proliferation of multinational corporations (hereinafter referred to as MNCs)
began 200 years ago, but they were making only a part of the foreign investment
in different countries in the form of portfolio rather than long term
Greenfield or joint venture investments.
increase of globalization, which is both the cause and the effect of
internationalization of world trade,
MNCs have become dominant players in the
global economy. Although severely affected by the economic and financial
crisis, and expected to fall from $1.7 trillion of 2008 to below $1.2 in 2009,
the foreign direct investment (FDI) by MNCs have been paid great importance for
high economic growth and strong economic performance in many parts of the
he end of
the Cold War which led to the liberalization of the developing markets and
opening of their economies with the removal of foreign investment barriers,
privatization of the state economic enterprises and development of FDI
attractive policies, has increased the investment of MNCs, especially in the
developing countries. Latin America, Eastern Europe and Asian economies have
become predominantly FDI focused first with labor-intensive manufacturing
industries and then with market-seeking FDI by 1990’s.
While MNCs are struggling to get an accurate answer
for the "where to invest"
Question, countries have got into the competition
of "attracting more FDI"
To "become hosts to branch plants of MNCs as
well as to small- and medium-sized firms from developed countries"
Particularly after 1990’s. FDI not only "has
become by far the single largest component of their net capital inflows"
but it also has become critical for these countries
in terms of their effects on the human capital of the economies.
These countries not only try to benefit from the
financial aspects of investment, they also try to get best practices, transfer
knowledge with new ideas and technologies and adopt managerial skills and new
methods of managing companies.
Additionally, investments of the MNCs in developing
countries have played a significant role in the process of integration of
developing countries with other countries of the world, which is referred to as
economic openness, via increasing imports and exports and integrating firms,
particularly SME’s into the global supply chain.
In this global picture, it would be better to
analyze the evolution of investment of MNCs in Turkey after early 1980’s, when
markets were liberalized and import substitution policies were left. The
decrease in the importance of government’s role in overall economy with the
privatization of state enterprises and commercial and legal reforms aimed at
attracting MNCs to Turkey, but the share Turkey had from worldwide FDI
investments remained low until 2000’s.
After structural reforms, the political stability,
economic growth of the domestic market, which increased annually by 6% from
2002 to 2008 in terms of annual average real GDP
Increase in the government focus on FDI and as a
result, increased openness of the country with local competitive environment
Have changed the figures and Turkey has become the
"target for foreign direct investment as it is both an efficient
production base and an important market for delivery of goods and
paper aims to analyze the determinants of the MNCs’ investments in different
counties with a focus on Turkey. First of all, the growing importance of MNCs
in global economy and their intentions to act globally will be analyzed.
Secondly, different determinants of international investment decisions such as
legal and commercial determinants will be discussed. Afterwards, investment
policies of developing countries and their reforms will be elaborated taking
Turkey as a topic of analysis and Turkey’s investment environment will be
discussed. In the conclusion, problems and different risks (commercial,
political, legal risks) which an MNC may face in investing in Turkey will be
different ways you can invest internationally: through mutual funds, American
Depositary Receipts, exchange-traded funds, U.S.-traded foreign stocks, or
direct investments in foreign markets. This online brochure explains the basic
facts about international investing and how you can learn more about foreign
companies and markets. Although this brochure covers foreign stocks, much of it
also applies to foreign bonds.
Types of Business Risks
risks are of a diverse nature and arise due to innumerable factors. These risks
may be broadly classified into two types, depending upon their place of origin.
Risks are those risks which arise from the events taking place within the
business enterprise. Such risks arise during the ordinary course of a business.
These risks can be forecasted and the probability of their occurrence can be
determined. Hence, they can be controlled by the entrepreneur to an appreciable
various internal factors giving rise to such risks are:-
Human factors are an important cause of
internal risks. They may result from strikes and lock-outs by trade unions; negligence and dishonesty of an
employee; accidents or deaths in the industry; incompetence of the manager or
other important people in the organization, etc. Also, failure of suppliers to
supply the materials or goods on time or default in payment by debtors may
adversely affect the business enterprise.
Technological factors are the
unforeseen changes in the techniques of production or distribution. They may result in technological obsolescence and
other business risks. For example, if there is some technological advancement
which results in products of higher quality, then a firm which is using the
traditional technique of production might face the risk of losing the market
for its inferior quality product.
Physical factors are the factors which result in
loss or damage to the property of the firm.
They include the failure of machinery and equipment used in business; fire or
theft in the industry; damages in transit of goods, etc. It also includes
losses to the firm arising from the compensation paid by the firm to the third
parties on account of intentional or unintentional damages caused to them.
risks are those risks which arise due to the events occurring outside the
business organization. Such events are generally beyond the control of an
entrepreneur. Hence, the resulting risks cannot be forecasted and the
probability of their occurrence cannot be determined with accuracy.
various external factors which may give rise to such risks are :-
Economic factors are the
most important causes of external risks. They result from the changes in the prevailing market
conditions. They may be in the form of changes in demand for the product, price
fluctuations, changes in tastes and preferences of the consumers and changes in
income, output or trade cycles. The conditions like increased competition for
the product, inflationary tendency in the economy, rising unemployment as well
as the fluctuations in world economy may also adversely affect the business
enterprise. Such risks which are caused by changes in the economy are known as
'dynamic risks'. These risks are generally less predictable because they do not
appear at regular intervals. Also, such risks may not necessarily result in
losses to the firm because they may also contain an element of gain for the
firm. For instance, due to market fluctuations well known product of a firm may
either lose its demand or may occupy a larger market share.
factors are the unforeseen natural calamities over which an entrepreneur has
very little or no control. They
result from events like earthquake, flood, famine, cyclone, lightening,
tornado, etc. Such events may cause loss of life and property to the firm or
they may spoil its goods. For example, Gujarat earthquake caused irreparable
damage not only to the business enterprises but also adversely affected the
whole economy of the State.
factors have an important influence on the functioning of a business, both in
the long and short term. They result
from political changes in a country like fall or change in the Government,
communal violence or riots in the country, civil war as well as hostilities
with the neighboring countries. Besides, changes in Government policies and
regulations may also affect the profitability and position of a enterprise. For
instance, changes in industrial and Trade policy annual announcement of the
budget amendments to various legislations, etc. may enhance or reduce the
profits of a business enterprise.
Market Risk: The
risk that the value of your investment will decline as a result of market conditions. This type of risk is
primarily associated with stocks. You might buy the stock of a promising or
successful company only to have its market value fall with a generally falling
Interest Rate Risk: The
risk caused by changes in the general level of interest rates in the marketplace. This type of risk is most
apparent in the bond market because bonds are issued at specific interest
rates. Generally, a rise in interest rates will cause a decline in market
prices of existing bonds, while a decline in interest rates tends to cause bond
prices to rise. For example, say you buy a 30-year bond today with a 6% annual
yield. If interest rates rise, a new 30-year bond may be issued with an 8%
annual yield. The price of your bond drops because investors aren’t willing to
pay full value for a bond that yields less than the current rate of interest.
Inflation or Purchasing Power
risk that the return on your investment will fail to outpace inflation. This type of risk is most closely associated
with cash/stable value investments. Thus, although you may think a traditional bank
savings account is relatively risk free, you actually could be losing
purchasing power unless the interest rate on the account exceeds the current
rate of inflation.
risks are unique to specific investment non-systematic risks.
Business Risk: This is
the risk that issuers of an investment may run into financial difficulties and not be able to live up to market
expectations. For example, a company’s profits may be hurt by a lawsuit, a
change in management or some other event.
Credit Risk: For bonds,
this is the risk that the issuer may default on periodic interest payments and/or the repayment of
principal. For stocks, it is the risk that the company might reduce or
eliminate dividend payments due to financial troubles.
invest internationally, the additional risks are also there,
Exchange Rate Risk: This is
the risk that returns will be adversely affected by changes in the exchange rate.
Country or Political Risk: This is
the risk that arises in connection with uncertainty about a country’s political environment and the stability of its economy.
This risk is especially important in emerging markets.
1 ECONOMIC RISK:
It is the
chance that macroeconomic conditions like exchange rates, government
regulation, or political stability will affect an investment, usually one in a
How it works/Example:
example, let's assume American Company XYZ invests $1,000,000 in a
manufacturing plant in the Congo. Aside from the business risk associated with
making the plant profitable, Company XYZ is exposed to economic risk.
political environment could shift quickly, perhaps prompting the Congolese
government to seize the plant or significantly change laws that affect Company
XYZ's ability to operate the plant.
hyperinflation could make it impossible to pay workers, or exchange rate
circumstances could make it unprofitable to move profits out of the country.
Why it Matters:
risk is one reason international investing carries more risk than domestic
investing. Shareholders and bondholders often bear the economic risk undertaken
by international companies like Company XYZ. Investors who purchase and sell
foreign government bonds are also exposed.
risk may also add opportunity for investors. Foreign bonds, for example, allow
investors to participate indirectly in the foreign exchange markets and the
interest rate environments of different countries. But the foreign regulatory
authorities may impose different requirements on the types, sizes, timing, credit
quality, disclosures, and underwriting of bonds issued in their countries.
risk can be mitigated by opting for international mutual funds because they
provide instant diversification, often
investing in a variety of countries, instruments, currencies, or international
2 POLITICAL RISK:
It is a type of risk faced by investors,
corporations, and governments. It is a risk that can be understood and managed
with reasoned foresight and investment.
political risk refers to the complications businesses and governments may face
as a result of what are commonly referred to as political decisions or “any
political change that alters the expected outcome and value of a given economic
action by changing the probability of achieving business objectives”. Political
risk faced by firms can be defined as “the risk of a strategic, financial, or
personnel loss for a firm because of such nonmarket factors as macroeconomic
and social policies (fiscal, monetary, trade, investment, industrial, income,
labor, and developmental), or events related to political instability
(terrorism, riots, coups, civil war, and insurrection).”Portfolio investors may
face similar financial losses. Moreover, governments may face complications in
their ability to execute diplomatic, military or other initiatives as a result
of political risk.
multinational compa nies, political risk refers to the risk that a host country
will make political decisions that will pro ve to have adverse effects on the
multinational's profits and/or goals. Adverse political actions can range from
very detrimental, such as widespread destruction due to revolution, to those of
a more financial nature, such as the creation of aws that prevent the movement
general, there are two types of political risk,
Macro risk and micro risk.
refer to adverse actions that will affect all foreign firms, such as
expropriation or insurrection, whereas micro risk refers to adverse actions
that will only affect a certain industrial sector or business, such as
corruption and prejudicial actions against compan ies from foreign countries.
All in all, regardless o f the type of political risk that a multinational c
orporation faces, companies usually will end up losing a lot of money if they
are unprepared for these adverse situations. For example, after Fi del Castro's
government took control of Cuba i n 1959, hundreds of millions of dollars worth
o f American-owned assets and companies w ere expropriated. Unfortunately,
most, if not all, o f these American companies had no recourse for getting any
of that money back.