Multinational Company Asniment

8/12/2019 Multinational Company Asniment

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Multinational OrganizationsA multinational organization is a company which has its

headquarters in one country but has assembly or production

facilities in other countries. Coca Cola, Nike and BP are examples ofmultinationals.

Advantages of multinational companiesMultinationals create jobs which boosts the local economy and moreworkers to tax.

They bring expertise in that skills of workforce are improved, some

may use IT that would never have before or other skills nowdeemed basic by the western or developing world.

Multinational companies can benefit from economies of scale

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.Technical economies can be gained with automated equipment, but

only when fixed costs of machine can be spread out over outputs.

Purchasing economies can be achieved, for example by buying inbulk companies can obtain supplies and materials at a cheaper costper unit.


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Reasons for a Company to Become a Multinational

Corporation

There are some reasons why companies wish to becomemultinationals:To increase market share companies may find they are at

saturation point in the domestic market and need a new outlet.They may start by exporting to other countries but eventually theywill want to be production overseas. Coca Cola started this way

following US soldiers around the world after WW1.

To secure cheaper premises and labor cost of land and labor willbe cheaper in developing countries. Sweatshops in the Far East are

an example of cheap labor, whereas production plants opening in

the old Soviet Bloc nations like Poland, Bulgaria etc are examples ofcheap factories.

To avoid tax or trade barriers different nations have different

levels of corporation tax and may have different barriers to entry.The Japanese only allow a small percentage of foreign cars to be

sold in Japan to protect their own industry.

Government grants many US companies were attracted to the UKin the 80s due to government giving them money to open up

operations here.

In the 1980's, the economist John Dunning developed a theory thatexplains why companies would invest abroad and become

multinational corporations (MNCs). This theory was named theeclectic theory. However, today it is more widely known as the OLImodel, due to the three factors that are thought to spike foreign

investments:1) Organizational Advantages

2) Locational Advantages

3) Internalization Advantages


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Coca-Cola is an example of a company with a significant

organizational advantage. Its trademark is well-known and enoughto sell soft-drinks in numerous countries across the world. Accordingto James W. Harrington,a professor in geographical economics atthe University of Washington, organizational advantages also cover

company specific factors such as product quality, delivered price,

marketing sophistication, distribution networks, low-cost inputs andsuperior production technology.

Natural resources in Greenland are becoming easier to access.

Mining companies locating there, such as Nuukfjord Gold, have alocational advantage. Low wages, local tariffs and other trade

barriers are also factors that would make it sensible to locate in aforeign country.Internalization, i.e. owning foreign operations, is sensible when a

company seeks to retain all expected profits or wishes to control the

quality, marketing and local growth strategies. Being representedand taking responsibility abroad may also make it easier to swaylocal decision makers. Finally, according to the economists Jeff

Madura and Roland Fox, having a presence in several countries canincrease the knowledge of and access to new financing and

investment opportunities.

Other Forms of International BusinessEncyclopdia Britannica defines a MNC as a company that isregistered and operates in more than one country at a time.Generally the corporation has its headquarters in one country and

operates wholly or partially owned subsidiaries in other countries.

Thus, companies that have a joint venture abroad, established aforeign subsidiary or acquired an existing operation in a foreign

country are considered MNCs.

In their book International Financial Management, Madura and Fox,

describes three alternatives to becoming a MNC.First, a company can simply choose international trade. Thereby,the company exports its goods and/or imports material or tools. Theadvantage of international trade is that it is relatively cheap to pull

out, if it turns out not to be profitable. However, international trade

can be risky, as earnings may decline due to protectionist reformsof tariffs and other trade barriers, exchange rate fluctuations or
http://faculty.washington.edu/jwh/349lec12.htm#OLIhttp://www.britannica.com/EBchecked/topic/397067/multinational-corporationhttp://www.britannica.com/EBchecked/topic/397067/multinational-corporationhttp://faculty.washington.edu/jwh/349lec12.htm#OLI


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sudden logistical constraints. E.g. exporters of perishable goodswere negatively affected when air freight was made impossible inlarge parts of Europe by thevolcanic ash cloud from Iceland's

Eyjafjallajokull,in April 2010.

The second alternative is licensing. Via licensing a company allowsother firms to produce, sell and market its products in foreignmarkets. According toThe Economist,it is reckoned that the NBA

earns millions of dollars by licensing their merchandise to local firmsin China. According to James W. Harrington, licensing has the

advantage that it requires very little investment and provides anopportunity to harness the increase in return that the foreignpartner may be able to create via superior technology, creativity

and/or customer relations. On the other hand, the originating firm

loses control of product quality.

Finally, a company can choose to become a franchisor. According toMadura and Fox a franchisor provides a specialized sales or service

strategy, support assistance and possibly an initial investment inthe franchise in exchange for a periodic fee. The advantages and

disadvantages of franchising are quite similar to licensing. However,the specialized sales and service strategy offers some control oversales conditions.

The Multinational Corporation's Choice of CountryWhen a company looks abroad and seek to open a subsidiary, the

attributes of the country should be thoroughly analyzed. Taking alook at the OLI model is not sufficient, e.g. a wider array ofmacroeconomic factors need to be taken into consideration. Both

the current and future state of the local political, economic, socialand technological environmentshould be thoroughly assessed.In

economic theory this is called a PEST analysis.

What Are the Different conditions or laws to be followed

by Multinational companies?Increasingly, multinational companies produce and sell products inmultiple countries. The rules and regulations that apply in one

country may not apply to another nation where the business

operates. Several international organizations set guidelines formultinational businesses. However, these guidelines form more of a
http://www.economist.com/displaystory.cfm?story_id=15952454http://www.economist.com/displaystory.cfm?story_id=15952454http://www.economist.com/business-finance/displaystory.cfm?story_id=15498407http://suite101.com/a/risks-and-opportunities-of-multinational-corporations-a234597http://suite101.com/a/risks-and-opportunities-of-multinational-corporations-a234597http://www.economist.com/business-finance/displaystory.cfm?story_id=15498407http://www.economist.com/displaystory.cfm?story_id=15952454http://www.economist.com/displaystory.cfm?story_id=15952454


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recommendation than hard-and-fast laws that a multinationalcompanies must follow. Many multinational companies haveimplemented these guidelines to standardize accounting, labor,

environmental and other issues that affect the multinational

companies.

Different countries have different rules and regulation. If any company

want to operate business in any country then they should follow the

the international rules as well as that country rules like in Pakistan if

any company want to business in Pakistan then they should be register

under the corporate law of the Pakistan and follow the rules and

regulation of Pakistan as well. If you want to made manufacture

industry or business in Pakistan then you have to follow factory act or

labor law of Pakistan.

For example manufacture of wine in foreign country is legal but in

Pakistan it is illegal. In Pakistan multinational companies follow the

condition they should produce halal products.

But in India multinational company follow their country rules and laws.

Like before some time kfc sale beef in India which is against the

religion of Hindus. Then kfc has stopped the sale of beef in India. In

India the multinational company follow there labor law.

Multinational companies firstly see the political, economic, social and

technological environment of that country in which they want to start

there business then made their own rules according to them.

International rules which are made by the mutual concert of all

countries. All multinational companies should follow that rules.

Following are the organizations.

World trade organization GATT Miga Icsid


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G10All these organizations made International rules and laws. Like w.t.o

made the multinational rules of trade all the multinational companies

bound to follow these rules. After international rules the multinational

company follow the country rule in which the start or want to start

their business and then made their own rules according to the suitable

conditions.

Multinational Company Asniment

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