Global Financial Crisis

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Introduction

The financial crisis of 2007-2009 which started in the United States (U.S.) had its effects spread across the global economies. The crisis reached its peak in the fiscal period spanning from 2007-2008 which saw the collapse of the world’s financial system.

Global credit markets ceased to function as the Gross Domestic Product (GDP) of the US was declining at an annual rate of 7 percent. This was accompanied by a drop in domestic demand and industrial production (Addo, 2010).

As a result of this, there was a drastic decline in the global credit market as the effects of the crisis spread from the US to other economies including but not limited to Europe, Asia, Australia, Africa and South America where Brasil was also not spared. In view of this, the paper explores this financial crisis as recent global financial crisis (GFC). It covers its background information, its effects to different parts of the world. Moreover, how this crisis has influenced effectiveness of multinational enterprises’ operations is also covered.

Background Information of the Financial Crisis

According to Addo (2010), the financial crisis of 2008 was predictable and avoidable. Initially, the collapse of AIG, the under-performance of Fallie Mac and Fannie Mac and the merging of the Bank of America and the Merrill Lynch were the start point of the financial problems in the US (United Nations, 2009). It is widely believed that this financial crisis was created by the US mortgage market.

The new mortgage lending policy induced majority of the households to take heavy debt burden that came to be commonly known as subprime. The subprime mortgage was meant for less credit worthy borrowers than the prime borrowers (National Institute of Economic and Social Research, 2008).

This policy curtailed the lower and the middle class income growth to the benefit of the wealthiest segment of the US population (United Nations). Addo continues to affirm that as a result of this policy, the outstanding household debt raised from 64 percent to 94 percent of the US Gross Domestic Product which led to the iniquitous financial crisis.

However, one may wonder why financial problems of a small segment of the market can spread out and be a major problem in the world’s financial services? In answering this question, one gets to unlock the mystery of this issue. First of all, the subprime mortgages of the US at the time were tremendously securitized.

However, the need to sell the idea led to a wide spread of default risk among participants in the market. In the event where by originators of these mortgages held them to the period of their pay off, potential high risk of defaulting intensified on the side of the originator (Davis, 2008).

It is therefore affirmed by Davis (2008) that as a result of securitization of these mortgages, losses that were incurred due to the rising foreclosure rate and delinquency were borne by the investor groups around the globe which include financial institutions such as banks, insurance companies among others (Sapelli, 2010). This then became the genesis of financial turmoil in the global credit market.

In addition, this financial crisis is attributed to have begun in the U.S. credit markets when banks and other non bank financial institutions started issuing Credit Default Swaps (CDS) to customers. The procedure was a form of over the counter derivative where a buyer was allowed to make payments to the seller in order to get a payoff of a loan or a bond that goes to default (Poole, 2010).

However, the CDS program was not well regulated since parties in the contract were at liberty to negotiate privately which made the market to lack transparency as it is required in sound financial management. It therefore led to the collapse of key players in the financial credit market of the US such as AIG and Lehman Brothers.

As 2008 progressed, Poole (2008) continuous to affirm that there were intensified strains in the financial sector and worse still, by April of the same year (2008), the Federal Reserves lowered its rate in funding to a low of two percent which was in place until September of 2008.

Moreover, it should be noted that the crisis was a worldwide problem affecting all continents with the financial sector being badly affected. However, the Asian markets and banks were stronger than the European and the U.S. counterparts but Asia could not escape the effects completely since employment and output fell all over the world (Poole).

GFC on Asia and how it influenced the effectiveness of MNE operation

Asia as a continent is critical in the global economy since it is the major supplier of oil in the world. However, the financial crisis of 2008 resulted to drastic drop in the global oil prices which in return had adverse effects to the oil producing countries.

For instance, United Arab Emirates (UAE) which is one of the leading oil producers in the world suffered a great deal of the crisis as its Gross Domestic Product (GDP) that was at 7.4 percent in 2008 fell to a low of 0.5 percent in 2009 (United Nations, 2009).

In addition, United Nations continues to affirm that Saudi Arabia which is one of the major oil producers in the global market had its GDP growth rate decline from the high of 4.2 percent in 2008 to a low of 0.7 percent in 2009.

With respect to this, it can be acknowledged that most MNEs operating in Asia especially in oil producing countries were greatly influenced in their effectiveness of service delivery. Importantly, most of these enterprises were applying a model of diversification in their product production.

However, with the hush economic environment of the time, most of these enterprises were forced to specialize in a few of their venture. As a result, this resulted to positive effectiveness in their operations as now their resources and efforts were directed to a given product line.

Moreover, the operational models of most of the MNEs operating in this region were adversely affected. For instance, with various operational models being employed, they were forced suite their models to fit in the current economic environment.

For example, models relating to relationships with other business units such as trading partners, customers and suppliers were affected since purchasing power of these parties were constrained. As a result, their effectiveness was negatively affected in this respect.

With respect to 2008 financial crisis on foreign direct investment (FDI), Asian countries were largely affected since their FDI declined by 21 percent which was mainly attributed to fall in oil prices (United Nations, 2009).

Since large proportions of FDI came from major economic powerhouse like US, Japan, Britain who were fighting their stability from the financial crisis and thus they gave little considerations to matters relating to FDI in other countries. Moreover, those MNEs that were opting to join this market were quickly discouraged since the environment was not palatable to them. This impacted negatively on effectiveness of these MNEs since they could no honor their operational model that relate to expansion strategy.

Accordingly, those MNEs that were already in existence in these Asian countries were able to structurally adjust to the environment and continue with their business processes. As result, they continued to operate in the region devoid of new players. This made them to optimize on their environment due to existing space hence helping them to achieve effectiveness in their operations.

Furthermore, the GFC has influenced effectiveness of MNEs this region. For example, with the experiences that these enterprises had drawn from the crisis, they were able to set realistic ambition levels in their operational models. It was understood that the crisis was brought about by unrealistic ambitions of some of the MNEs. As a result they had learnt to operate within their manageable capabilities which resulted to effectiveness in their operations.

GFC of 2008 on Europe and how it influenced effectiveness of MNE operations

Europe was adversely hit by the global financial crisis of 2008. Initially, the European economy was performing well until the summer of 2007 when the effects of the crisis started being felt. In 2007 fiscal year, Euro Area’s had a peak financial performance of 2.6 percent but with the onset of the crisis in the region, the GDP growth rate came down to a low of 0.25 percent in 2008 (National Institute of Economic and Social Research, 2008).

The financial crisis spread to Europe through the losses incurred by the European banks that operated abroad since they were affected by contraction in their lending particularly those operating in the US (Schwartz, 2009). In addition, countries with domestic real estate booms like Spain, UK and Ireland were facing same domestic lose that were being experienced in the US (United Nations, 2009). These countries experienced huge deficits in their current accounts.

As a result, the MNEs, various host countries in Europe and European Commission adopted various operational models. These models were in terms of structural adjustments programs that were aimed at guarding the MNEs form escalation of this crisis.

Moreover, some of these structural policies have remained to be guiding principles in operational activities of the enterprises. As a result, they act as checks and balances against some decisions of some players in the financial market. This has helped MNEs to achieve effectiveness in their operations.

GFC on Latin America (Brasil) and how it influenced effectiveness of MNEs operations

Most countries felt the heat of the financial crisis of 2008 at the end of that year. Moreover, the effects of this crisis spilled to the proceeding years of 2009, 2010 and only getting some reprieve in 2011. For instance, Brasil was adversely influenced in various ways in terms of their multinational enterprise operations.

Firstly, those enterprises that were in manufacturing industry fell significantly during this phase by approximately 37 percent (Addo, 2010). This state of affair was attributed to negative shocks that were experienced in flow of foreign capital market. Moreover, this was coupled with sharp depression of its local currency.

As a result, operational models of these MNEs were affected to a large extent. For instance, their approaches that relate to global integration were affected as the MNEs were forced to produce goods close to their markets (Robert, 2011).

As a result, foreign investment of these entities only targeted specific markets that were less affected by the crisis. Consequently, this was against their operational models that encouraged global integration that was supposed to be undertaken without segregation of some of the global markets. Nonetheless, segregation of some of the markets was inevitable due to their adverse susceptibility to the crisis.

For that case, because of the pronounced effects of the GFC, MNEs that were operating in Brasil at the time were forced to prioritize internal auditing and risk management which was one of their aspects of operational models.

These risk management approaches were desired to deter emergence of any financial crisis from ever hitting them again. In addition, internal audits were also prioritized which were also one of the strategies that was applied to guard against emergence of such crisis. As a result, with improved risk management, the MNEs were able to contain eruption of other financial crisis hence becoming effective in their operations.

Conclusion

To wind up, it is important to acknowledge that globalization has had several benefits in all spheres of life in the world. At the same point it is also relevant to note that same globalization has had several negative effects. For instance global financial crisis like the one witnessed in 2008 affected the whole world.

It is therefore evident that the crisis and its aftermath consequences will continue to affect the global economies for some years to come. However, there have been unending efforts to institute sound structural programs to manage fragile financial industry in order to prevent repeat of the 2008 financial turmoil. Some of these programs have resulted to effectiveness of MNEs since they have turned to be robust institutions.

References

Addo, A. (2010). The 2008 financial crisis: the death of an ideology. USA: Dorrance Publishing Co., Inc.

Davis, P. (2008). The Evolution of the financial crisis of 2007-8. National Institute Economic Review, 1(206), 5.

National Institute of Economic and Social Research. (2008). The Impact of the financial crisis on the Euro area. National Institute Economic Review, 3(206), 90-122.

Poole, W. (2010). Causes and consequences of the financial crisis of 2007-2009. Harvard Journal of Law & Public Policy, 33(2), 421.

Robert, J.C. (2011). International economics. USA: South-Western Cengage Learning.

Sapelli, G. (2010). Industrial relations and the world economic crisis in the context of globalization. Economics and Labour relations, 20(1), 111.

Schwartz, A. (2009). Origin of the financial crisis of 2008. The Cato Journal, 29(1), 19-23.

United Nations. (2009). The Global economic and financial crisis. Geneva: United Nations Publication.

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