share prices, market value of equities and asset price declined rapidly because the failure of the banks and the incline development of the crisis.
Government actions also increased the difficulties of the situation for the MNCs, such as restricted trade or controlled currency and inflation by changing prices or tax laws and tariffs. Conclusion As we can see from the discussion above, the 2007-2009 global financial crisis had a great impact to the MNCs, many companies were struggling from the situation. Although many of them are starting to recover, the process will take a very long period and since it was a global situation, companies were having difficulties to look for capital aboard. Therefore, MNCs are changing their strategies to focus on developing countries such as BRIC as they can see greater opportunities.
Since these countries have large resources, low cost labour market with highly skilled workers and higher rate of investment return provided, they can help the businesses growth faster and entry to the bigger market. Appendix A The world’s largest industrial multinational corporations S/No. Company Home nation Industry % of foreign sales 1 Exxon Mobil Corporation USA Petroleum 69. 4 2 General Motors USA Motor Vehicles 26. 1 3 Ford Motor Company USA Motor Vehicles 30. 4 4 Daimler Chrysler Germany/USA Motor Vehicles 32. 0 5 Royal Dutch/Shell Group UK/Netherlands Petroleum 54. 4 6 British Petroleum UK Petroleum 71. 3 7 General Electric USA Electronics 38. 1 8 Toyota Japan Motor Vehicles 49. 6 Chevron Texaco USA Petroleum 55. 5 10 Total Fina ELF France Petroleum 78. 0 Reference ABC News, n. d. Five ways the European debt crisis could affect the U. S.. [Online] Available at: http://abcnews. go. com/Business/ways-european-debt-crisis-affect-us/story? id=14830462 [Accessed 14 October 2012]. Alvarez, R. , H. , 2007. MULTINATIONALS AS STABILIZERS? : ECONOMIC CRISIS AND PLANT EMPLOYMENT GROWTH. [Online] Available at: http://www. bcentral. cl/eng/studies/working-papers/pdf/dtbc412. pdf [Accessed 14 October 2012]. Barefoot, K. , R. , 2010. U. S. Multinational Companies: Operations in the United States and Abroad in 2008, s. l. : s. n.
Business Insider, 2012. Weaker Euro Can Help Spain Fight Unemployment. [Online] Available at: http://www. businessinsider. com/weaker-euro-can-help-spain-fight-unemployment-2012-4 [Accessed 14 October 2012]. Business, 2011. U. S Multinationals Increasingly Hiring Abroad, Firing At Home. [Online] Available at: http://www. huffingtonpost. com/2011/04/19/multinationals-hire-abroad-fire-at-home_n_851094. html [Accessed 14 October 2012]. Butt, N. , 2010. Impact of Global financial crisis on Pakistan. [Online] Available at: http://www. scribd. com/doc/26221317/Impact-of-Global-Financial-Crisis-on-Pakistan [Accessed 14 October 2012]. Ceridian, 2009.
Easing the currency crisis: Multinational companies benefit from paying employees in local currencies. [Online] Available at: http://www. ceridian. com/payroll_services_article/1,6266,15806-70889,00. html [Accessed 14 10 2012]. Ernst , 2012. European debt crisis affects business worldwide. [Online] Available at: http://www. ey. com/US/en/Services/Assurance/BoardMatters-Quarterly-April-2012—European-debt-crisis-affects-business-worldwide [Accessed 14 October 2012]. Ernst & Young, 2012. The shifting tide of international trade. [Online] Available at: http://www. ey. com/US/en/Services/Assurance/BoardMatters-Quarterly-April-2012—The-shifting-tide-of-international-trade [Accessed 14 October 2012]. EU-Japan Centre, 2010. Multinational business finance in times of, http://documents. eu-japan. eu/seminars/japan/fdi/report_10_june. pdf: EU? Japan Centre for Industrial Cooperation. Guardian, 2012. Nokia to cut 10,000 jobs by end of 2013. [Online] Available at: http://www. guardian. co. uk/technology/2012/jun/14/nokia-to-cut-10000-jobs [Accessed 14 October 2012]. Gunnigle, P. , Lavelle, J. & Monaghan, S. , n. d. Weathering the storm? Multinational companies and human resource management through the global financial crisis, Limerick: Kemmy Business School University of Limerick. Kioskea, 2008. Nokia to cut another 1,700 jobs worldwide. [Online] Available at: http://en. kioskea. et/news/12310-nokia-to-cut-another-1-700-jobs-worldwide [Accessed 14 October 2012]. Ma, Z. & Cheng, L. , 2005. The Effects of Financial Crises on International Trade. [Online] Available at: http://www. nber. org/chapters/c0196 [Accessed 14 October 2012]. News, 2009. The Global Financial Crisis Affects Foreign Direct Investment (FDI) into Russia and China. [Online] Available at: http://www. skolkovo. ru/public/en/press/news/item/1737-2009-09-10-14/ [Accessed 14 October 2012]. Ovidius University, 2010. ECONOMIC SCIENCES SERIE. OVIDIUS UNIVERSITY ANNALS, X(2), pp. 176-182. Patnaik, I. & Shah, A. , 2010. Multinational corporations and crisis transmission, s. l. : s. n.