Companiesstart off domestic and eventually evolve to become multinational enterprises wherethey have a presence almost everywhere in the world either physically orthrough the internet. A company is only really regarded as a MNE if they havesubstantial direct investments in foreign countries. There is more of an easefor companies to become MNE’s now as opposed to historically due to things suchas the internet. This essay discusses the reasons and motives a company mayhave to become MNE’s. The global business environmentis increasing; therefore, businesses will need to adjust to the increases byinternationalising themselves.
By trading locally, businesses are not able tomake a name for themselves globally or even maximise profit. Therefore, companiesdecide to sell their product in a wider range of countries, especiallycountries with a better consumer market and a larger population. It also meansthat they can increase their brand identity.
These companies then customize theirproduct according to the specific country which allows them to target theconsumers in that particular country, therefore expanding their customer base. Byexpanding a business and making it a MNE means that its sales are likely to increaseand in result its profit which is the ultimate motive for most companies. Many ofthe world’s largest companies – such as Toyota, Apple, IBM and Shell – attain morethan half their sales from countries outside their origin. One example of when a businesswould need to alter its product in order to be a MNE is KFC, they are one ofthe biggest fast food companies in the world and in order to be dominant in asmany countries as they can they would need to make their product according toeach country. Such as, if they want to be successful in Islamic countries, theywould need to use halal chicken as this would open up their target audience.
Toyota is one example of a multinationalenterprise. It originated from japan in 1933 and by 2009, it employed 320808people worldwide. It has grown to become the world largest automobile maker bysales and production. Toyota now have manufacturing plants in over 25 countriesand it continues to grow. When considering becoming a multinational company,organisations could face different types of problems, such as, cultural, economic,political, environmental etc.When it was found that there was an issue with thevehicles Toyota produced, 4 million cars had to be recalled and repaired in theUS. Toyota had a social responsibility to do this as if they didn’t theirreputation would fall and would overall diminish the brand name.
Nokia is another example of a multinationalenterprise. In total, they employ over 101,000 people worldwide. They havelocated factories in less developed countries which means that there are lowercosts for labour and housing, meaning they can maximise profit. By diversifying where each part of the productis produced, nokia reduce their cost of production and it means that they areclose to various different markets.
Nokia’s annual revenue is around $23 billion;therefore, this means that by internationalising themselves, they have largesales amounts in over 150 countries. In 2012, Nokia was the world’s secondlargest mobile phone make in terms of unit sales and had a market share of 18%. Some companies decide to becomeMNE’s so that they can diversify themselves against risks and uncertainties. Ifa business has entered another country, they aren’t only reliant of the economyof the home country. For example, if a firm’s home county has a small economythen they will benefit from becoming a MNE and trading in countries such as theUS which has a large economy and a large consumer market.
Some countries are more advancedthan others, therefore by becoming a MNE and splitting production, businessesare able to expand and have access to better resources. This aligns withdivision of labour as firms can then use countries such as China for lowerlabour costs and other countries such as Sweden for their technical and design expertise(Adam Smith).Another motivation for a firm togo international is that resources such as land, labour and capital isavailable at a lower cost. This then means that the cost of production isdecreased allowing the business to offer competitive prices to consumers. Another main reason is FDI whichis important for the growth of MNE’s as if a firm doesn’t invest, it becomes immenselydifficult to internationalise.
Some ways to do this is by acquiring/ mergingwith companies in foreign countries or greenfield investment which involves buildingits operations in other countries. FDI is a way for companies to reachglobalisation as they have investments in different countries. Mergers andacquisitions are a good way to go about this, it allows them to join forceswith an already established business in that particular country thereforehaving a prior customer base which in return reduces the risks. Foreign investmentmeans that you have ownership of foreign property for a financial return. This couldbe owning assets in other countries or even land. If moving abroad, MNE’s havecertain responsibilities such as creating jobs for people in which they are notmistreated, this is important for them, especially big companies as if they areexploiting workers it can threaten to weaken their brand name.
One of the world’slargest companies, Nike was once under investigation after they were accused ofexploiting workers. It was found that these workers faced poverty, harassment,dismissal and violent intimidation. It was also discovered that workers in Vietnamwere being exposed to toxic fumes. Nike was then faced with backlash afterthese accusations which effected the brand name negatively. By trading from within the foreigncountry, businesses are able to meet customer demands quicker as there is notransportation time included. It also allows the business to overcome tariffand non-tariff barriers.
It allows them to produce the product and get it toconsumers at a lower cost. By having a presence in a foreign country andopening manufacturing plants abroad, businesses are able to meet the demand inthose countries without having to attain the costs associated with longdistance shipping. However, the downside of moving manufacturing abroad is thatthe domestic jobs in the home country are lost and employees face unemployment.Between 2001 and 2010, the US lost around 33% of its manufacturing jobs whichwas around 5.8 million jobs (Bureau of Labour Statistics.
) Whilst opening up achain of stores benefits the community by offering lower prices, it may also bea disadvantage as it means people have lower wages due to competitors not beingable to compete on the same level and it could force local small businesses to goout of business. Political risk insurance allows companiesto become mne’s confidently as they know that they are protected against any potentialhazard such as if the government in a country takes action that causes the firmto experience financial loss. This is cover against things such asexpropriation, political violence, or even acts of war and terrorism. Knowingthat they are protected the company can freely trade in other countries andwork to expand their business. The US is an ideal country forMNE’s to target due to its large population and high GDP. Therefore, America isthe country to choose to tap into the growing world market for goods andservices.
Americans always have a desire for new goods and services and arewilling to spend the money to buy them. China is another country that is being targetedby MNE’s, although china doesn’t have a high GDP, it has an emerging economyand a large population. In conclusion, there are manydifferent motives for a company to become a multinational enterprise with each companyhaving their own reasons. The overall motive of any company is to maximiseprofit which can be achieved by MNE’s. A few of the world’s largest companiesstarted off local and grew to become MNE’s, such as Nike, Zara and BMW. Theyare examples that by becoming an MNE they have ensured success.
Companies worldwideare attempting to reach internationalisation as it is a need of most businessesto guarantee they last in the long run and help them expand.