Introduction & Definition
A Corporation
that has its facilities and other assets in at least one country other than its
home country. Such companies have offices and/or factories in different
countries and usually have a centralized head office where they co-ordinate
global management. Very large multinationals have budgets that exceed those of
many small countries. An enterprise operating in
several countries but
managed from one (home) country. Generally, any company or group that
derives a quarter of its revenue from operations outside
of its home country is considered a multinational corporation.
(1)
A multinational, decentralized
corporation with strong home country presence,
(2)
A global, centralized corporation that acquires cost advantage through centralized production wherever cheaper resources are available,
(4)
A transnational enterprise that combines
the previous three approaches.
According to UNdata, some 35,000 companies have direct
investment in foreign countries, and the
largest 100 of them control about 40 percent of world trade.
Features of multinational companies
Giant Size : The assets and sale of Multinational
corporations are quite large . These companies operate on large scale as they
trade in more than one companies. These companies generate large wealth. Their
operations are so huge that sometimes their sales turnover exceeds the GROSS
NATIONAL PRODUCT of a developing Countries. By this we can imagine about the
powers and calibre of a multinational company. Example of MNC”s are, The
physical assets of IBM exceeds 8 billion dollars.
International Operation : A multinational corporation
operates in more than one country . It has branches , factories , offices in
several countries. It operates through a network of branches and subsidiaries
in host countries. They sell their products in different countries . For e.g. :
Coca Cola , apple etc.
Professional Management : A Multinational
corporation employs professional experts , specialized people. MNC”S Try to
keep their employees updated by imparting them training from time to time. It
employs professionals to handle the advance in technology effectively.
Centralized Control : The branches of Multinational
companies spread in different countries are controlled and managed from the
headquarters situated in the home country. headquarters in the home country is
the is the main branch. All branches operate within the policy framework formed
by headquarters.
Oligopolistic Powers : Oligopoly means power in the
hands of few companies only . Due to their giant size , the multinational
companies occupy dominating position in the market .They join hands with big
business houses and give rise to monopoly. They also take over other firms to
acquire huge power and improve market share
Sophisticated Technology : Multinational companies make
use of latest and advanced technology to supply world class products . They use
capital-intensive technology and innovative techniques of production
IMPORTANCE OF MNC:
The establishment of multinational companies has been good boon all over
the world. Some of its
importance are as follow:
1.TRANSFER OF CAPITAL AND TECHNOLOGY
The multinational companies transfer investment ,advance technology to
developing countries through establishing branches and subsidiaries. Therefore
developing countries like Nepal get benefited of receiving advanced technology
and capital investment through such companies.
2. Mass production
with help of advanced technology, they can produce quality goods and
products at cheaper price. Due to Job innovation and specialization help to produce more
consumption increase as production in more units reduce cost.
3. INCREASE IN EMPLOYMENT OPPORTUNITY
A multinational company requires a large number of skilled as well as unskilled
employees to operate its activities. Thus it provides employment opportunity to
the people of host country as a result economic standard of society is
improved.
4. INCREASE IN GOVERNMENT REVENUE
a multinational company is a large scale business. It pays a large amount of duties,
income tax, vat, etc to government. Therefore
Government revenue is increased due to operation of such companies.
5. RESEARCH AND DEVELOPMENT
In complete world, it is need of Research and Development. To meet
international standard of its products and services, a multinational company conducts several
research and development activities. Constantly such programs are beneficial to
society. It helps to develop better equipments, quality products and advanced
technology in production.
6. GOOD INTERNATIONAL RELATION
A multinational company recognizes the country in the international market. It
creates harmonious relation between parent company and subsidiary countries. It
recognizes exporting country to all over the world.
How Multinational Corporations Enter to a Foreign Market (6 Different Modes of Entry)
A
firm must decide as to how it will enter a foreign market, i.e., it must decide
its mode of entering the foreign market.
It
has to establish an institutional arrangement for selling its products in foreign
markets. Various options involve varying levels of investment, risk, control
and returns. Firms can choose which mode to use depending on their level of
commitment to the international markets.
1. Indirect Exporting:
Companies
can, while going international, use domestically based agents who operate on a
commission basis without taking title to goods, or merchants who sell the
products of the company in international markets (after taking title to the
goods). They can also use the distribution facilities of other firms in the
international markets.
Small
firms that find it difficult to use any of the above means can sell their
products via other organizations that export products on behalf of several
small firms collectively. These are generally large trading concerns and export
management companies that negotiate contracts on behalf of smaller exporters.
Such companies can take up several activities such as market assessment,
channel selection financing arrangements, documentation, etc., for the smaller
exporters.
The
scale of operations of the smaller exporters does not permit these firms to be
able to manage such activities. Moreover, the larger companies have better
access to information about international markets. The firm’s involvement level
with the foreign markets is lowest in this case. It may be evaluating the
attractiveness of the foreign market before increasing its stake. The
investment involved in this effort is the least among all the other
alternatives for expansion.
The
main advantage of using this strategy is that the exporting company can utilize
the expertise of the organization that has knowledge about the country in which
the goods are being exported. The exporting company can also have good links
with the organization that organizes such export activities, since both
companies are located in the same country.
2. Direct Exporting:
A
company may decide to export its products itself. The company develops overseas
contacts, undertakes marketing research, handles documentation and transportation
and decides the marketing mix Companies can use foreign-based agents or
distributors. An agent may agree to handle the company’s product exclusively,
or may handle products of other companies too. An agent does not take title to
the products and works on commission.
Distributors
take title to the products company appoints distributors when after-sales
service is required as they are likely to possess the necessary resources. The
advantages of foreign-based agents and distributors are that they are familiar
with the market and have business contacts.
Their
profit or commission is based on sales generated and they may not be interested
in developing long-term market positions for the company. They may not be
willing to put in extra efforts to sell new products and will give maximum
attention to selling established products of the company which will generate
maximum profit or commission for them.
They
may consider themselves to be representatives of their customers than of the
company and may be reluctant to give market feedback to the company. The
company has limited control over agents and distributors.
The
company can employ its own salespersons who will scout for customers in the
foreign market and sell to them. This method is recommended for expensive
products and when the numbers о customers are limited.
The
salesperson will pay attention to the development of the market. The
possibilities for feedback and other information from the market are better.
Thus, customers will be looked after better and the company’s interest would be
better served. This is an expensive method, so the order sizes have to be
large.
The
company may establish a sales and marketing office in the foreign market. This
office monitors the marketing efforts of the company. They may use agents or
distributors or may decide to develop their own distribution infrastructure and
appoint their own salespersons. The idea is to take charge of the marketing
operations of the company. This involves greater commitment of the organization
than indirect exports.
3. Licensing:
Under
licensing, a foreign licensor provides a local licensee with access to
technologies, patents, trademarks, know-how or brand/company name in exchange
for financial or some other form of compensation. The licensee has exclusive
rights to produce and market the product in the specified area for a limited
period. The licensor usually gets royalty or license fees on the sale of the product.
The
advantage of licensing lies in the fact that the company (licensor) can enter a
new market without making substantial investments. But the company loses
control over production and marketing of the product. Further the reputation of
the licensor is dependent on the performance of the licensee.
One
danger of licensing is the loss of product and process know-how to third
parties (licensee), who may become competitors once the agreement is over. A
company can use licensing to exploit new technology simultaneously in many
markets, if it lacks the necessary resources to set up manufacturing facilities
and sell the products. Licensing is popular in R&D intensive industries
where companies often license technologies which do not fit with their overall
strategy.
Licensing
agreements must ensure sustaining competitive advantage to the licensor.
Adequate supervision of licensees is important. Exchange of new developments by
the licensee with the licensor can also be made compulsory in the licensing
agreement. A licensing agreement that goes bad can damage the brand equity of
the licensor forever.
4. Franchising:
Franchising
is a type of licensing agreement where packages of services are offered by the
franchiser to the franchisee in return for a payment. The two types of
franchising are product and trade name franchising, and business format
franchising. An example of product and trade name franchising is Pepsi Cola
selling its syrup together with the right to use its trademark and name, to
independent bottlers.
Business
format franchising is used in service industries such as restaurants, hotels
and retailing where the franchiser exerts a high degree of control on the
franchisees based in the overseas market. In business format franchising, the
franchiser, like McDonald’s, lends operating procedures, quality control, as
well as the product and trade name.
5. Joint Ventures:
The
multinational corporation enters into a joint-venture agreement with a company
from the target country market. Two types of joint venture are Contractual and
Equity joint ventures. In contractual joint ventures, no joint enterprise with
a separate identity is formed. Two or more firms enter into a partnership to
share the cost of an investment, the risks and the long-term profits. The
partnership can be formed for completing a project, or for a long term
co-operative effort. In an equity joint venture, a new company is formed in
which the foreign and local companies share ownership and control.
A
joint venture may be necessary due to legal restrictions on foreign investment.
A joint venture also reduces the investment required by a foreign firm, besides
reducing risk. The danger of expropriation is less when a company has a
national partner than when the foreign firm is the sole owner. Forming a joint
venture with a local partner may be the only way of entering markets which are
very competitive and saturated. The Japanese set up joint ventures in the US
primarily for this reason. The foreign partner stands to gain from local
expertise.
Both
partners bring in their expertise in different areas that help in realizing the
success of the venture. Both the partners can specialize in their particular
areas of technological expertise. The foreign investor benefits from the local
management talent and knowledge of local markets and regulations.
But
such joint ventures face many hurdles. The local partner is satisfied if the
joint venture is reasonably successful in the local market but the foreign
investor has bigger targets. They want to dominate the local market and also
want to extend operations to neighbouring markets. Most local partners do not
bring technology and money on the table, and are primarily valued because of
their knowledge of the local system, culture, market and government policies
and regulations.
Once
the foreign investor gets sufficiently knowledgeable about the local
conditions, they find no use for the local partner. Most of the joint ventures
formed with the purpose of entering a country market are dissolved, or the
foreign investor buys out the local partner.
6. Direct Investment:
The
company entering the foreign market invests in foreign-based manufacturing
facilities. The company commits maximum amount of capital and managerial
efforts in this mode of entry. The company can acquire a foreign manufacturer
or facility, or build a new facility.
Direct
investment means that the company has control and significant stake in its
operations in other countries. The complete form of participation in foreign
countries is 100 per cent ownership, which can be established as a start-up, or
can be achieved by acquiring local companies.
Acquisition
of companies in foreign countries is a fast way to enter a new market. It
provides the company ready access to a product portfolio, manufacturing
facilities, customers, qualified employees, local management, knowledge about
local conditions and contact with local authorities.
In
saturated markets, acquisition may be the only feasible way of establishing a
manufacturing facility in a foreign market. But differing styles of management
between foreign investors and local management teams may cause problems. In
many countries, 100 per cent ownership by foreign companies may not be
permitted due to government restrictions.
In
direct investment, the foreign investor has greater degree of control than
licensing or joint ventures. It is able to prevent leakage of proprietary
information. The company is able to avoid tariff and non-tariff barriers. The
distribution cost is lowered. Being based in the local market, the company is
more sensitive to local tastes and preferences.
It
is also easier now to establish links with local distributors. It is now in a
better position to strengthen ties with the government of the host country. But
direct investment is expensive and risky. If the venture fails, the foreign
investor loses lot о money. And there is always a risk of expropriation,
however minimal.
Host Country
The host country is the country in which a
subsidiary of an MNC carries out its local investments projects. Asia-Pacific countries are selected as host
countries (e.g. Sri Lanka, Singapore, Thailand and Malaysia)
Advantages of MNCs for Host Countries
1.
The investment level, employment level, and income level of the host country
increases due to the operation of MNC's.
2.
The industries of host country get latest technology from foreign countries
through MNC's.
3.
The host country's business also gets management expertise from MNC's.
4.
The domestic traders and market intermediaries of the host country gets
increased business from the operation of MNC's.
5.
MNC's break protectionalism, curb local monopolies, create competition among
domestic companies and thus enhance their competitiveness.
6.
Domestic industries can make use of R and D outcomes of MNC's.
7.
The host country can reduce imports and increase exports due to goods produced
by MNC's in the host country. This helps to improve balance of payment.
8.
Level of industrial and economic development increases due to the growth of
MNC's in the host country.
Disadvantages of MNCs for Host Countries
1.
MNC's may transfer technology which has become outdated in the home country.
2.
As MNC's do not operate within the national autonomy, they may pose a threat to
the economic and political sovereignty of host countries.
3.
MNC's may kill the domestic industry by monopolizing the host country's market.
4.
In order to make profit, MNC's may use natural resources of the home country
indiscriminately and cause depletion of the resources.
5. A
large sums of money flows to foreign countries in terms of payments towards
profits, dividends and royalty.
Home Country
The home country is the home of the
MNC (or the parent company) where the MNC’s headquarters are located. The one
specific home country used as an example is the United States.
Advantages of MNC's for the home country
MNC's
home country has the following advantages.
1.
MNC's create opportunities for marketing the products produced in the home
country throughout the world.
2.
They create employment opportunities to the people of home country both at home
and abroad.
3.
It gives a boost to the industrial activities of home country.
4.
MNC's help to maintain favorable balance of payment of the home country in the
long run.
5.
Home country can also get the benefit of foreign culture brought by MNC's.
Disadvantages
of MNC's for the Home country
1.
MNC's transfer the capital from the home country to various host countries
causing unfavorable balance of payment.
2.
MNC's may not create employment opportunities to the people of home country if
it adopts geocentric approach.
3. as
investments in foreign countries is more profitable, MNC's may neglect the home
countries industrial and economic development.
Advantages of
multinational companies
1.
Multinationals create
jobs which boosts the local economy and more workers to tax.
2.
They bring
expertise in that skills of workforce are improved, some may use IT
that would never have before or other skills now deemed basic by the western or
developing world.
3.
Multinationals are in
position to benefit from economies of scale. This means the cost per
unit can be lowered through specialization – with a large workforce work can be
divided up and people can do their limited job expertly.
4.
Technical
economies can be gained
with automated equipment, but only when fixed costs of machine can be spread
out over outputs.
5.
Purchasing
economies can be achieved,
for example by buying in bulk companies can obtain supplies and materials at a
cheaper cost per unit.
Disadvantages of
multinational companies
1.
Can be accused that the jobs they create may be
deskilled jobs (known by some as 'McJobs') and in fact may be low paid,
repetitive assembly line work.
2.
Profits are not usually kept in the host
country. For example the money made and saved by General Motors moving car
assembly production to Mexico would still go back to HQ in Michigan.
3. Multinationals have been accused of cutting corners.
4.
Social responsibility may be overlooked.
5. They have been accused of exploiting the workforce and/or the
environment.
6.
Workers can work below
minimum wage and for longer hours.
7. Less chance of relaxed health and safety laws and little if
any environmental laws may be in place. For
example the Bhopal
gas disaster in 1984 killed hundreds of people in India.
8.
Multinational
companies can be environmentally irresponsible.
One Example:
GE, McDonalds, Pizza Hut, Siemens, Honeywell,
IBM, Honda, Yahoo, Nokia, Shell Oil, etc.
it’s basically any business that operates in
more than one country. The more countries it operates in the more multinational
it is..
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