The Effects Global Financial Crisis On Firms


In 2007-2009, the world economy experienced the deepest global financial crisis since the start of World War II. Most of the countries around the globe witnessed a major decline in the output, the state of employment and trade. The Gross domestic product in the industrial countries decreased by 4.6% in the year 2007 while the average real GPD growth in the emerging economies experienced a drop from 8.6 percent in the same year to 0.3 percent at the beginning of 2009. The rate of unemployment rose to an approximate of 9% across the OECD economies and therefore reaching double digits in the mix of industrial and the nations that are still developing. An evaluation of these factors poses some challenges and the role of the foreign direct investments in the determination of various economic responses at the firm’s level and the country level at large (Chabbott and Ramirez, 2006, page 163-187)

The role of the financial crunch in the market is enabled through the exposure of weaknesses such as the political, structural and economic shortcomings. During the financial crisis period, the degree of sufferance of the economy declares its weakness. Due to this, the world gets disturbed, and the capital flows and the liquidity will tend to shrinks, and hence a spillover may be noticed. The regulators in the firms will tend to assess the situations and thereby taking steps to insulate the economies from the unnecessary shocks. These exposures of the weaknesses will assist in the fast growth of the economy in the long run (Altbach &Rumbley, 2009, page 26).

The crisis has led to the emergence of a new economy; perhaps this is the first time when the world’s superpower and the biggest economy are struggling to overcome (Chabbott and Ramirez, 2006, page 163-187). The period when the world’s most major economies suffered more from this war, the firms took advantage from this fallout. Consequently, while the overseas markets suffer from this, the local business has been able to benefit from the weakness of the world’s money value which has increased the competition among the exporters with their international trade. For example, in the United States of America Lehman Brothers had the files for bankruptcy, the Washington Mutual operations are being apprehended and auctioned by the Citi group after the world war crisis

The performance appraisal is gaining ground, most of the businesses today are under lots of pressure to perform and exist in the market. However, with the increasing customer expectation, global competitions and other factors such as the financial crisis many firms struggle to meet the profit. Additionally, as the financial crisis rises, everyone is trying to save his or her job by giving 100% input on the firms. Therefore, the existence of this crisis leads to the improved performance of the firms due to the fear of loss.

Perhaps, when we consider the production linkage channels, it is noticed that in the time of crisis, the multinational can respond to the adverse shocks by increasing the home and foreign production in the market. This medium can either exacerbate the impact of the crisis on the affected establishments, depending on the nature of production linkages that is between the institutions and the headquarters. Moreover, if the production activities from the establishment sides double the headquarters, the firms will, therefore, tend to respond to adverse shocks by just shifting the production line back home(Altbach &Rumbley,2009, page 26). Conversely, the shocks from the multinational country of origin can be transmitted to the MNCs different establishments.

Secondly, we consider the financial linkage channel. The foreign-owned establishments can sometimes be less dependent on the host-country credit conditions because of the supply of the capital from the firm’s headquarters. These types of the financial linkages, by enhancing the multinational-owned companies to tap into the international credit markets in the world’s economy, support the capital market diversification (Altbach &Rumbley, 2009, page 26). Moreover, the advantage particularly vital when the incidence of a financial crisis is very great in the host countries but small in the MNC the country of origin and when the establishments tend to be financially reduced. Just like the above production linkages, the financial ties between the MNC foreign establishments and the headquarters can cause economic shocks in the MNCs’ home countries to the foreign establishment.

The average positive effects of the crisis can be established on the performance. The MNCs have acquired more productive local firms and as a result, perform better during the crisis. To address this concern, we can employ a matching technique to create a counterfactual of the MNC owned firms. We can, therefore, match each MNC establishment with a local firm based on the economic characteristics such as age, export status and sales as well as the location and the industry factors. The matched pair shared similar economics before the global crisis, except the situation of the foreign ownership. The result indicated that the MNCs owned establishments exhibited an average, better performance that the local matches (Cetorellie & Goldberg, page 41-76).

Work cited

Altbach, P.G., Reisberg, L., and Rumbley, L.E., 2009. Trends in global higher education: Tracking an academic revolution.

Cetorelli, N. and Goldberg, L.S., 2011. Global banks and international shock transmission: Evidence from the crisis. IMF Economic Review, 59(1), pp.41-76.

Chabbott, C. and Ramirez, F., 2006. Development and education. Handbook of the Sociology of Education, pp.163-187.