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Why And How Do Organizations Become Multinational Economics Essay

The term multinational includes two different words, 'multi' and 'countrywide'. Multi means many while the word national refers to nations or countries. Therefore a multinational company means a firm that has brain quarters in a single country but which includes operations in a single or even more countries.

While analyzing the introduction and evolution of Multinational Business (MNEs), it is clear that MNEs speedily spread since the Second World Conflict due to investment funds in resource founded activities and transfer substituting manufacturing in South East Asia. Before the World War, MNEs were limited to the U. S which accounted for only 18 percent of the global stock of outward FDI in 1914, that was a show lower than that of the major home country, UK with more than 45 percent(Dunning, 1983)

Analysing why do businesses become multinational:

The determinants for companies to be multinational are seen relative to respective country's complete (Adam Smith, 1776) and comparative gain (David Ricardo, 1817). The past advantage expresses that the country should have a solid capability to deliver a good or service whereas the latter states that it should be superior to the same good or service stated in other country.

To protect themselves from the risks and uncertainties of the home business pattern; if the market of the country is gradual or demand is dropping down in one country and chances are there to achieve another country. By setting up operations internationally, multinational companies can reduce the unwanted effects of economic swing action in the house country. It really is widely employed by Japanese as it is a form of international diversification, for example Japanese MNEs have discovered that their home economy has been in financial slump since 1990s but their All of us operations did quite well.

Increasing worldwide demand for goods and services. For instance many MNEs have targeted United States due to its large people and high per capita income. In 2001, china got into world trade group which was accepted by the market and made China more attractive for MNEs. By setting up operations close to the overseas customer, these businesses can reduce transportation cost, avoid over head bills such as charges of experiencing intermediaries to take care of the merchandise and take advantage of local resources. This technique is recognized as "internalization" of control.

Firms become MNEs to increase foreign competition and a desire to protect their home market share. Using a "follow the competitor" strategy, a growing number of MNEs setup operations in the house countries of the major rivals. .

It is a chance to take good thing about technological expertise by manufacturing goods directly rather than allowing others to do it under a license agreement. Lately some MNEs have concluded that it is unwise to give another firm access to proprietary information such as patents, trademarks, or scientific expertise and they have allowed current licensing contracts to lapse.

Another main reason is Foreign Direct Investment (FDI) which is a major index for the expansion of multinational organization and as a mixture of Greenfield investment, mergers and acquisition, therefore FDI serves to transitory business cycles. "The aggregate stock of FDI on earth overall economy has doubled to more than 10percent of the full total output in the last two decades, therefore in this rising development there are several local features deserving attention". (Barrel and Pain, 1997)

FDI in eastern Europe has gained benefit of acquiring usage of high degrees of technological know-how and chances of getting from the wider diffusion of scientific exchange associated with the single Western Market(Bora, 2002)

Firms become multinational to be able to take advantage of lower labour costs that results from the businesses enhanced capacity to 'split and rule': by producing in a variety of countries firms split their workforce, thereby obtain lower labour cost. As capitalist start new markets overseas, they also discover production facilities abroad, particularly in colonies or past colonies (Helpman, 1985). After all, where labour costs are less than in the house countries of the MNEs, in that way minimizing dividends to labour and maximizing profits.

"Efficiency-seeking FDI is to rationalize the composition of established source founded or market seeking investment so that the trading company can gain from the common governance of geographically dispersed activities. " (Dunning, 2008). The intent of efficiency-seeking MNE is for taking good thing about different factor endowments, ethnicities demand patterns, economical insurance policies and market buildings by concentrating development in a limited variety of locations to provide wide market segments.

Market seeking businesses will invest in foreign market segments when the neighborhood market segments are saturated. These organizations go multinational in order to maintain the growth level of the organization when the competition has changed to overseas market and therefore local demand and needs for the same products will be satisfied.

Strategic asset seeking firms invest in assets for the look and overview of the business. These investment funds are basically predicated on research and development and use of new technology for the development of new products, hence achieve long term goals by MNEs.

The other known reasons for any firm to look multinational are the three types of advantages benefiting a multinational corporation are ownership specific, internalization specific and location specific advantages. Ownership specific advantages are property privileges or intangible investments, including patents, trademarks, organizational and marketing experience, production technology that form the basis for a company's edge over other businesses. Internalization specific advantages include support from authorities regulations and regulations, compensate for the future markets. Location specific advantages include access to raw materials, cheap labour, technology and infrastructure in order to handle business operations effortlessly.

Analysing just how do firms become multinational:.

Basically how a organization becomes multinational is through the means and ways of FDI. FDI refers to an investment which is made to serve the business interests of the trader in a corporation, which is in a different country distinct from the investor's country of source. There are three types of FDIs, they are simply: Horizontal, Vertical and varied.

Horizontal FDIs means the solid buying the same industry abroad as that when a firm performs at home, however in a foreign market. This implies the international company which produces similar or same goods and services is taken over by the home firm and so invest in these businesses. Hence, product differentiation is the critical element of market framework for horizontal FDI

Vertical FDI is categorised into two forms as Backward and Forward FDI. Backward vertical FDI is an investment in an overseas company that provides inputs for a firm's local production processes. In front vertical FDI occurs when an oversea company markets the outputs of the firm's domestic production processes, this is less common when compared to backward vertical FDI. For instance, US car manufacturers found it hard to market their products in Japan because most of the Japanese car traders have close and good interactions with Japanese car producers, therefore it was difficult for US to market foreign cars. To prevail over this problem, American car traders embarked on a marketing campaign to determine their own network of dealerships in Japan to advertise their products.

In a conglomerate, one company possesses a stake in a number of smaller companies, which carry out business independently. Each of a conglomerate's management businesses is functioned individually of the other business divisions, but the subsidiaries management reports to older management at the father or mother company.

Mergers and take over's are also a part of business expansion to realize a position of MNE. For instance, Lakshmi Mittal - CEO of Arcelor Mittal. , for example has migrated his first rung on the ladder of development of his family business of steel by buying investments of a run out steel organization in Indonesia.

Joint venture is an agreement between several companies that share the ownership of an business undertaking. In case there is Goodyear Tire and Rubber, they have involved with a 51 percent managed tier manufacturing jv with Pernos, a Malaysian company.

Licensing contract is the right given by one company to some other company to make use of their possessions such as trademarks, copyrights, patents or know-how for a certain amount of fee. For example, U. S MNC has got into into joint venture with a chemical substance, rayon and other fibre supplier in Peru. Additionally agreement, the company negotiated a licensing agreement which expresses that royalty as a percent of the procedure and technology, and percentage of profits acquired should be paid to the neighborhood partner.

Franchising is another common method for the firms to move international that involves little investment of capita, it is similar to licensing contract. The franchiser is paid commitment fees as well as receive a part of talk about of the company. Dominos, for example a franchising company has emerged as the major food string.


Today's MNEs success depends upon close romantic relationship between domestic banking companies and FDI and wholly possessed businesses and their management. Future success will definitely involve international co-operation that aims to raise the overall competitiveness of home industries.

Therefore when we consider all the above reasons and causes 'why' and 'how' organizations become multinational venture it can be said that the organizations structure, aims and goals, marketplace and ethical ideals of the company are the key reasons.

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