Do the Institutional Factors Significantly Impact on the Governance Behaviour of Mnes?

Topics: Foreign direct investment, Investment, Governance Pages: 6 (1880 words) Published: January 19, 2013
The constantly emerging FDI behaviour of MNE represents the new development mode in the global economy.Whether the institutional factors have a significant impact on MNEs' governance remains to be discussed.With the large FDI behaviours,vast majority of capital, resources as well as labour circulate between developing countries and developed countries.On one side,developing countries try to set up preferential policies to attract inward FDI;On the other side,developed countries would like to invest outside countries to expand the market and achieve economies of scale.However,FDI also has some issues from the perspective of institutional theory.These problems push MNEs to revise their governance to further advance their growth.

In this study,the author will first evaluate the Dunning's eclectic theory,that is called OLI paradigm.The second part is the critical analysis of the impact of the institutional theory on the MNEs' governance and the global regulatory environment.Finally the author will critically evaluate the MNEs governance and strategic behaviour.

1.0 The brief evaluation of selected FDI theory------Dunning's eclectic theory (OLI paradigm) Dunning's eclectic theory absorbed Hymer's theory about the ownership endowment advantages. It can not only explain the different types of direct investment behaviour and other international operation mode,but also the geographical distribution of enterprise and M&A behaviour in MNEs.It also analyse three main productive incentives:Market-based theory,Resource-based theory and Efficiency-based theory. However,these three advantages are not appropriate to be divided under some circumstances, because the ownership is sometimes connected and determined by the location.Considering the MNEs' advantages in OLI paradigm, the ownership advantages may arise from product differentiation, marketing skills and production secrets etc;As to location,MNEs can gain access to raw materials and low labour costs;In order to reduce transaction costs and the transfer of human resources,internalization is a better way for some MNEs to maximize their internal advantages (Mark Cook,2012).

2.0 The critical analysis of the impact of the institutional theory on the MNEs' governance and the global regulatory environment When applying the institutional factors to the OLI paradigm,the ownership is relevant to governance and regulation;the location may be linked to social capital;and the internalization could be other relevant factors.The reason why institutional factors can affect countries attracting FDI could be two considerations.First,foreign investors can be attracted by the good regulatory infrastructure by improving productivity.Second,weak institutions will always bring extra costs to FDI,that is defined as corruption.Third,there is rarely no possibility for FDI to undertake any vulnerable uncertainty,like the prevention and changeover of weak governments and the weak power of property authority and legal system(Agnès, Bénassy-Quéré ,Maylis, Coupet & Thierry Mayer,2007).Therefore, institutional factors are essential to the growth of MNEs.

2.1 Inward FDI in host countries and pull factors
It seems that the majority countries attracting inward FDI are developing countries,because they consider FDI as the most stable constituent part of capital flows (Agnès, Bénassy-Quéré ,Maylis, Coupet & Thierry Mayer,2007).As host countries,whether they can attract FDI depends on the efficiency of the pull factors.Risk factors,including bureaucratic red tape,political uncertainty,corruption and weak legal system,always has a negative effect on inward FDI. Undoubtedly,perfect legal structure is beneficial for host countries to attract foreign investors.Unpredictable legitimacy and policies,government uncertainty as well as lack of social responsibilities are all deterring inward FDI.Furthermore, a good capability of institutional government can attract inward FDI, and poor institutions may...
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