Free What Is Meant By Multinational Enterprise? Essay Example
Multinational is a term that is made up of two different words, multi and national. Multi means multiple or great in number whereas the word national is referring to countries or nations. This shows that the term multinational means that it exists in multiple numbers of countries. A multinational company is such a company which has a main head quarter in one country but it is operating in more than one countries (Dunning & Lundan, 2008)
The multinational enterprises became quite common when they evolved and emerged after the occurrence of the Second World War. They were widely spread everywhere because of the huge investments in activities which were mostly based on resources. Before the world war, the multinational enterprises were only limited to the United States of America. In 1914, they were just 18 percent of the international stock of outward foreign direct investment. This was a much lower share than the United Kingdom. Their share was of almost 45 percent at that time (Dunning & Lundan, 2008)
A multinational enterprise can be defined as an enterprise which is involved in foreign direct investments. Such an enterprise owns and controls activities which may add value to the final product or service. All the big names of multinational enterprises were once started as a small firm with a very small number of employees. When they initially started their business operations, they had very less financial resources and time constraints. Gradually when they came to know about the customer needs and how to satisfy them, they started manufacturing their product or services according to that. This helped them in achieving high success in their market(Helpman, 1984)
The multinational firms are one of the most persistent types of firms in the international economy. It can be defined as a firm which has its assets and employees in multiple countries. There are more than 62,000 companies that can qualify as being a multinational one. They are controlling almost half million subsidiaries internationally. Some are relatively small and employ less than 250 workers. Others are quite sprawling and extensive organizations with more than 200,000 employees spread all over the world in more than 100 countries. The top 500 largest multinational enterprises own about 25 percent of the world product and nearly half of the total world trade. Multinationals are becoming quite significant relative to the size of the international economy. They are now almost three times prominent today than they were about twenty years ago. More than 80 percent of these multinationals are based in the rich countries of Canada, Australia, Western Europe and the United States of America. In the previous decade, many new multinationals have become known internationally from countries like Taiwan, Brazil, Argentina, Spain, South Korea and Mexico (World Bank Organization, 2000).
Economic Advantages of the Multinational Firm
These multinational enterprises are existent just because of certain economic conditions which make it convenient for them to operate profitably by producing their goods and services in a foreign location. It is essential to clearly understand the distinguishing factor between the horizontal and vertical foreign expansion by the firms to fully interpret the basic economic principles which trigger the activities of multinational enterprises (Haider, 2010).
Vertical expansion takes place when the multinational firms have its assets and employees in an international country with the sole intention of securing the production of raw materials or the distribution of goods or services. This advantage is usually linked to the productivity or prices of production factors like capital, land or labor. For example, a clothing boutique may consider producing in some foreign location to incur lower labor costs where labor is cheaper. Like currently many famous clothing brands like H&M, Levis Straus, Marks and Spencer and a few others are doing this. They have hired cheap labor in under developed and developing countries. They have production units over there and they make the desired clothing items according to specifications. Later on, they are shipped internationally for sale under the multinational firm’s logo and brand name. This helps them in reaping high profits as it had affected the costs of production. When cost was low due to lower labor costs, then it will get high profit margin after selling (Haider, 2010).
Horizontal expansion will occur when the multinational firm establishes a plant or facility of delivering the service in a foreign location. The aim behind this is to sell it in that market without finishing the production of that good or service in their home country. It is desirable to produce products and services in a foreign market where there is a visible presence of high transportation costs, protectionist barriers, unfavorable currency exchange rates or local demand of exporting from the home country unprofitable or unfeasible.
Why Do Firms Want To Become A Multinational?
Firms want to become multinational with the aim of increasing foreign competition and by desiring to protect their home market share. They usually use the strategy of following their competitor. Many multinationals set up their business operations in their home countries of their major competitors. They get a chance to take advantage of the technological expertise by producing goods directly rather than allowing others to do the same under a licensed agreement. Recently, many multinational enterprises have mutually agreed upon the conclusion that it is quite foolish to give another firm right to use the proprietary information such as trademarks, technological expertise or patents (Kaptein, 2004)
Another reason for entering the international market is of foreign direct investment. It is a major index for the multinational enterprise’s growth. It is a mixture of mergers, acquisitions and investments. This means that the foreign direct investment acts to short lived business cycles. According to some economists, there has been a 10 percent increase internationally in the total output of the aggregate stock of FDI (Kaptein, 2004)
A multinational enterprise is a firm that enters the borders of another nation. They operate through branches in different countries. They are responsible for manufacturing goods and services for selling them in other countries. For example, car manufacturers have mastered the art of international segmentation of producing them. Like in the case of Toyota, the vehicle is assembled in San Antonio but it will be designed in Australia's design center. The aluminum wheels of these vehicles might be manufactured in Delta, British Columbia. Besides this, probably the other components might be produced in some other location.
Other multinationals copy the entire process for production in different countries. For example, let’s consider Coca-Cola. If somebody is visiting Poland, he may drink Coca-Cola which might have been produced in a local plant of Lodz within Poland although the company and brand belongs to the United States of America (Guillen & Gracia, 2009)
The main reason behind a firm which outsources its products is to know what really does the customer demand and what are the current market conditions. Outsourcing will help them to reduce the total costs within the organization. Due to this, the cost factor is quite less. Once the firm satisfies the customer needs and expectations, then their business operations can be expanded globally. It is important for the firm to design their products and services according to the customer needs and wants rather than only focusing on the market conditions. Although the market conditions are equally important but the firms should know how well their product is doing in the market and how long it is going to last in the market. Customers are considered to be the king source of this business. Any business firm reaches out to its customer through means of advertising. Due to this, a large share of budget is spent upon advertising. If the firms outsource their product then there is no need to worry about such advertising expenses
Another important reason for the firms is to decide for investing internationally to secure the key supplies which are essential for their business operations. These multinational companies invest in such countries where they have access to cheaper resources as this helps in limiting their business operations. For example, companies which are involved in manufacturing tires can expand their business operations by extending to some other country where cheaper rubber is available. Similarly, oil companies want to secure new oil fields in unexplored locations like Venezuela, Canada and the Middle East. Most capital intensive companies in the developed countries like Europe and US are establishing in offshore locations for producing their products as labor is cheap there. Due to rapid globalization and removing the trade barriers all over the world, more and more firms want to secure new markets in international countries (Guillen & Gracia, 2009)
It is essential for the firm to concentrate mainly on quality, market condition and the needs of target market. When the market share of customers is increased, then that firm can surely attain high profits. Then, they can expand their operations globally and manufacture their products according to customer preferences. For example, McDonalds is the best example for product customization due to cultural and taste differences. People in America are huge lovers of junk food. They prefer their meals in a good quantity with extra fries and extra cold drinks. For this purpose, they have a more than regular sized glass size for their outlets in the United States of America. When they expanded their outlets in India, it was a huge challenge for them to do so. Indians are usually belonging to the Hindu religion. According to their religious views, they do not eat any animal food like chicken, beef, mutton or goat. For this purpose, McDonalds has a special customized menu for Indians.
As they are vegetarians, there is a large variety of burgers but with a vegetable patty. This customization according to their religious views and preference has helped McDonalds gain a large market share in India. Besides this, another such example of a multinational enterprise is of the largest pizza chain, Pizza Hut. They have opened up many outlets internationally. They are quite successful in gaining a large market share instantly because even they serve perfectly to the customer’s needs. For people, who are cheese lovers, they have a special pizza that only has a thick layer of scrumptious cheese on it. For vegetarians, they have a pizza with only vegetable toppings. In Pakistan, the people have a special liking for spicy and char grilled food. For this purpose, they have a special menu with a taste of such food. In Saudi Arabia, they are serving shawarma pizza which has an aroma and ingredients of their local shawarmas. This unique product customization is only possible due to extensive research about customer’s likes and dislikes.
Advantages of Becoming a Multinational Enterprise
International economists and business scholars have observed that firms aspire to become a multinational enterprise to exploit three major advantages. The first one is of ownership advantage. These firms usually develop and own proprietor rights of technology. For example, Coca-Cola has a patented formula which has been kept extremely secret since ages. Such multinational firms are usually the technological leaders. They invest heavily for the research and development of products, brands and processes. They keep them confidential and protect them by intellectual property rights. If the protection of these products and services is strong, then these elements will help the firm to reap great profits because of innovation within the industry.
Secondly, localization is another obvious advantage. Multinationals always try to sell and produce their products or services near the consumer. As mentioned above, people living in Poland are drinking Coke which is being produced locally but belongs to an international brand. Similarly, people living in other countries will also be getting a locally produced product but at an internationally acclaimed quality standard. This will facilitate in reducing the transportation costs and it will help the firm to adjust appropriately with their local environment. It is necessary to do this as the management should be familiar with the local tastes, preferences and needs. Proximity with their target market will help the firm to adapt their likings with their products and services. They can also take advantage of having a lower cost of production. This may include the labor costs, lower environmental standards and energy levels. For example, the multinational unit in Poland owns a few bottling plants in the area of Beskidy Mountains. This location is quite self-sufficient in mineral water for using in making other beverages (Contessi, 2010)
Lastly, multinational enterprises want to maximize their benefits of owning a particular technology, expertise, patents or brand that they may find to be quite risky and unprofitable to license or rent out to any other firms. It can be costly and ineffective to enforce international contracts in countries where the rule of law is not much evidently strong and the court procedures are very lengthy and inefficient. If such a case occurs then it will be difficult for the company to risk their ownership advantage.
Firms become multinational because they have numerous advantages like cheap raw materials and cheap labor which helps them to cut down their cost of production. They strive hard to increase their sales in a competitive market. There are three major stages which every firm goes through when it becomes multinational. Firstly, they greatly rely upon export and expansions of their sales for building new outlets in the country. Secondly, there must be a prescribed limit for the overseas sales which is being halted by any multinational enterprise. Thirdly, they need to start planning, production, marketing controlling, organizing, research, coordinating, and financial support. This can collectively be named as extensive research and development.
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Dunning, J. H., & Lundan, S. M., 2008. Multinational enterprises and the global economy. Edward Elgar Publishing.
Guillén, M. F., & García-Canal, E., 2009. The American model of the multinational firm and the “new” multinationals from emerging economies. The Academy of Management Perspectives, 23(2), 23-35. from http://amp.aom.org/content/23/2/23.short
Haider, M.J., 2010. Advantages of Multinational Company. . Retrieved on 29 December 2014 from: http://www.indiastudychannel.com/resources/125324-Advantages-Multinational-Company.aspx
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World Bank Organization, 2000. Poverty in Age of Globalisation. Retrieved on 29 December 2014 from: http://www.sph.umich.edu/symposium/2004/pdf/povertyglobalization.pdf