Business of multinational

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Many believe that 'globalisation' is a recent concept and is introduced as a part of New Economy, but it all dates back to March 20th, 1602 - when the Dutch East India Company was established. This entity was the first Multi National Corporation (MNC) in the world and the first company to issue stocks. By the 19th century, the newly emerged capitalists in industrialized Europe began investing in the less-developed economies of the world. Today, such companies are referred -and often interchangeably- as multinational, international, global and transnational corporations. Though according to the working definition referred by Bartlett, Ghoshal and Beamish, only few of these entities through history could be called true MNCs - because to earn the title of MNC, an entity should have substantial direct investment in foreign countries and it should be engaged in the active management of these offshore assets. The entities simply holding the investments in a passive financial portfolio are excluded from being called a true MNC.

Today all the major multinationals are from developed nations like United States of America, Japan and Europe. For example -Nike, Coca-cola, BMW, Adobe etc. These post-industrialized economies have off-shored most of their operations to the developing nations like India and China. Why do these corporations become multinational enterprises? This question is not too difficult to answer. It is right to believe that all businesses' activities are aimed at earning profit and maximising it over a period of time. Any business organisation is always looking for additional revenue and profit. The profit in financial terms equals to the difference obtained after deducting cost from the revenue. So to maximize profit, the two approaches are - to maximize the revenue sales and/or reduce the costs. Thus the two major motivating factors of any company, who determines to become a multinational enterprise, can be classified as - low cost factors and market-seeking factors. The low-cost factors may include the availability of cheap labour, availability of raw-materials and lower-cost capital (through government investment subsidy etc.). Textiles companies in UK and Germany, for example, have outsourced some of their operations to the Far East and Eastern Europe because of the cheap labour costs. Increased market demand, dumping of excess production overseas, fulfilling the need of brand recognition etc are the examples of market-seeking factors. One of the major factors in this category is to gain competitive advantage in the domestic market.

Though these are not the sole-objectives for any firm to go global, but they are the major reasons why a firm may want to become multinational. Hymer (1960) perceived that the major advantage arising from internationalisation is -increase in market power through the reduction in competition and thus reaping profit out it. Sometimes a company may act defensive and in turn internationalise, to offset the pressures in domestic markets. Also, when a domestic market becomes saturated or it is the end of the product's domestic life cycle, a company may decide to become multinational to gain the international opportunities available. Beyond the immediate advantage of increased profits, globalising the company may also prove beneficial from economies of scale which the larger international demand brings in. Many companies also are motivated to globalise the operations as there are number of subsidies provided to them by the government - in form of tax subsidies and lower interest loans etc. There are many government programmes which encourage and help the national companies to expand globally. This help ranges from providing the information on global market to the financing of international projects.

Before becoming multinational, the "cost of doing business abroad" is analyzed and if it's much lesser than the benefits (profits, brand development etc.) derived from doing it; it makes sense to carry on with the operational activities of internationalization. Sometimes a company might just want to carry out its Research & Development operation in foreign countries for the reason of minimized R&D cost. Becoming a multinational is no different than expanding the business activities within the nation, the only major difference between both processes is the consideration of national boundaries.

To answer any question relating 'Why?'- the merits derived out of doing "it" can be listed. Because of internationalization of national corporations, both - home and host countries are benefited. The home country is the one where the company has its headquarters located while all the other foreign countries - where the company carries out its operations are the host countries. The multinational corporations help the home countries by bringing in profits earned by exploiting foreign resources - which directly contributes to the economic growth of the nation. The company will also represent the home country in its operational sector globally for instance Tesco of United Kingdom and Wal-Mart of United States of America. All the business activities results in financial transactions, which in turn leads to management of foreign exchange - in case of multinational organisations. This foreign exchange is an important part of the Balance of Trade (BoT) of any country. Any multinational corporation entering foreign markets brings in new technology, knowledge and management techniques to the host countries. It also creates jobs for the population of foreign nations - helping in reduction down the unemployment rate prevailing in those specific countries.

After a company is motivated enough to internationalise its operations, it needs to determine about how it is going to enter into the global market. This analysis and determination generally depends on the need of the expansion of the company. There is no definite system defined about how a firm should move in the process of becoming a multinational company, but a thorough research about the corporation laws in various countries should be carried out in order to see which one allows majority foreign ownership in a domestic venture. After this the list of the countries should be narrowed down on the basis of most favourable working conditions. For instance, many countries offer tax incentives to foreign investors.

Laughton & Thornes(1995) mentions that there are four basic ways of internationalising a business -exporting, licensing/franchising, joint venture and foreign direct investment (FDI). Exporting is the most convenient method to internationalise a company's operation - it is the process of selling goods or services from one country to another. Though according to the working definition mentioned above - a company which simply involves itself in export operations cannot be called a true multinational company because of the absence of "substantial direct investment". Similar is the case with licensing or/and franchising -wherein the others (licensee/franchisee) whatever the case would be - is authorised to utilise or sell intellectual property in a prescribed manner in return for compensation. It is not always the case that a company opens manufacturing units in foreign land to internationalise itself. Root (1987) gives the examples of high technology companies for whom licensing is the first mode of entry into foreign markets. Also, most of the companies enter into a foreign market through joint ventures with the domestic companies in the host country, for the reason of limited foreign ownership. The major advantage of getting into a joint venture with a foreign company in its own market is that the partner company would provide the newly formed venture with all the knowledge and information required for the domestic market of the host country and thus help the company to carry out its operational activities in an efficient manner without any kind of delays. Businesslink lists out that a successful JV can offer increased production capacity, increased product demand, government negotiations, shared risk & cost and access to greater resources -including specialized & skilled staff, technology and finance. Foreign Direct Investment (FDI) is another method by which a national company can become multinational. Through FDI, a company acquires income-generating assets in foreign country and has control over them. It demands great long-term commitment from the investing company. Buckley (1987) showed that companies may use "mixed" approaches to its individual foreign markets -For instance, an American company may just decide to open a manufacturing unit in India and sell the products in European market through exporting.

A firm, firstly, analyzes the problems it is facing in domestic market or the opportunities it foresee in the foreign market and then decides on the mode of entry into a foreign market accordingly.

Buckley, P.J., Mirza, H. And Sparkes, J.R. (1987), "Direct foreign investment in Japans as a means of market entry: the case of European firms", Journal of Marketing Management, Vol 2 No. 3, pp. 241-58

Businesslink - Joint Ventures and Partnering - Joint venture benefits and risks -

Christopher A. Bartlett, Sumantra Ghoshal, Paul W. Beamish (2006), "Expanding Abroad", Chapter One in Transnational Management: Text, Cases & readings in Cross Border Management, New York, McGrawHill

D. Laughton, How Firms Internationalise their Operations in B. Dawes, International Business : A European Perspective, Stanley Thornes, Cheltenham, 1995

Hymer (1960) - Journal of International Business Studies (2008) 39, pp 167-76

Root, F.R. (1987), Entry Strategies for International Markets, DC Heath, Lexington, MA