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Motives For Businesses To Become Multinational Businesses Economics Essay

Multinational Companies, as defined by John Dunning, are the enterprises which take part in foreign immediate investment (FDI) and own or control their value adding functions in several country. The multinational companies (MNEs) have influenced the global market enormously. The total world outward stock of FDI was estimated at a huge $10, 672 billion in 2005 due to the increasing activities of multinationals, which have a direct impact on increasing amount of world GDP (UNCTAD 2006). The multinationals in expanding countries are growing at an instant rate. Dragon multinationals, because they are called, accounted for only about 9% of MNEs parents in 1994 but grew significantly to be responsible for 22% of MNEs parents in 2005 (UNCTAD 2006). Multinationals have grown to be a fundamental element of life. Today, an Indian citizen can drive a BMW or Toyota, could work at the IBM office in his country, eat at McDonalds, use a Nokia cell phone etc, which has been possible because of the living of MNEs. They have empowered the individual with the best of selections to choose from and eventually purchase what they really want. In this article, I'll discuss the reason why for which companies strive to become multinationals and then your ways in which the companies become multinationals.

One of the major reasons for which the businesses decide to make investments in foreign countries is to secure the main element supplies required for their operations. These businesses spend money on countries which provide them with usage of cheap resources thus decreasing their cost of creation. For example, the companies manufacturing tires went in another country seeking cheaper rubber plantations and the oil companies wanted to secure new oil domains in Canada, Venezuela and the center East to gain access to the low cost factors of development (Bartlett et al. 2006). Most capital extensive sectors in developed countries like US and European countries established offshore sourcing locations, where labour was cheap, for producing their products. With all the expansion in globalisation and removal of trade barriers across the world, increasingly more firms wished to secure new markets in foreign countries. The businesses which got a competitive edge in their house countries, such as superior technology, brand acknowledgement and unique product qualities were the most stimulated to become MNCs which helped them exploit the economies of range and competitive gain in foreign marketplaces. Some companies make investments in another country in response to strict restrictions in domestic market segments and also to reduce cyclical or seasonal downturn in home market needs by creating overseas demand. Moreover organizations desire to internationalise their businesses when the demand for their product has high in the domestic market. E. g the tobacco companies exploited new market segments in producing countries as the marketplaces in developed countries became saturated. Some businesses concentrate on the economies of size that a huge demand in a overseas country can bring apart from the additional profits and revenue. The government performs an important role in getting foreign firms to purchase their countries. The government help for exporters such as providing information about the overseas markets and financing the business enterprise opportunities have enticed more companies to become MNCs.

Raymond Vernon described in his product life cycle theory how these motives encouraged the businesses, mainly in US, to be MNCs. He described that the internationalization process for a company starts with creativity in the home country. The company prefers to build up the products in the house country with its major target market which allows them to synchronize their research and production activities. In this phase the requirements from international countries are met through exports. The demand for the product becomes large in the foreign countries as the product extends to the maturity level. This pushes the organization to create the creation facilities in the international country and stay near to the market to avoid any local rival firms, who see the potential opportunity of the rising demand of the merchandise, from entering the market. This activity essentially transforms the neighborhood organization into a MNC. Finally, as the product becomes highly even, the MNC looks for cost effective techniques to reduce the product cost and maintain its benefits. Thus it tries to determine the creation facilities in growing countries where it has usage of cheap resources required for production, thus expanding its procedures further (Vernon, 1966).

Other motives for companies becoming MNEs are to make get away or support investments. Businesses make FDI when the federal government policies in their house country are highly regulated and not well suited for business. They are called escape investments. Support investment funds are done by companies to support the major activities of the company. The affiliates thus created in the overseas country have emerged to provide benefits to the MNE all together rather than being do it yourself earnings centres. Their activities include facilitating imports, circulation and marketing in the overseas country.

They are relatively large plus they do have competitive electricity on the market place and bargaining power in the insurance policy- making arena, particularly in smaller growing countries. They are really global players that can circumvent local laws and policies more easily than national businesses. These are footloose, in a position to move activities between their vegetation at relatively low priced, removing benefits as swiftly as they deliver them. And they do mass-produce standardised products, jeopardising product variety. Yet other top features of multinationals also describe why countries compete fiercely to catch the attention of them. They often times bring scarce technologies, skills and money. They are fast in taking good thing about new opportunities and adding to national wealth creation. They are really bound by international standards and market competition and they often offer better career conditions and product qualities than national companies.

[Multinational Firms in the World Economy

by Giorgio Barba Navaretti and

Anthony J Venables

CentrePiece Spring and coil 2005


John Dunning has described the foreign activities of MNEs through the eclectic (OLI) framework (1976). It declares that the amount of overseas investment undertaken by the MNEs be based upon three interrelated factors. The foremost is the competitive advantages of the organization which lead to ownership specific advantages. The second is the location specific advantages that your organizations seek in the international countries such as cheap resources, exchange rate and politics risks, the regulations and policies of supra-national entities and associates with local firms and government that are unavailable in own country. The third is the internalization benefits for the firm in foreign marketplaces. You will find four main types of activities which draw in organizations to the overseas lands and be multinationals. First is the market seeking activity by the companies to fulfill the demand for the merchandise mainly in markets of developing countries like China. Second is the reference seeking behaviour where in fact the organizations exploit the access to natural resources like minerals, cheap skilled labour etc. in international countries. The 3rd is the tactical asset seeking FDI by the businesses to market their existing competitive advantages in foreign marketplaces by acquiring possessions of foreign businesses. The fourth will be the efficiency seeking businesses which engage in cross border specialisation to get good thing about economies of level and scope and to spread the risk of international investment.

Firms engage in cross-border Mergers and Acquisitions to get new resources and to usage of new capabilities, gain market electricity, lower the expenses of production or even to stop the monopoly of opponents.

Internalisation theory points out that firms engage in FDI when they realize the net benefits in possession of foreign activities and the related transaction costs to be much higher than offered by other trading human relationships such as licensing. This provides the advantages to the investing company to avoid looking for overseas businesses, prevent negotiation of costs, costs of wrong selections and therefore protecting the trustworthiness of the business.

According to Robert Aliber, the imperfections in the forex markets are in charge of international investment by organizations. He explains that MNCs generally originate from hard currency zones to borrow or increase capital in domestic or foreign markets and tend to capitalise on the revenue at different rates of interest in less developed and recently growing countries with weak currencies.

According to Hymer (1976), MNEs emerge to take good thing about the imperfect market segments in a variety of countries. He explained that organizations desire to set up foreign subsidiaries to eliminate competition between them and the companies in other countries. Control over the belongings in the overseas country is necessary by the MNE to reduce risks and gain the marketplace power.

The process of a firms entrance into foreign marketplaces was described as a learning process in 1970s by two Swedish academics in Uppasala. The company spend particular amount of resources in the overseas market and learns about the market, the competition, competitors and federal government conditions. After evaluating the marketplace conditions with the business's capabilities, it creates further assets like creating a distribution string and setting up production facilities. A company desperate to become an MNC can enter in foreign markets in several ways. It could sell the technology to or permit it out to overseas manufacturers. Franchises can be setup internationally using its brand name. It can also sell its products through local vendors or trading companies without establishing its own businesses in the international country. Some companies invest in or acquire local associates to broaden its functions. E. g Walmart got into the UK by purchasing supermarket ASDA alternatively than expanding own stores. Some companies subcontract local associates like Amazon. com establishing its business in Canada without any local employees. Other methods are Joint ventures and direct foreign investment.

There are several options by which firms can invest in foreign market segments like exporting, licensing, franchising, Joint endeavors and foreign immediate investment. The companies choose between your options predicated on the resources and information they may have, their degree of dedication in the foreign market segments and their risk taking capacity. Exports can be immediate or indirect. For indirect exports, the organization consists of an intermediary generally in the firm's local country like the Export houses in the UK. Though this process is more expensive and the organization doesn't have any control over the export process, it is effective for new exporters who look for quick overseas sales without spending any significant resources. Immediate exporting may involve agents or distributors in international countries as intermediaries. The businesses have a larger engagement when exporting straight. The agents work on behalf of the exporting organization by finding business in the overseas markets. The agents help the exporting firm in providing the market information which helps it in making the proper decisions to enter in the marketplace. The firm may also make an agreement with a local distributor in the overseas country who would sell the merchandise in the foreign markets. The businesses may also export right to retailers or market sectors in international countries.

Some firms involved with significant research activities and with strong intellectual property may wish to permit or sell its technology, brand name, products and designs to foreign firms in return for financial compensation. It can help the organizations to type in the foreign markets quickly and never have to bear the costs of production, syndication and promotions. However the licensing of the ground breaking technology to may allow the foreign firm to become a strong competitor when the licensing contract concludes.

Some firms enter foreign marketplaces by franchising their procedures. It is a type of licensing where in fact the franchisee uses the franchising firm's competitive advantages such as listed trademark, patents, technology, management support and training steps to use in a manner recommended by the firm. In return the franchising company gets royalties or fees.

Some firms create joint endeavors with a company in international country to expand its operations. The two businesses form a tactical alliance where they integrate their resources and cooperate to have benefit of market opportunities. Joint projects can be equity or contractual joint endeavors. In collateral joint ventures, the two participating firms make a 'child', which is a separate legal entity, to carry out the business enterprise. Contractual joint ventures will be more formal with partners where no separate legal entity is created. The firms mixed up in joint venture have clearly defined duties and cooperate to share the risks and rewards.

Other types of contracts which firms consider are Management contracts, turnkey operations, agreement production and countertrade.

Firms also extend their operations in another country through Foreign Direct Opportunities (FDI). These companies acquire or set up possessions in the foreign country for carrying out their functions. FDI generally hails from the bigger multinationals as it requires a permanent commitment from the company for the resources and capital. Among the reasons for companies choosing FDI is to avoid the government restrictions for immediate exports like tariffs or other barriers. Besides, FDI can be used in the most effective way by the firm to stay near to the market, make use of its competitive advantages and the availability of cheap resources and favourable federal guidelines in the coordinator country.

Thus with firms become MNCs when they have got location specific advantages, ownership advantages such as tactical competitive benefit and organizational features to progress earnings from leveraging its strategic strengths internally somewhat than through exterior market mechanisms such as deals or licenses (Bartlett et al. 2006)

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