Multinational Companies in Asia
Asia is the largest continent in the world, comprising a land area of 17,139,000 square miles. It also has the largest population in the world. According to (2007) among all the countries in Asia, China has the largest economy in terms of gross domestic product. Over the past years, the economy of China, as well as, in India has been growing very quickly with an annual growth rate of more than 7%. Asia also has the largest pool of natural resources among the continents in the world, with rich resources in petroleum and iron, agriculture, fishing and forestry. The manufacturing industry is also very strong especially in the East and South East Asian regions, the countries in those two regions manufacture cheap products such as apparels up to high-end products such as computers and cars. And with the rise of Business Process Outsourcing in Asia, many multinational companies have decided to set-up companies in the region.
This paper examines the reasons behind why multinational companies are setting-up businesses in Asia. Moreover, this paper also gives discussion on the causes and the interest of multinationals in the Asian region.
According to Snow (1979) the multinational corporations plays a significant role in the economic development and employment in most parts of the world, especially the developing nations. Moreover, he stated that the implications of the multinational companies in Asian countries are positive, due to the fact that in nations wherein there is a huge number of MNCs, the economy changed for the better, like in the case of Singapore.
The multinational companies have a huge influence in the social and cultural life of Asians aside from the creation of jobs. The social and cultural transformations that impacted many Asians are the choices of products that the consumers, particularly of the Asian nations, are exposed. The advertisements of the Multinational companies augments the wants of the consumers, the television programs and music from Western nations have transformed the native culture and social life in different ways. The tourism industry such as international hotels has a huge influence in the structure of the preservation of the indigenous cultures, at the same time forms the job market. Clearly the Multinational Companies have contributed a lot in the development of the economy and employment in Asian Nations. However, is that the main reason why more and more Multinational Companies are establishing in Asia?
The Asian economy is composed of more than four billion people with the purchasing power parity of the region in about .07 trillion. Asia is a vast continent; therefore the wealth is not distributed equally. Asia exhibits a huge discrepancy in wealth, having Japan the second largest economy in the world and North Korea which is considered one of the poorest nations.
However, with the emergence of the economy of a number of Asian countries such as China and India, and the continuous stability of the economy of the “Asian Tigers” and the entrance of ASEAN nations in long-term growth have led to multinational companies to set up hubs in the region. Aside from the stable economy of the region there are also other reasons in the rise of multinational corporations setting-up in Asia.
One factor is the cheap labour of Asians compare to their Western counterparts. Multinational companies established factories in China and India, as well as in ASEAN because the payment for the workers are cheaper, even if the companies set-up more plants in the region the cost would still be less expensive. Another booming industry, in which the multinational companies are channelling towards Asian nations, is the outsourcing. Outsourcing in India, China, Vietnam and the Philippines have increased over the past years, and more and more multinational companies are eyeing these countries for their businesses and setting-up hubs. Multinational companies that have already set-up offshore headquarters in Asia are AOL, Barnes and Noble, Chevron, Citigroup, Dell, HP, HSBS, IBM, Intel, Procter and Gamble and Motorola.
Many multinational companies are eyeing the region because of the rapid growth of the economies of a number of countries. According to (2005) analysts have predicted that there will be an approximately 6.5 per cent growth across China, India, Hong Kong, Singapore, Taiwan, Indonesia, Malaysia and the Philippines. The growth has attracted more multi-national companies in the region more than in the past years. A number of them have expressed their interest in setting-up headquarters in the region.
In the article written by (2002), the superlative size of the Asian market has always caught the interest of multinational corporations. Recently, as the policies of the governments of a number of Asian nations have developed gradually as well as transformation in the cultural attitudes, the strategies of the MNCs also evolved.
In addition, according to (2005) the figures that the United Nations Conference on Trade and Union Development has gathered revealed that there is a new wave of investment striking the region. Wood stated that in the year 2003, after the Asian Financial Crisis, a second wave of foreign direct investment started, which is breaking the previous records. In 25004, the DI leapt 55% in Asia and has reached 6 billion, which is considered the highest in the history of the Asian economy. It is evident that multinational companies are investing in the Asian region, and a number of multinational companies that invests in the region come from Asian companies also, however Western MNCs is not far behind.
The primary reason for the investments in the region is very simple. Asia provides huge cost savings for MNCs that are ready to transfer their manufacturing, business processing and research and development operations in order to take advantage of the loc-cost of labour in the Asian region.
In addition, Asia is starting to become one of the most important markets in the world. The region boasts of an impressive 35% global output, and the doubled growth rates, and even three times higher in a number of Western countries, and because of that multinationals from Europe and the United States are clamouring to be in the situation.
However, upon establishing of headquarters in Asia by the multinationals, working out with the new people and environment is difficult. According to Frank Richter, the first investment of Western companies has been put to waste. Moreover he said that the MNCs have met wrong partners with poor joint ventures which lead them to misidentification of the market. That was prior to the Asian Financial Crisis, MNCs are more sensitive towards those issues, added to the fact that nowadays due to the evolvement of the government policies, it became easier to do business in Asia, and example is in the case of China wherein the government have allowed foreign-owned companies to fully and wholly operate, which makes management easier and it also prevents theft by local partners.
Recently, the multinational companies have transformed their investment approach from an absurdly optimistic projection of business to learning to interject reality and flexibility with regards to their decisions in investment. An example is the American Express, the company utilized real option analysis, in which the managers use confidential option-pricing theory in order to evaluate the worth of real projects, and moreover the technique is more flexible in investment planning. In addition, it aids the multinational companies to enter new markets.
Another trend that describes the second wave of multinational investments in Asia focuses on the contention over developing a market share or centre on the profitability. The MNCs are torn between becoming huge in Asia as the market expands; the companies want to obtain more profits.
An example, of a company which is wrestling with the issue is the Trane Company, a US-based manufacturer of air-conditioning systems. The company have increased it sales in the region in about 10% and twice as much in China in 2004, however the competition have faster rate of increase. This is because the investment method that Trane utilised is too conservative for the market. Another multinational Company that also have issues regarding market share and profitability is AstraZeneca, an Anglo-Swedish drugs giant. The sales of the company in China have increased in the year 2004 for almost 30%, which prompted China in the top-ten list of their market. And due to that the company immediately requested to change their ten-year plan in China and be replaced urgently. In the new plan of AstraZeneca, they urge more investment in marketing and sales; increase the production facilities and broader clinical trials. However, the risk is still huge in the Chinese market because the economy of the country changes rapidly and unexpectedly; therefore the company keeps aware of the risks and develops risk management procedures by having accurate calculations of the market.
Another issue that has a huge impact on the investment strategy of multinational companies in Asia, particularly MNCs that made acquisitions, are the corporate governance and the financial reporting. The quality of disclosure in organisations that MNCs target to acquire is very inadequate. The main concern of MNCs, particularly in China is the taxes. State owned corporations are exempted in some tax by the government however when it is acquired by a multinational company the taxes are suddenly enforced.
Another issue that would affect the investment of multinational companies in Asia is the rampant corruption on most nations, as well as, the lack of transparency with regards to public and private forms.
Despite of all the issues concerning the Asian Economy, multinational corporations are still flocking in the region hoping to get a piece of the emerging markets. Since the early 1990s, Asia has been considered by businessmen, analysts, and economist as the next big thing in the market, and because of that many MNCs became interested and began to invest. However, when the Asian Financial Crisis hit the region, MNCs are now reluctant to invest in the region.
Yet, when the year 2000 approached, the Asian economy has picked up and the growth ever since has been rapidly surging. This is the main reason why most multinational companies invest in the region; they see this as a potential huge market. Aside, from the potential market, the region also provides cheap labour; therefore the cost for MNCs will be lesser compare to the cost in establishment of a factory or firm in the West.
After the Asian Financial Crisis in 1997, (1999) have reported that a study have revealed that multinational companies seek for growth opportunities in Asia and two-thirds of Asian firms and three-quarters of Multi-national companies looks at the region as an opportunity rather than a crisis. The corporations that took advantage at that opportunity are now reaping the profits as the Asian economy is rapidly growing, a rate that is faster than the previous ones.
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