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