Global Environment Perspectives

With globalization, the world is undergoing a rapid transformation. MNEs are engaging fiercely in FDI to compete with rival firms to meet consumer demand for foreign products.

This has resulted in change of international trade patterns. The happenings of financial tsunami, caused by the American subprime crisis and the bubble crash of the global real estate market in 2006-2007, has spread like wildfire, and results in global economic shrinkage (Hui & Chen, 2012), liquidity constraints (Blalock et al., 2008), and global dollar liquidity (Rose & Spiegel, 2012) will lead to co-movements of business cycles (Lee et al., 2003), and herding behavior in the global stock markets (Chiang & Zheng, 2010).

From the above literatures it is seen that global environmental change and foreign disasters will generate a considerable impact on MNEs performance in FDI. This raises proposition 4 as:

Proposition 4: Global economic risk may affect MNEs success while engaging in FDI.

To further explain the proposition 4, a detailed discussion on how global environment

may influence cross border activities is needed. The global crisis that took place in 2007 in the U.S. caused severe recessions in both developed and developing countries due to instability in the financial and real estate market, leading to severe credit constraints. This is due to withdrawals of funds and investment by foreign investors, as a consequence it affected the global stock markets and trade volumes, resulting in the plunge of asset prices, higher cost of capital, decreased exports, lower GDP growth rate, high capital cost and drying up of private capital flows especially in the Middle East and North African (MENA) countries thus affecting the stock market of these countries (Neaime, 2012). This led to a complete structural change in the bank ownerships and governance due to restructuring and reforms in the financial sector. The international economic crisis as seen in the case of Thailand where the East Asian financial crisis of 1997-1998 had decreased the firms bank connection and reduced the impact of investment cash flow sensitivity (Espenlaub et al., 2012), declined asset prices due to depreciation of foreign currency and hence investment channels caused by such crisis due to credit constraints have a negative impact on FDI level.

Though majority of countries have suffered a loss, some other countries benefited from the global financial crisis. The countries that gain the most benefits are those whose currency value stands against other countries’ currency. For example, the Asian financial crisis that occurred in 1997 has prevented Japanese transnational corporations from leaving Asia since they can employ labor at a much lower cost as compared with their home country, this is due to change in exchange rate operations were maintained by shifting to export so as to earn profit in foreign currencies by undertaking production in Asia (Edgington & Hayter, 2001).

Increased international trading activities and economic integration have led to synchronization of business cycles between home and host countries, It had being observed that business cycles of the home country will bear certain similarities with those of the partner countries due to trade linkage between them. But such co-movements in business cycles can normally happen during times of export recessions, as caused by the U.S.

recessions (Yetman, 2011; Antonakakis, 2012). For Example, the Asian business cycles are getting closer and closer with the OECD cycles (Fidrmuc & Korhonen, 2010). Thus, it can be said that global crisis has a positive impact on countries business cycles.

The aftermath of the global crisis has led to what is known as asset bubbles. The bubbles are elements of the financial crisis caused by agency relationship in banking sector whereby investors utilized the money borrowed from banks for their investment in risky assets which seems to be attractive for investors as because they can avoid losses in states with low payoffs through default on loans (Allen & Gale, 2000). Asset bubbles are outcomes caused by financial liberalization and credit expansion in the banking sector that has resulted in increased stock market prices and real estate market leading to what is known as bubble inflation, where the inflationary rate reaches a point and burst. With the bursting of bubbles asset prices start to collapse, this might continue for a shorter or longer duration of times and thus affecting the economy as whole. The asset bubbles that occurred in Japan’s real estate and stock markets during the years 1980s and 1990s provide a good example of the after results caused by such crisis.

In addition, the onset of global crisis has also resulted in herding patterns. Herding are behavioral patterns that are followed by people in mimicking decisions of another people, it is done in a chronological decision problem without disclosing private information (Effinger

& Polborn, 2001). Foreign investors tend to herd more as compared with domestic investor (Bowe & Domuta, 2004). Furthermore, the level of herding is largely dependent on market condition and differs from country to country. For example, during times of declining market and high trading volume, investors in Chinese stock markets tend to herd more as compared with investors in Indian stock market where no sign of herding behavior is observed (Lao &

Singh, 2011).

Moreover, even if the global economic condition improved MNEs will gain no benefit, as because what has been planned before the crisis happened cannot be implemented, as all investment has been spent in the setting up of infrastructures for FDI project. If condition gets worsened after the crisis, then MNEs are in a doldrums as the readied FDI project is of no use to MNEs, thus suffering from huge loss due to inflexibility of the FDI project.