What Causes Multinational Companies to Increase Resource Commitments during Financial Crises in Emerging Markets?

By Gao, Tao; Sarraf, Talin E. | Multinational Business Review, Summer 2009 | Go to article overview

What Causes Multinational Companies to Increase Resource Commitments during Financial Crises in Emerging Markets?


Gao, Tao, Sarraf, Talin E., Multinational Business Review


Abstract:

This paper explores the major factors influencing multinational companies' (MNCs) propensity to change the level of resource commitments during financial crises in emerging markets. Favorable changes in the host government policies, market demand, firm strategy, and infrastructural conditions are hypothesized to influence the MNCs' decision to increase resource commitments during a crisis. The hypotheses are tested with data collected in a survey of 82 MNCs during the recent Argentine financial crisis (late 2002). While all the above variables are considered by the respondents as generally important reasons for increasing resource commitments during a crisis, only favorable changes in government policies significantly influence MNCs' decisions to change the level of resource commitments during the Argentine financial crisis. The research, managerial implications, and policy-making implications are discussed.

Keywords: Financial crisis, emerging markets, Argentine financial crisis, multinational companies, changes in resource commitments, FDI, changes in investments

INTRODUCTION

Background

To many multinational companies (MNCs), the term "emerging markets" means growth opportunities. Growth in these markets can occur on a variety of fronts - development of infrastructure, opportunities for making foreign investments, and expansion of the consumer market fueled by rising income and emerging of a middle class - to name a few. Featuring large physical sizes, large populations, strong rates of growth, significant economic reforms, and major political importance within their regions, big emerging markets such as China, India, Brazil, and Argentina are often considered important drivers for regional or even global economic growth (Pillania 2009a 2009b).

Meanwhile, the constant changes of events typical to emerging markets represent both exciting opportunities and considerable risks for multinational businesses. Perhaps the most relentless challenge in doing business in emerging markets is the risk of being caught up in a financial crisis. Unfortunately, with their regular heavy reliance on external capital for economic development, emerging markets are highly susceptible to financial crises (Grabel 2000; Singh andYip 2000). Several major financial crises have occurred in the past two decades from Argentine to Mexico to Southeast Asia to Turkey to Brazil and to Russia. The most recent case of such a catastrophe in an emerging market took place in Argentina in 20012002, when it experienced its worst political and economic crisis since 1983 (Cooper and Madigan 2002; Goodman 2002), characterized by drastic policy changes, government turmoil, and social unrests.

The complex and volatile changes in the currency value, government policies, consumer demand, and support industries, among others, present major challenges to the operations, sales, and profitability of all multinational firms doing business in the market. The changes create threats to MNCs ranging from loss of markets, disruption of supply and distribution chains, collapse of local alliance partners, increased financial risks, increased hostility toward foreign firms, disruption of cost structures, to greater political risks (Singh and Yip 2000). Meanwhile, even the worst financial crises in emerging markets could spell opportunities for MNCs such as short-term bargain hunting of inexpensive assets, ability to expand exports to neighboring markets, and long-term strategic investments.

Crisis situations call for crisis management responses and MNCs must expect and deal with a financial crisis as it occurs (Bartels and Freeman 2000; Goodman 2002; Singh andYip 2000; Thompson and Poon 2000) and changing the amount of committed resources in an emerging market under crisis is perhaps the most important strategic decision for a firm. The decision redefines the scale of the foreign operation and largely shapes the MNCs control in the local operations and its level of risk exposure (cf. …

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