About the multinational enterprises




In this essay we are going to see about the multinational enterprises; their mode of entry, their operations and the reasons why and how the firms actually become multinational enterprises. The basic reason for the firms to become multinational enterprises is the globalisation or internationalisation of markets. Because of this major factor the firms tend to operate as multinational enterprise in almost all parts of the world.


Globalisation is the major factor that drives the firms forward to operate internationally. International trade is carried out based on the principle of comparative advantage that benefits all. The internationalisation of firms plays a vital role. The firms not only move goods and services from one country to another, but also it transforms societies along its way. Firms engage itself in international trade mainly because they are not and cannot be self-sufficient. There are various resources such as raw materials, technology and cheap labour that exit in the other parts of the world which allows firms to go global. During the international trade, the countries will try to sell its resources that they have in abundance and buy the resources that they don't possess. First and the foremost form of international trade were import and exports of goods and services.


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Multinational enterprise can be defined as a firm or an organisation that has its assets or its employees that operate in more than one country. Also the firm is considered to be multinational only when they hold substantial direct investment in foreign countries. A multinational enterprise usually has its capital or headquarters in the home nation and operations in the other parts of the world. A firm can be multinational if i) it sells in more than one country, ii) it runs its own subsidiaries in two or more countries and iii) it is owned internationally.

The reasons for the growth of MNE's are rapid technological change, trade advantages over national barriers, privatisation and deregulations. MNE's operates on a global scale and play a vital role in the world's economy. For a firm to succeed in overseas market, it has to possess certain attributes. The firm must be able implement its desire to expand overseas through a series of decisions and commitment. The local firms have more advantages when a new firm extends abroad. But the firms extending has an additional advantage such as improved technology, superior knowledge or skills that often leads to the success of new firms that trade internationally.


The reasons for the firms to become multinational enterprises or the advantages of being multinational are as follows, Multinational firms come in to existence because of certain economical conditions that will allow firms to be more profitable and to carry out its production of goods and services internationally. Firms tend to be multinational enterprise when the business tends to diminish at the home town or if there is great opportunities abroad.  Firms often tend to go multinational if their competitors operate internationally and so that they do not want to be left behind. Most important factor may be because of the availability of resources and technology abroad which most of the firms' lack. High unemployment rates in specific areas and market opportunities abroad attract large number of firms to go multinational. The foreign markets can even have skilled labours and very hard workers which the firms lack in their home country. In certain Asian countries like India, China, etc., the labour cost is cheaper than the European nations so the firms in these regions tend to go international for the cause of cheap labour. For example, Nike makes use of this factor of cheap labour and extended its firm in to the Asian countries and now makes huge profits. Also India is a nation of large amount of natural resources and raw materials that caught the attraction of the British in the earlier days to trade in India. 

Firms invest in more than two or more nations in order to reduce the risk factor in the view that even if the firm fail in one location it could operate in the other country. Firms are also influenced to be multinational even due to the host government related factors. There are certain governments that offer incentives in the form of tax concession, grants, import tariffs and special quotas in order to attract foreign direct investors in their country to improve the economy. For example, this policy was followed by the British government under the leadership of Margaret Thatcher which attracted a lot of multinational enterprises, especially Japanese, by offering them various tax concessions and capital grants. This was the basic reason and factor that led to the Industrial Revolution.

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The steps taken by the firm after deciding to go multinational are a series of analysis that includes

i) Preliminary screening criteria- screening and selecting the countries that will be suitable for the firm to be successful.

ii) Determining success criteria - factors suitable for success of the firm in a particular country are determined and ranked.

iii) Country evaluation - for the above two evaluations, a particular country or countries are evaluated and selected.

By doing the above series of analysis a firm can expand in to a multinational enterprise and for doing so the steps involved and methods are as follows.

The transformation of firms in to multinational enterprises starts with the involvement of companies in international business with the actual exchange of goods and services, and of money which is usually in the form of hard currencies, such as US dollar or UK pound sterling. The first and the foremost form of international business that led to the formation of multinational enterprise are the import and export of goods and services. Firms buy or sell resources and services from other countries which their country lack or cheaper abroad. This is the main motive that led to the formation of multinational enterprises. How the multinational enterprises were formed is due to the following,


Exporting is recognised as being the least risk method of internationalisation. There are few firms that export their own products and services. Exporting firms choose their local partners and sales agents abroad to handle the sales of the goods once they arrive at their destination.


Sellers of goods and services, who tend to buy them from their trade partners present in the other country, sign a contract under the conditions of their respective government. This type of trade based on signing contracts is called countertrade. Countertrade is not only a form of trade over barriers, but also followed by many developing countries to increase their exports and to maintain the competition between their international partners.


It is a similar form of licensing. In terms of licensing agreements, the products are made under different names. But under franchising, the firms may use the original company's brand name. For example McDonald's issues franchising to firms that are willing to sell its products. By this way the McDonald's established its business internationally and it is found in almost all the countries. Under franchising the parent company has its operations and full control of the business.


It is also a form of international trade in which the firms may buy shares in one or more firms operating in other countries. The firms holding shares earn only dividends but do not have managerial control.


A firm usually accepts an agreement with the foreign government when expanding internationally and the firm operates only for a limited period of time. At the end of this period the firm is expected to hand over the company to some other local competitors and leave.


It is a partnership in which two or more firms share the cost of capital, risks and long term profits. It may be formed for a particular period of time. Once the period is over, the foreign investor may retain minority of the shares according to the agreements.

Some of the other methods of firms becoming multinational enterprises include management contract, offshore processing, wholly owned subsidiaries, strategic alliance, collaborative arrangements, etc.


So I conclude saying that individual firms has turned in to large multinational enterprises over the years. Even very small firms turn MNE and they develop a brand name in a very short period and turn very successful. The growth of these MNE's has clearly increased the economy of the world and taken the world forward to the next step. But the economy cannot keep on increase on a wide scale, at some point of time it will fall to its lowest. Now we have experienced such a situation. In the future to avoid any such critical issues, the government must take steps in order to reduce the amount of MNE's and give opportunity to the local firm's development.


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Hill,C.W.L.(2000). Entry strategy ans strategic alliance: International business competing in the global marketplace, pp. 426-448.

Peter,J.B. and Pervez,N.G.(1993). The internationalization process of the firm-a model of knowledge development and increasing foreign market commitments: The Internationalization of the firm- A Reader, pp. 32-44.

Tayeb,M.H.(1992). Firms and International Business: The Global Business Environment- An Introduction, pp. 1-24.