The Role and Impact of Capital Flows on Multinational Enterprises

This report delves into the critical role of capital flows for multinational enterprises (MNCs), exploring their significance in international trade and economic development. It examines the importance of capital flows for companies, highlighting how they facilitate investment, enhance profitability, and contribute to national economic growth. The report analyzes relevant international laws and regulations, particularly those in the UK, such as the Enterprise Act 2002, the Competition Act 1998, and others, that govern MNC operations. Furthermore, it contrasts the impacts of capital flows on both developing and developed countries, discussing how these flows influence financial stability, market expansion, and the overall economic landscape. The report also covers the importance of capital flow management for MNCs, including short-term and long-term capital flows and their effects on a company's financial health.

Importance of capital flows
for Multinational Enterprises
and impacts of capital flows in
developing and developed
countries

Table of Contents
INTRODUCTION...........................................................................................................................4
IMPORTANCE OF CAPITAL FLOWS FOR DEVELOPING COUNTRIES ...........................26
CONCLUSION..............................................................................................................................31
REFERENCES..............................................................................................................................32

INTRODUCTION
Organisations which are working in the international markets are having responsibility to
follow international corporates laws, rules and regulations to make a fair trade within the market.
It is essential for the companies which are working in the UK to follow all the rules and
regulations while working in the national and international market. International trade laws
emphasis on the fair trade in between those companies which belongs to different nations. It
involves a set of rules and regulations which are appropriate to handle a business in between two
countries. So it is essential for a company which is working in the international market to follow
all the rules and regulations which rules on the trade style, finance and product quality1. These
laws works on the business also so it is essential for the companies to manage their capital
investment accordingly. Capital flows are related to the financial investment in a particular
project, plan and operation by which organisation can increase and improve their profits and
revenues. It is an important factor for the companies to manage their capital flow which can
supports them to improve their profits by new investments. As well as it has a huge importance
for the national economical growth. It help to a manage flow of the currency and as well as in the
to develop economy.
IMPORTANCE OF LAWS ON INTERNATIONAL MNC'S
From 1970's the government of the countries for Multinational Corporations have been keeping
an eye on their operation so as to ensure fair enough operations of the enterprises within the
country. The government imposes certain kind of Acts and Regulations that the enterprises have
to abide and work in accordance with the protocols of that particular country 2. Also it depends
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on the enterprises itself that how they respond to the specifications provided by the government
and how much they can gain from that country with their fair and unbiased business.
The MNC is provided with a set of rules and acts that the enterprise has to abide and act in
parallel to the country's protocols.
The UK government formulated a set of acts and regulations that has to be followed by the
companies.
The Enterprise Act 2002: The Enterprise Act 2002 was made on 27th August 2015, was laid
before the government on 28th August 2015 and was finally came into action on 1st October
2015.The act included five main policy objectives : competition decision-making by independent
bodies, figure out anti-competitive activities, to make a damper effect, imGopinath G, Helpman
E, Rogoff K, editors. Handbook of international economics. Elsevier; 2014 Feb 22.prove
competition policy 3. The Companies Act made certain provisions for the companies facing
downfall in the long run and to create a rescue method for those companies so as to save the life
of the companies facing insolvency. It also helped the companies to save their assets being given
to the creditors as a result of outstanding liability. The act proved to be of great help to the
corporations facing a situation of bankruptcy or insolvency.
Enterprise and Regulatory Reform Act 2013: This act has been framed by the parliament of
United Kingdom abbreviated as ERRA, aims at reforming the regulatory environment faced by
the enterprises over there. It also includes a number of laws regarding employment , competition
and market authority. The act proposed liability of the employer to employee as an important
issue as per the Health and Safety at Work Act 1974. For instance at the present time, any
employee getting injured at the workplace can claim for the injury according to the act.
Therefore the act established a complete liability of the employer to his employees and it is his
duty to protect his employees in any case of injury. The act has proved beneficial for the
employees in case they get injured at the workplace they can claim against it without a need to
give any evidence of the injury
2012 May 31;28(3):995-1001.
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The Competition Act 1998: This act has been framed for reforming the business ideas and
practices been conducted in the country. The most important goal of the act was to produce a
harmony with the other countries competition policy like Europe. Also it made provisions about
the existing competition in the market and to abuse the superior or dominant position in the
market. The Act has laid impact on the organisations in the following ways:
It has regulated the unfair competition and cartel activities which may adversely affect the
efficiency of the market.
It has promoted healthy competition and increased the efficiency of the marketplace.
A regulatory framework has been formulated by the act to establish a healthy and fair
competition.
Fair Trading Act 1973: The Fair Trading Act of 1973 framed a non-profit and non-government
body known as Office of Fair Trading (OFT). The main aim of the act was to implement
protection of consumers and enforce competition law.
The purpose of OFT was to see that markets are working good for consumers and also had a
check on the unfair business practices and ensuring healthy competition among the markets. This
act has been applied to each and every trade practice prevailing in the market and ensures
consumers with their rights to know about the safety of the goods and services they are receiving
from the enterprise 4. This act also bans the false conduct of business and provides the provision
for unbiased and healthy trade practices.
The Insolvency Act 1986: This act was farmed by the parliament of UK in 1986 and aimed at
providing a platform for the issues related to insolvency of any person or corporation. This act
implemented the ideas of CORK report that included Individual Voluntary Arrangement(IVA)
and Company Voluntary Arrangement(CVA),
It framed laws regarding insolvency and a number of other legislative amendments since 1986.
This act handles the issues of the companies that are incapable of paying their debts. The term
insolvency is concerned with the incapability in repayment of the debts. It enforces an attempt to
rescue the companies which are in a situation of bankruptcy. It minimizes the difficulties of the
4 Aizenman J, Sushko V. Capital flow types, external financing needs, and industrial
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companies in terms of its losses and finally it divides the burden of debt into the organisation's
community say for example,, its employees, the creditors, and the related stakeholders. In a
situation where the company cannot be rescued it is then liquidated where its assets are sold out
and the debt is paid off.
The Companies Act 2006 : In the British parliament history it has been the longest act,
containing 1300 sections, with 700 pages and holding 16 schedules. The act was enforced into
stages with final enactment on 1st October 2009.It provides comprehensive details about the laws
of the company in UK. The Act explains the duties of the director of the company. There are
various provisions mentioned in the act for private and public companies. It says that the
directors must consider the company as a single unit which enforces the enlightened shareholders
approach given by the Law Commissions(1999) and CLR(2001), which defines that the directors
should equally consider the shareholders and the stakeholders while managing the enterprise. It
not only considered the concerns of the the shareholders rather it laid emphasis on the corporate
governance which is a vital part of an economy. It also describes that with the factor of good
corporate governance, a company should lay emphasis on the wider aspect of corporate ethics.
The Corporation Tax Act 2009 : This act came into action on 1st April 2009. It reframed some
of the enactments and laws in order to make clear provisions for the laws existing at the time.
The highlighted objective of the act is to reframe the charges to tax of corporations and primary
corporation tax legislation being adopted by the corporations in calculating their income. This act
is the fifth bill made by the Tax Law Rewrite Project. The basic idea of the bill remained same
while rewriting.
Limited Liability Act 1885 : The act explains about the limited liability of the enterprise which
could be established by the common people of the UK also 5. The act also said that the
shareholders will be directly responsible for the unpaid part of their shares. It allowed around 25
members for the companies for limited liability. The act excluded the insurance companies. It
also emphasised that the partners of a business are equally responsible for the whole debt being
concerned.
The Employment Rights Act: The Employment Right Act was enacted in 1996, by the
conservative government to reframe the prevailing law on the rights of the individuals in UK
5 Tong H, Wei SJ. The composition matters: capital inflows and liquidity crunch during a
global economic crisis. Review of Financial Studies. 2011 Jun 1;24(6):2023-52.

labour law. It included the basic rights of the employees being engaged in any organisation like
unfair dismissal, notice given before the dismissal, flexibility in the working time etc. This act
helped a lot in the protection of the employee's rights at their workplace. Hence all of the above
mentioned Acts and laws clearly shows the impact of their enactment practically. They not only
bring the balance among the corporate and the society but also it takes care about the concerns of
the small businesses. The enactment of various acts and laws let the corporations flow in a
positive way and make them work in a fair and healthy environment.
IMPORTANCE OF CAPITAL FLOW FOR MNC'S
Capital Flow means the making the money to flow in the market for business purpose,
investment, or trading. It can be understood as the capital to be invested in the enterprise, or the
money to be invested in the research and development work 6. In broader aspect it can be
understood by the example of government where the government directs tax receipts for the trade
and businesses with the other countries. Basically it is nothing but the movement of money for
the purpose of trade and business. International capital flow results in the economic development
of a country by enhancing the skills of doing business in the international market. They resolve
the problem of balance of payment of the developed countries. As the developed economies
enjoy an advantage of financial stability and advanced technology, they gain the maximum
benefit capital flow by investing in the developing economies in order to establish their financial
stability in the foreign markets also. They utilise the opportunity of establishing their market in
the foreign countries also so as to expand their business roots all over the world. International
flow of capital is nothing but just the flow of funds from one country to another. The increase in
capital flow has been much more than the trade flow at international level due to liberalisation in
the financial markets. Capital flow can be both long-term and short-term which depends on the
credit instrument engaged. Short-term capital flow is the one in which the credit instrument is
involved for less than one year and for more than one year involvement of a credit instrument the
capital flow will be termed as long-term. It is the change in the position of the company's cash
with change in time period. If the inflow of capital is more than the outflow then the company
holds a good position. And if the situation is opposite then it is not a good indicator for the
financial health of the enterprise. As capital is the base from where the functioning of an
6 Tong H, Wei SJ. The composition matters: capital inflows and liquidity crunch during a
global economic crisis. Review of Financial Studies. 2011 Jun 1;24(6):2023-52.

organisation starts, the enterprise should hold a strong financial position. The strong capital flow
in an organisation depicts that it is having good buying power and can increase its business
through raising its capital more and more. A positive capital flow indicates following plus points
for an organisation:
Cope up with Debt: If an enterprise borrows money to acquire its assets, it most probably
uses its future capital flow to make the purchases. And as a result the company needs positive
capital flow in order to cope up with the debt commitments. Most of the companies have long
and short term credits and loans and these loans are repaid in monthly instalments. These
monthly instalments restrict the free flow of capital into the organisation as the repayment of
loan is the obligation for the organisation.
Growth: In addition to keep a pace with the debt management, the positive capital flow
let the organisation to strengthen its root in conducting business activities. If the organisation is
having strong capital flow it will further invest in the growth of its infrastructure, technological
Rey H. Dilemma not trilemma: the global financial cycle and monetary policy independence.
National Bureau of Economic Research; 2015 May 14. development, research and development,
and attaining more powerful assets to be implemented in further growth of the enterprise. The
positive capital flow in the organisation will led the strategic development and strong flexibility
to deal with uninvited risks.
Flexibility: Strong capital flow in the enterprise ensures flexibility in dealing with the
uneven situations and handling them smoothly without endangering the growth of the company.
It also ensures the ability to make critical decisions which could not be met without financial
stability of the organisation 7. If it is having financial prosperity then it could divide its capital
into shareholders and owners as dividends which would improve the inter-personal relationship
of the owners of the company. This also improves the brand image of the company and as a
result it can borrow debt at any time from the lenders due to its good position in the market.
In terms of international trade the capital floe is always from rich to poor country or from
developed to developing countries.
Private capital flow are mainly of three categories which are as follows: Foreign Direct
Investment(FDI), Portfolio Investment, and other investment which involves capital flow of
7 Agosin MR, Huaita F. Overreaction in capital flows to emerging markets: Booms and
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banking. The increase in the international capital flow has resulted in the cross-border holdings
of assets and financial investment. It has caused in a rise of globalisation of investment and has
led the developed countries to strengthen their roots outside the country also. They have become
a part of the balance sheet being globally connected. In addition to the financial stability of the
economy, the size of the government, or it can be the stability of the political system has equally
important role. Government policies are equally responsible for the increased foreign investment
as the government imposes certain sets of regulation over the international trade and the
organisations has to pay certain duties in return to the permission of trading across the borders of
that particular country. The international capital flow can be under by the following types: Direct
and Portfolio.
Foreign Direct Investment: FDI is the investment in which a company goes outside the country
to another country for the production of goods and services in the company of the host country
and also participates in the management of that particular company. It is considered as one of the
most stable flow of capital. FDI can be mergers, acquisitions etc. In FDI liquidity is very low and
normally consists of fixed assets which are difficult to be sold out at turmoil times. It takes into
consideration long-term profits. The investors in FDI may attain the voting power in the
enterprise by directly owning a subsidiary or company in the host country or by holding shares in
that particular organisation or through merger or acquisition of an unrelated enterprise or by
engaging in equity joint ventures. Foreign Direct Investment brings a drastic change in the local
productivity growth of the enterprise. There are three types of FDI which are as follows:
Horizontal FDI: It is a type of investment where an enterprise imitates its own country's
activities at the same value chain level in the host country 8. It decreases the trade at international
level as the product is aimed at the host country only.
Platform FDI: In this investment the source country invests in the host country in order to make
export to a third party or country.
Vertical FDI: In this type of investment, the investment strategy moves up and down in different
value chains.
Foreign Portfolio Investment: In FPI, the concern is not about earning ownership of the
company, rather the emphasis is laid down on the earning profits by investing in foreign
8 Gourinchas PO, Jeanne O. Capital flows to developing countries: The allocation puzzle.
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securities. Portfolio is a collection of securities such as bonds, stocks or cash. Portfolios can be
maintained by a single investor or can be held by financial professionals, banks or some other
financial institutions. Portfolio investment is all about risk management of the securities where
the investor has invested. FPI involves bond and equity investment as well. Here the liquidity is
very high and the securities can be sold out as and when required.
Funds are inflow into the country when an investor from a foreign country make
investment in the host country. FPI is made where the investor is not interested in involving in
the management of the organisation. Also it is not concerned with creating control in the
management rather it is just concerned with making profits out of the securities in which he has
invested. It can be taken as a passive mode of investment.
The other aspect in capital flow at international level is trade flow. Trade is basically
related to with the goods and services. They can be linked with import and export. If the country
is making exports it is definite that the capital is inflowing into the country and if it is importing
goods and services the capital is flowing out of the country 9. Hence import and export are an
important source of capital flow in an economy. The other aspect is services, unilateral transfers
and investments which are considered as invisibles sources of capital flow to or out of the
country. The foreign investment can be determined only by some factors of the recipient or host
country. These factors include macroeconomic context, political risk, regulatory jurisdiction and
fiscal policy of the recipient country. Basically there are two factors influencing flow of capital:
country-specific pull factors and push factors. Pull factors rave concerned with the domestic
elements of the country which are the factors operating at the domestic level. They include the
availability of the domestic market for the foreign investors, liberalising the foreign investment,
macroeconomic policies of the country etc. These factors are internal factors of an economy. The
Push factors are the external factors which affect from outside of an economy. Now there are
some other determinants of international capital flow:
Rate of Interest: The capital flow greatly depends on the variation in the rate of interest in
different economies as it affects the flow of fund in terms of the push and pull factors.
Integration of Financial Markets: The capital flow is highly dependent on the availability of the
financial markets to the investors who can come up with the financial stability of the economy.
9 Cardarelli R, Elekdag S, Kose MA. Capital inflows: Macroeconomic implications and
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In order to ensure the greater availability of markets to the investors the country should lay
emphasis on certain policies like deregulation, liberalisation, privatization and structural
adjustments.
Growth in International Financial Capital: From the last two decades, financial markets have
been transformed into global financial system. This allows them to allocate fund not only within
their country but also to outside countries. The economies raise fund by investing in international
securities. More and more Multinational enterprises are investing in the stock exchanges and
raising funds from the financial markets of various economies. They are investing in the mutual
funds, hedge funds, pension funds, insurance schemes and other investments. The investors have
taken the advantage of liberalised investment policies.
Stability: Economic stability also plays an important role in the flow of capital from one
economy to another. The economic factors such as inflation, currency value are the major
determinants in this part. In addition to economic stability, political stability is equally important
in the international capital flow.
Government Policies: The government of the recipient and source country are major participants
in determining the international flow of capital. The policies framed by the government are the
benchmarks that any organisation has to meet before making any kind of investment in any other
economy. The government policies influence both the inflow and outflow of the capital. For
increasing the inflow of capital a government should adopt the policies like liberalisation,
deregulation and dismantling of the control in investment.
Overheads(Social and Economic) : The social and economic overheads include potential labour,
infrastructure, technological advancement etc. The policies related to the labour management
will also affect the foreign investment 10. Also the ability of local market to attract the investors
will also influence the inflow of the capital.
Credit Rating: Credit rating deals with how the economy is financially strong and this will be
affected by the economic,political and social stability of that particular country.
Speculations: Speculations are just guesses about the rise or fall in the interest rates of any
economy. Hence speculation is one another factor that puts an impact on the international flow of
capital.
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Profitability: Profitability is probably the most important factor for making foreign investment
resulting in capital flow. Any country will invest in an economy where it feels there are chances
of higher profits. Capital Flow
Capital flow dispatch the money of movement it's purpose of increase the investment and tread
with business production. It is include the corporation flow of capital money figure of investment
capital. Its focus the capital pass away on research ,operation and development. In this capital
any individual inverter directly save and invest money into securities like -mutual funds ,stock
and bonds. It is a allow the investor to verity and take risk or increase returns , they are allow all
country repaid finance rate and investment and growth economic and will be increase
expenditure.
Develop aggregate demand : it's components boots the higher investment and convey the
improve economic growth. This is lead to unemployment lower levels. AD inward invest the
capital money of the MNCs crop the small business. There impact must be crop limited business.
It's effect are depends on AD increase on the economy situation. Example – when any country
had low growth and high unemployment then investor boost the country economy. However , Ad
increase the convey inflation.
Develop product efficiency : Aggregate Demand (AD) will be not only increase the inward
investment but it's also increase the aggregate Supply (SP). The investor invest the new factory
increase the protect efficiency and aggregate supply should be shift the right.
Technology improvements : inward investment must be not only invest the new product
efficiency. They are may be also put up to new working become that help improve labour
productivity 11. Example Japanese is a invest the firm in UK but it has said about the how to
improve the labour relation and visit the more workforce. They can be contribute the improve
labour productiveness.
Helps to financial accounts of the balance payment : it's helps to the current account balance
loss without any inflows.
Minimum prices for the consumer : Foreign firms give the chance and offer to be increase the
goods and product efficiency and follow the minimum makeshift firm.
11 Chang YP, Zhu DH. The role of perceived social capital and flow experience in building
users’ continuance intention to social networking sites in China. Computers in Human Behavior.
2012 May 31;28(3):995-1001.