Companies is only really regarded as a MNE

 

Companies
start off domestic and eventually evolve to become multinational enterprises where
they have a presence almost everywhere in the world either physically or
through the internet. A company is only really regarded as a MNE if they have
substantial direct investments in foreign countries. There is more of an ease
for companies to become MNE’s now as opposed to historically due to things such
as the internet. This essay discusses the reasons and motives a company may
have to become MNE’s.

 

The global business environment
is increasing; therefore, businesses will need to adjust to the increases by
internationalising themselves. By trading locally, businesses are not able to
make a name for themselves globally or even maximise profit. Therefore, companies
decide to sell their product in a wider range of countries, especially
countries with a better consumer market and a larger population. It also means
that they can increase their brand identity. These companies then customize their
product according to the specific country which allows them to target the
consumers in that particular country, therefore expanding their customer base. By
expanding a business and making it a MNE means that its sales are likely to increase
and in result its profit which is the ultimate motive for most companies. Many of
the world’s largest companies – such as Toyota, Apple, IBM and Shell – attain more
than half their sales from countries outside their origin.

One example of when a business
would need to alter its product in order to be a MNE is KFC, they are one of
the biggest fast food companies in the world and in order to be dominant in as
many countries as they can they would need to make their product according to
each country. Such as, if they want to be successful in Islamic countries, they
would need to use halal chicken as this would open up their target audience.

 

Toyota is one example of a multinational
enterprise. It originated from japan in 1933 and by 2009, it employed 320808
people worldwide. It has grown to become the world largest automobile maker by
sales and production. Toyota now have manufacturing plants in over 25 countries
and 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 the
vehicles Toyota produced, 4 million cars had to be recalled and repaired in the
US. Toyota had a social responsibility to do this as if they didn’t their
reputation would fall and would overall diminish the brand name.

Nokia is another example of a multinational
enterprise. In total, they employ over 101,000 people worldwide. They have
located factories in less developed countries which means that there are lower
costs for labour and housing, meaning they can maximise profit.  By diversifying where each part of the product
is produced, nokia reduce their cost of production and it means that they are
close to various different markets. Nokia’s annual revenue is around $23 billion;
therefore, this means that by internationalising themselves, they have large
sales amounts in over 150 countries. In 2012, Nokia was the world’s second
largest mobile phone make in terms of unit sales and had a market share of 18%.

 

 

 

Some companies decide to become
MNE’s so that they can diversify themselves against risks and uncertainties. If
a business has entered another country, they aren’t only reliant of the economy
of the home country. For example, if a firm’s home county has a small economy
then they will benefit from becoming a MNE and trading in countries such as the
US which has a large economy and a large consumer market.

Some countries are more advanced
than others, therefore by becoming a MNE and splitting production, businesses
are able to expand and have access to better resources. This aligns with
division of labour as firms can then use countries such as China for lower
labour costs and other countries such as Sweden for their technical and design expertise
(Adam Smith).

Another motivation for a firm to
go international is that resources such as land, labour and capital is
available at a lower cost. This then means that the cost of production is
decreased allowing the business to offer competitive prices to consumers.

 

Another main reason is FDI which
is important for the growth of MNE’s as if a firm doesn’t invest, it becomes immensely
difficult to internationalise. Some ways to do this is by acquiring/ merging
with companies in foreign countries or greenfield investment which involves building
its operations in other countries. FDI is a way for companies to reach
globalisation as they have investments in different countries. Mergers and
acquisitions are a good way to go about this, it allows them to join forces
with an already established business in that particular country therefore
having a prior customer base which in return reduces the risks. Foreign investment
means that you have ownership of foreign property for a financial return. This could
be owning assets in other countries or even land. If moving abroad, MNE’s have
certain responsibilities such as creating jobs for people in which they are not
mistreated, this is important for them, especially big companies as if they are
exploiting workers it can threaten to weaken their brand name. One of the world’s
largest companies, Nike was once under investigation after they were accused of
exploiting workers. It was found that these workers faced poverty, harassment,
dismissal and violent intimidation. It was also discovered that workers in Vietnam
were being exposed to toxic fumes. Nike was then faced with backlash after
these accusations which effected the brand name negatively.

 

By trading from within the foreign
country, businesses are able to meet customer demands quicker as there is no
transportation time included. It also allows the business to overcome tariff
and non-tariff barriers. It allows them to produce the product and get it to
consumers at a lower cost. By having a presence in a foreign country and
opening manufacturing plants abroad, businesses are able to meet the demand in
those countries without having to attain the costs associated with long
distance shipping. However, the downside of moving manufacturing abroad is that
the 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 which
was around 5.8 million jobs (Bureau of Labour Statistics.) Whilst opening up a
chain of stores benefits the community by offering lower prices, it may also be
a disadvantage as it means people have lower wages due to competitors not being
able to compete on the same level and it could force local small businesses to go
out of business.

 

Political risk insurance allows companies
to become mne’s confidently as they know that they are protected against any potential
hazard such as if the government in a country takes action that causes the firm
to experience financial loss. This is cover against things such as
expropriation, political violence, or even acts of war and terrorism. Knowing
that they are protected the company can freely trade in other countries and
work to expand their business.

 

The US is an ideal country for
MNE’s to target due to its large population and high GDP. Therefore, America is
the country to choose to tap into the growing world market for goods and
services. Americans always have a desire for new goods and services and are
willing to spend the money to buy them. China is another country that is being targeted
by MNE’s, although china doesn’t have a high GDP, it has an emerging economy
and a large population.

 

In conclusion, there are many
different motives for a company to become a multinational enterprise with each company
having their own reasons. The overall motive of any company is to maximise
profit which can be achieved by MNE’s. A few of the world’s largest companies
started off local and grew to become MNE’s, such as Nike, Zara and BMW. They
are examples that by becoming an MNE they have ensured success. Companies worldwide
are attempting to reach internationalisation as it is a need of most businesses
to guarantee they last in the long run and help them expand.