Paper Example on Entry of Multinational Companies in the Economy of Cyprus

Introduction

Foreign Direct Investment (FDI) is referred to the presence and function of a business in one country while its origin and control are based in another country. It is known in the world of business that a nation that attracts large foreign corporations has made progressive steps towards laying a right business environment. Sustainable and profitable business environment attracts the giant corporations in the world to any economy. Cyprus in the past few years has been ranked among top destinations concerning attractiveness for foreign direct investment (Hanappi et al., 2017). When the nation became a candidate for accession to the European Union (EU), most investment restrictions were removed. Financial intermediation is one of the sectors that greatly benefited from the initiative; Cyprus began to bank large amounts of FDI every year.The essay delves on the issue of FDI in the economy of Cyprus exploring both the past and present and seeking to find the future. The article will also discuss the motives of the numerous multinationals getting into the nation and their implications to the economy (Andreff, 2017). The paper will be based on specific examples of these multinationals that are already in the country.

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According to the latest UNCTAD global FDI fell from $1.81 trillion in 2016 to $1.52 trillion in 2017. The global decline was caused by the general fall of -25% in FDI flows in large economies(Jaklic& De Beule, 2016). Europe registered a drop of -26% while North America declined by -32%. It was balanced by other positive FDI in developed states like Australia(Jaklic& De Beule, 2016). Developing nations remained almost at the same level with the inflows rising with a 2% margin in some regions like Latin America and Caribbean (Hanappi,Katsikides& Scholz-Wackerle, 2017). James Zhan, a director of UNCTAD division of investment, pointed out that there is a high possibility of upward synchronization in 2018 though the risks are high. Cross-border contracts in India produced to 22 billion dollars from$8 billion in the last year. Theportion of Asia in the world-wideinfluxes rose to 31% in 2017 from 26% in 2016 (Andreff, 2017). The increase is attributed to the significant sale of cross-border M&A rummage sale which exploded from $43 billion to $72 billion in 2017.

The inward statistics of Cyprus indicate that most capital has its origin in the UK, Russia, and Greece(Rasciute& Downward, 2017). After the significant drop, the country began to sprout with some sectors like gas industry, tourism, privatizations and large-scale projects causing an increase of 9.2%. Some of the notable improvements of the inward FDI in Cyprus include promotion of development projects, modernization of legislation, the introduction of tax incentives, and diversification of tourism (Hanappi et al., 2017).The country is still maintaining its status as a great nation that has incredible destinations for investors, retirees, vacations, smooth citizenship program through packages that appear among the top ten in the world.

According to the Marxist theories, imperialism is one of the motives of multinational companies establishing in the international market. Imperialism is a policy of extending the authority of a nation through the establishment of political and economic influence over the subject nation (Hanappi et al., 2017). According to Lenin and Bukharin, capitals look for other beneficial investments because developed nations have an unstable rate of profit. Other scholars, Hobson and Luxemburg, have said that the other motive for imperialism is expanding the consumption tendency in underdeveloped nations because in the developed ones there is an under-consumption of the products (Jaklic& De Beule, 2016). The multinationals make more money in underdeveloped countries because of the high demand created and cheap labor present which causes a low production cost.

To explain further the motives of MNE's entry into the international market, the theory of absolute advantageAdam Smith (1776) is applied.Classical theories of trade indicate that different nations can produce goods at lower costs than others (Ratten, Dana & Ramadani, 2017). Businessmen advise nations to specialize in providing products that they can deliver more efficiently. The theory could explain why Switzerland export chemicals, confectionery, and pharmaceuticals while Russia exports oil and gas. Absolute advantage in production can be facilitated by the quality of land, lower labor costs, building expertise in some key areas, and subsidies to assist native industries.

David Ricardo (1817) came up with the theory of comparative trade where he mentioned that even if a nation is self-sufficient regarding producing all the products it requires and at lower costs, business remains exceptionally beneficial based on comparative costs. Profits are made when a country exports what it produces at the highest profit and import those with least comparative advantage (Jaklic& De Beule, 2016). This theory has promoted the concept of high-end industry specialization where only the competitive ones should be left to operate.

Cyprus is a country that is hosting more than a hundred substantial multinational enterprises because of the favorable climate that the state has offered. Most of these measures and removal of significant restrictions have made business highly profitable when conducted in Cyprus (Buckley& Strange, 2015). The principal reason for internationalizing a company is increased profit which explains their massive presence in Cyprus. Other than the advantages, the country is located in a strategic place globally where the time zone allows businesses to interact with clients in the East and West during the same working day(Orphanides, 2016).Few regions have this opportunity because the time zones for the East and West are contradicting. People in Cyprus are highly qualified and most of them due to close and frequent interactions with nationals from other regions, they have become multilingual. Other than the favorable time zones, the country is strategically located between Middle East, Europe, Asia and Africa. A useful transport system and infrastructure are available with numerous international shipping companies already at bay. The country is a member of the Eurozone and European Union which makes it easy for member states to enjoy the business freedom signed by the member states. Some of the multinational companies have even set their warehouses in Cyprus to ship their products from there because of its strategic location (Rasciute& Downward, 2017). The above government incentives have played a significant motivating position to the entry of multinationals such as Shell, Total and BP in the fuel industry, IBM, MTN, NCR, and Microsoft in the ICT. .Some of the reasons that drive a country towards creating a favorable environment for foreign investments in the jobs that will be created, enhanced competitiveness and the impact the stakes will have on the trade balance. Most of the incentives mentioned have facilitated entry of numerous multinational companies.

According to the theory of factor proportions by Heckscher-Ohlin, the differences in the production with changing environments occur due to the differences inthe supply of production factors. For goods to be produced, one of the requirements is workers and capital hence each variable affects the result directly (Chaikin, 2015). Some products require less capital to build while others are capital intensive hence the prices in the market for the two items will vary. The same applies to goods that need fewer workers while others are labor intensive. The neoclassical theory of trade comes in to conclude that nations should export products that make intensive use of the factors they have in plenty and import those that make intensive use of scarce elements (Ratten, Dana & Ramadani, 2017). Looking at the case of India and the USA; India is well endowed with labor. they should export products that are labor intensive as USA exports those that are capital intensive.The Heckscher-Ohlin theory makes several assumptions such as labor and capital which are the major factors of production do not occur in equal proportions in the same country (Nouri & Soltani, 2016).

The Vernon's IPLC theory of 1966 is based on the experience of the US market where the proponent noticed that in the better part of 20th century, most new products in the world came from the USA. The USA controlled technology and was the initiator of many technology-driven products (Buckley& Strange, 2015). However, after a long while, US became a serious importer of goods that it had earlier developed, produced and exported. The best environment to producenew products is an environment of a high per capita income both socially and economically such as the US (Chaikin, 2015). In the current product age, the monopolistic position is taken where minimal exports occur.

In the stage of product maturing, the foreign demand for products expands as mass-production methods are discovered. In the stage of product standardization, imitation increases and the only way to remain competitive is by lowering the prices of products. The manufacturers find means of reducing the prices by cutting the production costs. The only way that can be achieved is through taking the production to developing nations and later exporting them to developed countries. This theory explains why many companies are producing their products in developing countries such as Nigeria. Numerous UK and US products are manufactured and assembled in developing nations where the cheap labor is available (Shenkar, Luo& Chi, 2014). By so doing they lower the prices of their products competitively while the host country benefits from thousands of jobs the citizens are given.

Internalization theory is explained by the bounded rationality where firms operate in constraints because of the imperfect information they possess. More problems are generated by independent economic agents when they practice opportunistic behavior. Because of the imperfections present in the market, substantial benefits are achieved when a business chooses to internalize it (Nouri & Soltani, 2016). MNEs are generated when knowledge is passed across national boundaries to create internal markets.

The primary issue of discussion is understanding why companies expand internationally. Since globalization changed the course of things in the late 20th and 21st century, companies and businesses have moved to other economies freely. The world has turned to be a one-stop shop market since the regional barriers were levelled (Lasserre, 2017). Countries have formed various business communities in which they sign Memorandum of Understanding on how they want their business to be conducted.Several business treaties are signed to allow member states to carry on their business in any of the member countries without restrictions (Nouri & Soltani, 2016). Some of these agreements are facilitated by organizations such as the EU, COMESA, IGAD, and UNCTAD among others.

Before a company goes into the international market, it is wise to understand where it will be based, why it must internationalize, when is the right time and how it is going to go about it. Hollensen (2012) came up with two primary reasons why companies increase, and they include proactive and reactive motives. According to Schorling, Johansson, and Strandberg (2006), reactive firms internationalize because they lack alternatives while proactive firms expand because they have chosen to.

The most significant motivation for companies to internationalize according to scholars is the profits to be earned.In the...