International Business and the Balance of Payment Essay

International Business and the Balance of Payment - Essay Example According to the research findings, it can, therefore, be said that the outward movement of a firm's international operations is considered as internationalization, not only in terms of the number of markets served but also in the operation methods utilized. Johanson and Vahlne define internationalization as "a process in which the enterprise gradually increases its international involvement. This process develops the relationship between the development of knowledge about foreign markets and operations on one hand and escalating commitment of resources to foreign markets on the other. Many critics view multinational corporations as a negative factor in the development efforts of Third World Countries; Hymer; Hopkins; Mullier found that the multinationals are perceived as a principal source of the underdevelopment of Third World Countries. Moreover, Frank supports this statement by saying that multinational corporations create net capital outflows, contribute to problems in balance o f payment, distort the domestic consumption patterns, export unsuitable technology, and products at excessive prices and, most emphatically, do not solve the unemployment problems. In addition, they aggravate economic and social inequalities in the host countries through the formation or the intensification of a small group of indigenous elites who collaborate with and benefit from the multinationals. The balance of payments is an important factor that greatly influences the internationalization process of many firms. A deficit in the balance of payments of a host country might force the government to use artificial barriers (i.e. tariffs and quotas) to limit and control imports. Managers can utilize the evaluation of the level of GNP in a host country in making important decisions not only by providing them with an indication of a potential consumer base in the market and average income per capita but also by helping the managers to forecast the future trends in a foreign country's economy. Rigorous crises in the balance of payments and currency take place with some occurrence in emerging-market economies--more than 51 crisis episodes over the past 25 years, demonstrating that about 8 percent of the time an emerging-market economy was facing serious turbulence in currency markets. Likewise, this frequency of currency crises appears to be a reoccurring phenomenon, persistent over time and across regions of the world. In terms of the other variables of the model, study of Glick & Hutchinson concluded that actual exchange rate overvaluation is a significant factor slowing output growth. This finding is discussed comprehensively in Moreno. In view of the fact that real overvaluation also takes part in an essential role in generating currency and balance of payments crises in the first instance, the undesirable effects emerge to work through two channels - the direct and the indirect channel. The direct channel is to reduce real output by weakening in export compe titiveness. The indirect channel is by contributing to a currency crisis, which in turn is associated with a disruption in financial markets and a downturn in output growth.