Porter's Five Forces

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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[1]. (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[2] 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...
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