International business as the field of management training deals with business activities that cross national boundaries whether they be movement of goods, services, capital or personnel transfer of technology, information or data or even the supervision of employees. MULTInational COORPORATIONS Definition Multinational corporations or transnational corporations is a corporation or enterprise that manages production or delivers services in more than one country. According to Marketing Dictionary
“Corporation based in one country that maintains manufacturing facilities or operation offices in other countries and that markets its products or services on an international basis. A multinational corporation is able to take advantage of special economically advantageous opportunities that exist in the countries where it operates, such as a low labor cost or favorable rate of currency exchange. ” According to Political Dictionary: “When clear managerial coordination and control together with some element of ownership link legally distinct businesses operating in several countries, the result is a multinational corporation (MNC).
” “A commonly accepted definition of MNC is an enterprise at least 25% of its world output outside of its country of region. ” According to Franklin Root an MNC is a parent company that 1. Engages in foreign production through its affiliates located in several countries. 2. Exercises direct control over the policies of its affiliates. 3. Implements business strategies in production, marketing. Finance and staffing that transcend national boundaries. Introduction
International business has evolved from the simple idea of trade-the importing and exporting of the products of various areas-into a complex system in which multinational corporations (such as the American-based IBM, the Japan-based Matsushita, or the Canada-based Massey-Ferguson) play a major economic role in a worldwide context, often with far-reaching political and social implications. History * MNC originally originated early in the 20th century and proliferated after World War 2. * Britain’s always claiming to have invented the wheel.
As a matter of fact, the first multinational corporation, as well as the first public corporation and first corporate colonizer were the Dutch. United Company of the East Indies (Vereenigde Oost-Indische Compagnie or VOC). Although as such it was founded in 1602,2 years after British East India Company, the VOC was the result of the merger of several earlier Dutch companies going back to the “Compagnie van Verre” * Founded in 1670, it once controlled (or at least claim to )most of what is now Canada as well as some bits of the US.
It is now “Canada’s departmental store”. Assuming that neither the East India Company nor VOC is in existence that is the oldest store surviving. * The first American multinational corporation was I. M. Singer and Company (later changed to Singer Manufacturing Company), who’s name became synonymous with the sewing machine. Established in 1851, * The phenomenon of Multinational business is neither purely American nor particularly new. European companies such as Ericson, Nestle and Unilever have been in the Multinational Business for more than half a century.
And some writers who include the trading activities of companies like the British East India Company and the Hudson’s Bay Company suggest that MNC’s has its roots far back in history. Terminologies Mobile Factors Factors that can move across international boundaries e. g. capital and to a lesser extent labor. Host Country: The country that receives foreign investment or immigrant labor. Immobile Factors: Factors of production that can readily move across international boundaries e. g. land Source Country:
The nation from which the labor or capital departs. We also name it as Home country. Labor Migration: A flow of labor from one country to another. Brain Drain: International migration of educated persons, typically from a developing to a developed nation. Why business become multinational Larger Market: Larger market, market power production possibilities, geographic, product or both. Check population and income as determinants of market size. Population will attain greater profits from foreign markets than those revealed locally.
Growth and Expansion: To secure future market or deal with future competitors, factors of growth are rapidly increasing expansion of technology, liberalization of government policies, privatization, development of institutions encouraging growth and increase in global competition. Optimization of Resources: More people utilize idle materials, spread the risk, minimized co-operative risk, protect investments and cost smoothing. Co-operation Need To Compete: Co-operation watches competitors’ action.
Competitive environment varies from country to country because the number and strength of competitors, suppliers and customers and because of regulation on how a company can compete. Competition has become global via new products. Economies of Scale: Cost advantages associated with large scale of production. Eventually the cost per unit might increase or form incurs more fixed cost to produce additional units, e. g. Whirlpool produces 50% of all washers in USA. Stages of evOlution 1. Export Stage * Initial inquiries => firms rely on export agents * Expansion of export sales
* Further expansion foreign sales branch or assembly operations (to save transport cost) 2. Foreign Production Stage There is a limit to foreign sales (tariffs, NTBs) DFI versus Licensing Once the firm chooses foreign production as a method of delivering goods to foreign markets, it must decide whether to establish a foreign production subsidiary or license the technology to a foreign firm. Licensing Licensing is usually first experience (because it is easy) e. g. : Kentucky Fried Chicken in the U. K. * It does not require any capital expenditure
* It is not risky * Payment = a fixed % of sales Problem: The mother firm cannot exercise any managerial control over the licensee (it is independent) . The licensee may transfer industrial secrets to another independent firm, thereby creating a rival. Direct Investment It requires the decision of top management because it is a critical step. * It is risky (lack of information) (US -> Canada) * Plants are established in several countries * Licensing is switched from independent producers to its subsidiaries. * Export continues 3. Multinational Stage
The company becomes a multinational enterprise when it begins to plan, organize and coordinate production, marketing, R&D, financing, and staffing. For each of these operations, the firm must find the best location. Features Lobbying Multinational corporate lobbying is directed at a range of business concerns, from tariff structures to environmental regulations. Corporations lobby tariffs to restrict competition of foreign industries. For every tariffs to category that one multinational wants to have reduced, there is another multinational that wants the tariff raised. Even within the U. S.
auto industry, the fraction of a company’s imported components will vary, so some favor tighter import restrictions, while others favor looser ones.. This is very serious and is very hard and takes a lot of work for the owner. Multinational corporations such as Wal-mart and McDonalds benefit from government zoning laws, to prevent competitors from competing. Many industries such as General Electric and Boeing lobby the government to receive subsidies to preserve their monopoly. Patents Many multinational corporations hold patents to preventcompetitors from arising. For example,Adidas hold patents on shoe design, Siemens A.
G holds many patents on equipment and infrastructure and Microsoft benefit from software patents. The pharmaceutical companies lobby international agreements to enforce patent laws. Government Power In addition to efforts by multinational corporation to affect governments,there is much government action intended to affect corporate behaviour. The threat of nationalization(forcing a company to sell its local assets to the government or to other local nationals) or changes in local business laws and regulations can limit multinational’s power. Tax Competition: Multinationals have played an important role in globalization.
Countries and sometimes subnational regions must compete against oneanother for the establishment of MNC facilities,and the subsequent tax revenue, employment, and economic activity. To compete, countries and regional political districts sometimes offer incentives to MNC’s such as tax breaks, pledges of governmental assistance or improved infrastructure, or low environmental and labor standards enforcement. This process of becoming more attractive to foreign investment can be characterized as a race to the bottom, a push towards greater autonomy or corporate bodies, or both.
While multinational certainly regard a low tax burden or low labor costs as an element of comparative advantage, there is no evidence to suggest that MNC’s deliberately avail themselves of lax environmental regulations or poor labour standards. As for labor costs, while MNC’s clearly pay workers in, e. g. Vietnam, much less than they would in U. S. Market Withdrawal: Because of their size, multinational can have a significant impact on government policy , primarily through the threat of market withdrawal.
For example, in an effort to reduce health care cost, some countries have tried to force pharmaceutical companies to license their patented drugs to local competitors for our very low fee, thereby artificially lowering the price. Similar corporate and government confrontations have occurred when govts tried to force MNC’s to make their intellectual property public in an effort to gain technology for local entrepreneurs. When companies are faced with options of losing a core competitive technological advantage or withdrawing from a national market, they may choose the latter. This withdrawal often causes govts to change policy.
Types Multinational corporations (MNC) are often divided into three broad groups: Horizontally Integrated Multinational Corporations Horizontally Integrated Multinational Corporations manage production establishments located in different countries to produce same or similar products. Some of it’s examples are as follows: (example: McDonalds) 1 Joint Verture: A joint venture (often abbreviated JV) is an entity formed between two or more parties to undertake economic activity together. The parties agree to create a new entity by both contributing equity, and they then share in the revenues, expenses, and control of the enterprise.
The venture can be for one specific project only, or a continuing business relationship such as the Sony Ericsson joint venture. This is in contrast to a strategic alliance, which involves no equity stake by the participants, and is a much less rigid arrangement. Examples of Joint Venture The XFL between NBC and World Wrestling Entertainment The Nokia Siemens Networks between Nokia and Siemens AG The Balfour Beatty Skanska JV between construction contractors Balfour Beatty and Skanska Shell-Mex and BP between Royal Dutch Shell and British Petroleum (1931-1975) United Launch Alliance (ULA) between Boeing and Lockheed Martin.
Sony BMG Music Entertainment between Sony Music Entertainment (part of Sony) and Bertelsmann Music Group (part of Bertelsmann). 2-BRANCH: A multi national corporation operates by establishing branches in various countries to expand it's business. 3-FRANCHISE: MNC also provides exclusive rights to manufactureor market their products in specified or licence country or region. A franchise is a right granted to an individual or group to market a company's goods or services within a certain territory or location.
Some examples of today's popular franchises are McDonald's, Subway, Domino's Pizza, and the UPS Storep (part of Bertelsmann). There are many different types of franchises. Many people associate only fast food businesses with franchising. In fact, there are over 120 different types of franchise businesses available today, including automotive, cleaning & maintenance, health & fitness, financial services, and pet-related franchises, just to name a fewAn individual who purchases and runs a franchise is called a "franchisee. " 4-SUBSIDIARY COMPANIES:
MNC also form their subsidiary companies in different countries to carry on their business. A subsidiary corporation or company is one in which another, generally larger, corporation, known as the parent corporation, owns all or at least a majority of the shares. As the owner of the subsidiary, the parent corporation may control the activities of the. identity. Subsidiaries can be formed in different ways and for various reasons. A corporation can form a subsidiary either by purchasing a controlling interest in an existing company or by creating the company itself. 5-MERGER
A merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability. . There are 15 different types of actions that a company can take when deciding to move forward using M&A. There are 15 different types of actions that a company can take when deciding to move forward using M&A. Usually mergers occur in a consensual (occurring by mutual consent) setting where executives from the target company help those from the purchaser in a due diligence process to ensure that the deal is beneficial to both parties 6-ACQUISITION:
An acquisition, also known as a takeover, is the buying of one company (the ‘target’) by another. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover.
Vertically Integrated Multinational Corporations Vertically Integtated Multinational Corporations manage production etablishment in certain country/countries to produce products that serve as input to its production establishments in other country/countries. (example: Adidas) Diversified Multinational Corporations Diversified Multinational Corporations manage production establishments located in different countries that are neither horizontally or vertically integrated. (example: Microsoft). Both the vertically and diversed Multinational Corporations have same sub types as described under the horizontally.
Hierarchy of multinationals President GM country A GM country B GM Exporting & Licensing Vice president Product A president Vice president Product B Vice president Product C Vice president International Corporate staff Production, control Marketing, finance, eting, Marketing Divisional staff production, marketing, finance, control etc Merits Merits of Multinational Corporations: It is therefore vital that we understand, first, the very great actual and potential benefits that multinational companies can bestow on countries that attract their investments, and, second, how such countries can maximise and
enjoy those benefits while remaining masters of their own fate. Investment from multinational companies is beneficial in that it adds to a country's total stock of capital and so facilitates increases in economic activity, productivity and growth that otherwise may not occur. But it is true also when it involves the takeover of existing domestically owned enterprises or the purchase of real estate by foreigners ('selling off the farm'). One commentator has summarised these benefits thus General Merits Merits to the Host Country General Merits
Benefit to the Resident: Economic benefits always accrue to the residents who choose to dispose of their assets to foreigners. Whenever domestic financial or real assets are purchased by non-residents, the amount of funds available to residents for additional spending is thereby supplemented. The proceeds of the sale of assets may then be used to create new domestic assets, to be spent on consumption, or even to acquire new foreign assets. Promotion of Trade Another benefit that multinational companies can confer on their host countries is the promotion of trade.
A large proportion of international trade occurs between multinational companies and between the different branches of such companies Commerce between multinational companies and domestic firms provides the latter with access to international trade networks and generally deepens a country's integration in the international economy, so helping it to discover and exploit more fully its comparative advantages. Strengthening of Domestic Competition A third benefit that multinational companies can bring is the strengthening of domestic competition.
This is likely to be especially the case with small economies, many of whose markets may be dominated by one or a few suppliers. Example:- A striking example in New Zealand is the telecommunications market in which, before deregulation, Telecom Corporation enjoyed a virtual monopoly. Now several multinational telecommunications companies have entered the market. Technological progress Multinational companies can also be sources of technological expertise. It is well established that technological progress is an important factor in economic growth.
Multinational companies are a major transmission mechanism of such progress. Some technology is costly and requires substantial investment that only large companies, like multinational ones, can afford. Providing Employment The famous system of employing and training local teenager labour by the MNC’s creates lasting benefits for its employees. The competition it provides for local rivals has greatly improved the latter’s quality of service. They provide job opportunities to the new comers and new generation and helping in countries economic development. Growth of MNC’s
In 1993 THE ECONOMIST estimate that the number of multinationals had grown at least fivefold during the two decades to 1993, and that the top 100 multinational companies accounted for between 40 percent and 50 percent of all cross-border assets. However, that represented only about 16 percent of the world's productive assets. And for all the talk of 'globalisation', almost every country funds the lion's share of its investment out of its own savings. Economic Globilazation: Economic globalisation has provided new opportunities for those with capital to increase it, creating greater concentration of wealth in hands of minority elites.
Most international trade and investment takes place within the triad of the US, EU and Japan, and it is the multinational corporations based in these countries which have benefited the most from the free trade rules enforced by WTO and the deregulation Merits to Host Country * Create jobs and employment in the host country. * Bring new techniques of management. * Increase competition in the host country. * Provide improved quality and variety of goods and services. * Carry research and development and investment in the host country. * Govt. of the host country collect taxes from multinational which can be used to
provide merit goods(e. g. education & health care) and public goods (e. g streets, lights, roads national defence ). * Multinationals develop friendly relation of the host the country with the country of its origin and other countries where there are the branches of multinational. labor. * Multinationals give higher wages and better work conditions with fringe benefits (e. g. transportation, free accommodation, lunch, education etc) to its workers. Due to actions of multinationals other firms also have to provide handsome wages & other benefits to attract labor.
* Multinationals produce goods within the host country, therefore host country's imports means improved balance of payments. demerits General Demerits Globalization: Economic globalization is a catalyst for free trade which in turn suffers economic growth. However this free trade is often damaging to the environment and is why state needs to coordinate their environmental policies. With an increase in trade and more capital MNCs relocate their activities to where services are cheapest more readily available and where they may compete on for profits on the large playing field.
Influence On Environment: An MNC search for the ways in which to maximize their profits, wastes are often exported to the poor countries, where they are dumped and not disposed of properly. It is in these poor states that the governments frequently sacrifice the environment. MNCs use environmentally damaging techniques to conduct their businesses, in an effort to save money they often skimp on precautionary measures to ensure environmental production. Example: The Exxon Valdez oil spill is one such instance, where a corporation put profits before the environment.
In an effort to cut expenses, the number of crew members was cut back forcing the crew to work and additional four to five hours a day. This let to exhaustion and fatigue, which gave room for the human error. Consequently mistakes were made resulting in the tanker shifting off course, causing it to hit a reef. Moreover the loss of almost 11 million gallons of oil would have been so extensive had the Exxon Valdez had a double hull, a precautionary measure which would have caused 20-30 million dollars, but a financial burden that the corporation was not willing to take. Problems To Residential Areas:
The pollution caused by MNCs not only hurt the environment, but more often then not, resident who live in the area for the ten years between 1942 and 1952, Hooker Chemicals buried toxic wastes in the Love Canal waterway in the US. Soon after a school was built on the site and a community grew. Almost 15 years later residents began suffering from the chemicals buried beneath their land. Difficulty In Controlling Pollution: It is very difficult to try and create acceptable standards of pollution across the globe and a great degree of variation exists in different countries.
This is one prime reason that encourages MNCs to shift from state to state. Standards stipulate how much damage a corporation can inflict on the environment before penalties are incurred. They do not however, make them accountable for their actions. Governments often set standards so that it appears that they are in charge of protecting the environment. These actions usually only benefit the governments because standards are a political tool used to win votes. 2. Demerits to the Host Country * Multinationals switch their profit back to the country of origin.
* Multinationals may force domestic firms to shut down by aggressive competition. * Shut down of domestic firms will lead to unemployment. * Multinationals will exploit workers in less developed countries, by paying very low as compared to the workers in developed countries. * Multinationals may avoid paying taxes in the host country by taking the advantage of poor tax collection system in LDC'S. * Multinationals may switch their factories where ever it is profitable, causing unemployment in the host country.
* Sometimes multinationals grow too strong to interfere in the govt. affairs of the host country. Criticism from the Home Country Conflicts between international businesses and the home country are usually economic in nature. They result in the following criticisms: Build a Plant in Home Country: Rather then building a plant in another country, a United States company, for example, should build another plant in the United States to provide jobs and keep dollars in the country. Elimination of Jobs for Workers:
Moving operations to foreign countries to take advantage of lower wages there tends to depress domestic industry and eliminate jobs for domestic workers. Taxation: The profits of foreign-based operations, by staying in foreign countries, are not taxed by the home, which reduces and allows multinationals to escape their duty to support their countries financially. Response to these Criticism The responses to these criticisms are: Income: Although production may move to another country, income is still entering the home country because headquarters are based there _ a net gain in productive income for the home country.
Creation of new Jobs: Jobs are not lost by these operations except in declining industries. In the long run those jobs will be replaced by the creation of new positions generated by the income the businesses. Taxation: The difficulties of double taxation: profits of the affiliate are taxed by the host country and then, when some profits are returned to the company’s headquarters, they are taxed again by the home country. For the investor, profit is the measure and companies should try to minimize double taxation.