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Why Organizations become Multinational Enterprises

Keywords: why do organizations become multinational

Introduction

One of the top aspects of globalization is the international transformation of the firms surrounding the world. The firms have progressed from being a domestic firm to a multinational organization and being present just about everywhere in the world either actually or via internet. These international companies are regarded as true MNCs only when they have made substantial direct investment in foreign countries and have actively and continually considered part in the management of the investments (Barlett, Ghoshal, p2). Though the companies had started out the internationalization process as early as in the seventeenth and the eighteenth hundred years when the developed countries moved into the under developed ones for acquiring key resources and in search for markets, however the latter part of the twentieth hundred years and the start of twenty-first century witnessed a huge expansion in the scope to that your businesses go international (Barlett, ghoshal, p1). The internationalization process has changed greatly because of the development of the motives and just how firms integrate and increase their businesses across the world. A couple of both proactive and reactive motivations for a firm going international. Proactive motivations are apparent in firms that visit a dependence on a tactical change and want to go international; whereas reactive organizations are the ones that go international because they need to in order to deal with the competition from the domestic organizations growing internationally as well as the foreign players joining the home market. (Czinkota, The Export Marketing Imperative, 2004, pg 4). This essay talks about these motives for organizations to become MNEs and how they go about it.

Why firms become Multinational Enterprises

In the progressively more global business environment, many companies cannot find the money for to be under the assumption that their local markets will always be profitable. For this reason, many companies start with retailing their existing products to the countries that have more volume of consumers (e. g. China and India) or where consumers have more purchasing vitality (e. g. , USA) (Rennie, Michael W, 193). This arises from the primary profit-seeking purpose of the firms but also helps these to increase their brand id and global existence (Czinkota, p4). These businesses then modify their product line based on the country in which they are selling in order to broaden their customer platform and tackle the competition from the local players. So more sales are a major purpose for a company's growth, and in simple fact, many of the world's greatest companies - including Volkswagen (Germany), Ericsson (Sweden), IBM (USA), Michelin (France), Nestle (Switzerland), and Sony (Japan) - derive more than half their sales from outside their home countries (UN Meeting: Promoting Linkages, 2001).

Another purpose, which arose from the businesses heading international, was seeking affordable resources to propel development for local and overseas market segments. As the companies widened geographically, they needed to attain competitive edge over other overseas as well as the local companies. This drove them to get abroad in countries where resources needed for production were offered by low priced (Cosmin Sabau). In the last times, these resources included mainly the natural resources like silicone, steel, light weight aluminum, etc. , for example, crude engine oil was sourced from gulf countries to meet the shortfall in the home supply of crude petrol. Today, it offers low priced land, labor and capital as well. This helped in reducing their cost of production and offering competitive prices to the client. Sports activities good companies like Rawlings rely basically on labor in Costa Rica, a country that hardly plays baseball, to produce baseballs (Philip Hersh, 2009).

The motivations to grow internationally however transformed slowly but surely in response to the great organizational and scientific causes (Barlett, ghoshal, p6). Among the major modern motives is achieving economies of size. It had been first known by manufacturers in the military services aircraft industry in the 1920's and 1930's that direct labor costs reduced by a frequent percentage as the cumulative quantity of plane produced doubled. By increasing the cumulative outcome and exporting to a larger market, the companies may bring down their cost of creation by 20-30 percent (Ghemawat).

Many companies set up overseas research and development (R&D) facilities to touch additional scientific resources, sometimes acquiring useful knowledge along the way (Heather Berry, 2006, p 151-168). Avon, for instance, is applicable know-how from its Latin American marketing experience to help sell to the united states Hispanic market (Nery Ynclan, July 23, 2002:EI). Another purpose for companies going international was shortening PLCs (Barlett, ghoshal, p6). As the life span of a product became shorter, satisfactory returns for all your research and development done for the product could be produced only by presenting the merchandise to multiple bigger markets. In addition companies nowadays try to launch the merchandise simultaneously in as much markets as you can to enjoy the utmost returns before more companies start producing substitutes.

How firms become Multinational Enterprises

Internationalization is a very crucial and proper decision that a company takes in its life span. Certain prerequisites have to be met before a company can think of nationalizing and becoming an MNC. The first one is high country elegance. The country should be able to offer something that will guarantee a competitive edge for the company or something that will help the company maintain its existing competitive benefits. Another prerequisite is the possession of strategic competencies. The company must have some competencies that will help it counter balance the incognizance of international marketplaces and environmental conditions. Also, the business should have some organizational capacities that will boost the ROI by leveraging the business's strategic talents intensively. These three prerequisites are crucial for selecting the function of internationalization and the mode of country entry that will assist the company compete in world business. (Barlett, Ghoshal)

There are extensive methods followed by companies to internationalize and overcome foreign markets. The initial method utilized by companies in their procedure for becoming MNEs was exports and imports. This may include both merchandise exports and imports and service exports and imports. Service exports and imports may be travel and leisure and travelling, service performance and property use. Some services earn repayment for the firms for the performance of these services. For instance, the firms may pay fees for turnkey assignments which are used in the owner once they are operational. Management agreements also earn the firms fees for the performance of general and particular management functions for another. Advantage use includes Licensing, Franchising, etc. Licensing is the process of allowing another company to utilize its intangible investments like patents, trademarks, copyrights, or competence, under agreements known as licensing contracts for which they earn royalties. Example. Franchising is the process of business in which a company allows another company to use the hallmark as a secured asset of the franchisee's business. The franchisor can help the franchisee by delivering recycleables, management services etc. and will lay down guidelines and criteria that are to be followed by the franchisee. For example, McDonald's has franchised its stores in many countries like UK, India, etc. In lots of circumstances, a multinational with an exclusive technology may dread a licensing contract business lead to dissipation of its proprietary knowledge. In that case, establishing a overseas subsidiary is a more suitable strategy. (http://cep. lse. ac. uk/pubs/download/CP167. pdf)

Another approach to expanding internationally is by making investments on the foreign countries. Foreign investment implies ownership of foreign property in exchange for a financial return. You can find two types of foreign investment: direct and stock portfolio. The foreign direct ventures (FDIs) confer the trader with a managing stake in the business. For example, when Nintendo's CEP bought the Seattle Mariners, the football team became a Japanese FDI in america. Although the control in the international company do not need to be full; despite having a minority stake and the remaining ownership widely dispersed, the overseas investor can take decisions that cannot be vetoed by some other owner. When the ownership of the business is considered by several company, it is called as a jv. Today, at least 61, 000 companies worldwide control over 900, 000 FDIs in every industry (UN Conference: FDI from Developing and Change Economies, 2006, p 30-31). Alternatively, the foreign collection investment is a non controlling desire for a firm or ownership of a loan designed to another party. This can be in the form of stocks in a firm or loans to a corporation in the kinds of bonds, expenses, or records purchased by the investor. They are comparatively safer than FDI's in terms of risk.

Conclusion

The changing magnitude, identity and geography of MNE activity over the past two decades is itself a representation of a series of path-breaking technological, economical and political situations. But internationalization is not really a "one size suits all way" have different motives to visit global and do it in the way that best suits their business models and gives them maximum dividends. Whichever method a firm adopts, it goes through a learning process and raises its knowledge throughout the procedure. Internationalization has indeed become the need of the hour for companies to preserve their businesses over time and develop company's strategic and organizational capabilities.

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