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Advantages and Drawbacks of Multinational Enterprises

Keywords: multinationals advantages and disadvantages, mne features

One of the very most modern approaches accompanied by almost all corporations in the 21st is internationalization, in which a successful firm ventures into the overseas markets and chooses to go global in procedure, which in turn changes these flourishing domestic businesses into Multinational corporations (MNE's) and boosts sales and build brand reputation. One of the key features of an MNE is that although it has the company headquarters in one country, the production and functional activities are create in more than one country for several reasons such as cheap labour resources, obtaining raw materials, advantage of tax variations and the protectionist obstacles.

There are several important characteristics that are used by MNE's such as large size of the companies and its international activities which can be centrally governed by the mother or father businesses. Such organisations, as a result of these experience, are also better able to adapt and react to micro and macro environmental factors such as suppliers, challengers, customers, the government and other stakeholders as well as the politics setup of an country, its financial procedures and systems and the local culture. In addition, it aims to get access to the natural resources of new, possibly unexplored market segments as well concerning assets, patents, human being resource and technical and managerial knowhow. These seeks are fulfilled through tactical alliances with local, home companies ready to share and work at the goal.

Why do firms go Multinational?

There are various reasons as to the reasons a company makes a decision to look international. The Dunning Eclectic theory or the OLI paradigm highlights the benefits of these multinational corporations going overseas. A few of these have been outlined in detail as follows:

Ownership Advantages: Possession advantages are usually intangible and can be moved within the multinational firms at a cheaper price. The company would have monopolistic advantages as they would get easy access to the resources which are scarce in the house country of the organization. The barriers to admittance would also be high, scheduled to high installation costs of the business. They also own the show of technology and information from the countries in which the expansion takes place that helps the organization.

Besides benefits for the MNE, the sponsor economies are also at an advantage. These MNC's generate large amounts of employment opportunities and bring with them high degrees of managerial skill and globally utilized advanced technology. Since the company has high buying power, the advantages of economies of scale also become sensible and thus, very prominent.

Location Advantages can be broken down into three major categories:

Economic advantages: Relate with all cost and revenue related factors such as low costs of recycleables, low transportation, storage area and distribution, and the resulting development of economies of scale and scope, the top size of an unexplored market, etc.

Political advantages include the nature of the economy, the government's plans, systems and the entire bureaucratic setup. Lenient policies have an effect on and encourage inward Foreign Direct Investment (FDI) movement, intra-firm trade and international production.

Socio-cultural advantages include the ability to adjust to the culture the company wishes to operate in in terms of overcoming language and cultural barriers (such as, it may be easier for an American company to expand in to the UK somewhat than into China), distance barriers (it may be easier to choose neighbouring country somewhat than otherwise), general attitude towards foreigners and so on.

Internalisation Advantages: Internalisation is the process by which the activities are kept directly within the firm's control. The key advantage is the fact that it would reduce the transactional costs no threat of principle agent problem to the company.

Another reason companies grow is to get access to knowhow regarding the international business environment and accomplish innovationand generate ideas. Novel ideas and concepts help organizations adapt to new markets and grow into other areas as well as diversify their product and service offerings, thus, minimizing risk and instability.

Internalisation is the process by which a firm's activities are maintained within the umbrella of the firm. The procedure of development in other market segments of the world consists of different factors. An enterprise which fulfils all these standards can also sometimes be recommended against expansion. There are numerous benefits of internalisation, such as secrecy of research and no leakage of information.

Global investment funds are valuable because sometimes these organizations or establishments have the ability to gain more income in the number countries than their own house countries. Among the main reasons for this is that the masses of the countries are ready to explorenew flavours and test new products given that they would be imported. Also there are some people who wish to buy these products but couldn't do earlier as placing your order them online weren't very popular then.

How do Businesses go Multinational?

Multinational firms searching for an chance to explore International markets have to consider crucialentry decisions as these market segments involve high risk and uncertainties. The three basic decisions a company contemplates before expanding into the overseas markets are the decision concerning which market to step into. Another important concern is to understand the politics and economic issues that eventually affect the attractiveness of an foreign market. Additionally it is essential to lookout for factors including the market size with respect to the demographics, the purchasing power of the consumers and the expected growth of the country in the future. Time of entry into these market segments plays a key role, for example it might not be practical to broaden or enter new market segments during times of downturn and vice versa during durations of economic growth. Last but not least, the multinational venture has to consider the function of admittance besides deciding on whether to get into the marketplace on a big scale or a small scale basis. Few firms contain the resources to enter into a particular international market on a big scale. Companies that are set up in large level in their house country opt to enter at a little scale into other nations which enable them to build brand reputation down the road.

The options with regard to the method of entry include the following:

Indirect and Immediate Export: Companies usually start with indirect exporting as they have got potential advantages like less risk as the self-employed intermediaries brings in experience and services to the partnership, therefore seller will make lesser errors. Immediate exporting where companies deal with their own exporting activities and the initial investment and risk are higher but high results are more likely.

Licencing & Franchising: Licencing consists of one company permitting another organization license for a limited period to use its patent, trade secrets or other item for a fee or royalty.

Franchising is nearly the same as licensing, involving an arrangement between two firm where one organization allows other to work with its brand, technology, methods to market and produce the product.

For example: Mercedes-Benz, from the family Daimler AG in Germany has setup its head office in Dubai in the UAE. The Multi-national giantshave franchised their procedures to the locals in the web host countries working in the Middle-East. The company Gargash Corporations L. L. C has obtained a dealership as a sole distributor, through franchise agreements with Daimler AG to market Mercedes-Benz vehicles in Dubai and Northern Emirates. The strategy was used remember the local image and the social adaptability of Gargash Enterprises L. L. C. in the Middle-East.

Joint Endeavors: Joint projects (JV) are contracts or contracts between organizations often setup in different countries to operate in co-operation with one another as a single corporate entity and talk about profits and losses through the execution of an business or starting. The central issues JV should take into account before getting into would be possession, length of deal, control and rates agreements etc. The best example for jv operations in India would be Markings & Spencer with Reliance Retail Ltd. The excellent advantages would be easy access to enter the market, joint product development, local knowledge and technology, consumer behaviour and cultural adaptability.

Direct Investment:

Direct Investments may also be categorised as Foreign Direct Investment (FDI). Here, the multinational venture directly enters the marketplace and possesses the service of the mark country. FDI can also be made in the proper execution associated with an acquisition of an existing firm or by setting up an entirely new organization. It basically comprises transfer of technology, resources which include capital and also skilled labour.

The firm looking to directly make investments into a international market should have advanced of resources and the ability to understand the consumers and their competitive environment. Nevertheless, it is vital for them to bring in high degree of control and commitment to showcase their strength in the new market segments.

Multinational organization- The Voyage continues. . .

Companies nowadays are always searching for potential internationalization opportunities in new unexplored market segments like China, India and the Middle East. Such expansions are targeted at accessing the home country's natural resources, availing the features of cheap labour, deal of products for income maximization, and the overall progress and development of the business. However, the irony of the condition has been the recession that has hit globally, will we start to see the beginning of internationalization of companies or would we witness companies that will be prepared to take up the task of universal development?

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