Advantages and Disadvantages, Concept of Multinational Enterprises;
What is the Concept of Multinational Enterprises? The MNE describes as one that has working subsidiaries, branches, or associates placed in overseas countries. It additionally consists of companies in carrier things to do. Such as consulting, accounting, construction, legal, advertising, entertainment, banking, telecommunications, and lodging.
One of the most modern approaches followed by almost all corporations in the 21st is internationalization. Where a successful firm ventures into foreign markets and decides to go global in approach. Which in turn converts these flourishing domestic businesses into Multinational enterprises (MNEs) and improves sales and build brand reputation. One of the key features of an MNE is that although it has the company headquarters in one country. The production and operational activities stand set up in more. Then one country for several reasons such as cheap labor sources, obtaining raw materials, the advantage of tax differences, and the protectionist barriers.
Several important characteristics stand adopted by multinational enterprises and the global economy. Such as the large size of the firms and their international activities which stand centrally governed by the parent firms. Organizations, as a result of their experience, are also better able to adapt and respond to micro-and macro-environmental factors. Such as suppliers, competitors, customers, the government, and other stakeholders. As well as the political setup of a country, its economic policies and systems, and the local culture. It also aims to gain access to the natural resources of new, potentially unexplored markets. As well as assets, patents, human resources, and technical and managerial know-how. These aims stand fulfilled through strategic alliances with local, domestic companies ready to share and work towards a common goal.
There are various reasons why a company decides to go international. The Dunning Eclectic theory or the OLI paradigm highlights the advantages of these multinational corporations going overseas. Some of these have stood outlined in detail as follows:
Ownership advantages are usually intangible and can transfer within multinational firms at a cheaper price. The firm would possess monopolistic advantages as they would get easy access to the resources. Which are scarce in the home country of the firm. The barriers to entry would also be high, due to the high setup costs of the business. They also possess the share of technology and information from the countries in which the expansion takes place that helps the firm.
Besides gains for the multinational enterprises, the host economies also benefit. These MNCs generate large amounts of employment opportunities and bring with them high levels of managerial skill and globally employed advanced technology. Since the firm has the high buying power, the advantages of economies of scale also become realistic and thus, very prominent.
Relate to all cost and revenue-related factors such as low costs of raw materials, low transportation, storage, and distribution. And the resulting development of economies of scale and scope, the large size of an unexplored market, and so on.
Political advantages include the nature of an economy, the government’s policies, systems, and the overall bureaucratic setup. Lenient policies affect and encourage inward Foreign Direct Investment (FDI) flow, intra-firm trade, and international production.
Socio-cultural advantages include the ability to adapt to the culture the firm wishes to operate in terms of overcoming language and cultural barriers (such as it may be easier for an American firm to expand into the UK rather than into China), distance barriers (it may be easier to invest in a neighboring country rather than otherwise), the general attitude towards foreigners and so on.
Internalization is the process by which the activities keep directly within the firm’s control. The key advantage is that it would reduce the transactional costs and no threat of principal-agent problems to the organization.
Another reason why companies expand is to gain access to know-how regarding the international business environment and facilitate innovation and generate ideas. Novel ideas and concepts help organizations adapt to new markets and grow in other areas. As well as diversify their product and service offerings, thus, minimizing risk and instability.
Internalization is the process by which a firm’s activities keep within the umbrella of the firm. The process of expansion in other markets of the world involves different factors. A business that fulfills all these criteria can also in some cases advised against expansion. There are numerous advantages of internalization, such as secrecy of research and no leakage of information.
Global investments are valuable because sometimes these firms or establishments manage to gain more profits in the host countries than in their own home countries. One of the main reasons for this is that the masses of these countries are ready to explore new flavors and experiment with new products since they would import them. Also, some people want to buy these products but couldn’t do them earlier as ordering them online was not very popular then.
An agency is known as a multinational if it features in its u. s. foundation and has a department in at least one overseas country. A commercial enterprise in basic terms conducting exports except for any places of work in an international market will now not fall under the definition of a multinational company. MNCs can have countless global branches and subsidiaries relying on their size.
Usually, multinational enterprises prolong themselves into different international locations using introducing merchandise acceptable to the nearby wishes and culture. If Amazon had supplied items central to Seattle buyers. It ought to have hardly ever tapped into doable customers from different continents such as Asia, which has awesome needs.
Multinational firms seeking an opportunity to explore International markets must consider crucial entry decisions as these markets involve high risk and uncertainties. The three basic decisions that a company contemplates before expanding into foreign markets include the decision as to which market to step into. Another important issue is to understand the political and economic issues that eventually affect the attractiveness of a foreign market.
It is also vital to look out for factors such as market size concerning demographics. The purchasing power of consumers, and the expected growth of the country in the future. Time of entry into these markets plays a key role. For example, it may not be practical to expand or enter new markets during times of recession and vice versa during periods of economic boom.
Lastly, the multinational enterprise has to consider the mode of entry besides deciding on it. Whether to enter the market on a large scale or a small scale basis. Not many firms have the resources to enter a particular foreign market on a large scale. Firms that establish on a large scale in their home country prefer to enter at a small scale into other nations. Which enables them to build a brand reputation later on.
The options for the mode of entry include the following:
Companies usually start with indirect exporting as they have potential advantages like less risk. As the independent intermediaries bring in experience and services to the relationship, therefore seller will make lesser errors. Direct exporting is where firms handle their exporting activities and the initial investment. And risks are much higher but high returns are more likely.
Licencing involves one firm permitting another firm to license for a limited period to use. Its patent, trade secrets, or another item for a fee or royalty.
Franchising is very similar to licensing, involving an agreement between two firms in one firm allows. The other is to use its brand name, technology, and methods to market and produce the product.
For example:
Mercedes-Benz, from the family Daimler AG in Germany, has set up its headquarters in Dubai in the UAE. The Multinational giants have franchised their operations to the locals in the host countries operating in the Middle East. The company Gargash Enterprises L.L.C has obtained a dealership as a sole distributor. Through franchise agreements with Daimler AG to sell Mercedes-Benz vehicles in Dubai and the Northern Emirates. The strategy was adopted keeping the local image and the cultural adaptability of Gargash Enterprises L.L.C. in the Middle East.
Joint ventures (JV) are contracts or agreements between firms often set up in different countries to operate in cooperation. With each other as a single corporate entity and share profits and losses through the execution of a business or undertaking. The core issues JV should take into account before entering would be ownership, length of the contract, control and pricing agreements, etc. The best example for joint venture operations in India would be Marks & Spencer with Reliance Retail Ltd. The prime advantage would be easy access to enter the market, joint product development, local knowledge and technology, consumer behavior, and cultural adaptability.
Direct Investments can also categorize as Foreign Direct Investment (FDI). Here, the multinational enterprise directly enters the market and owns the facility of the target country. FDI can also be made in the form of an acquisition of an existing firm or by setting up an entirely new enterprise. It comprises the transfer of technology, and resources which includes capital and also skilled labor.
The firm looking to directly invest in a foreign market should possess a high level of resources and the ability to understand the consumers and their competitive environment. Nevertheless, they need to bring in a high degree of control and commitment to showcasing their strength in the new markets.
Companies nowadays are always on the lookout for potential internationalization opportunities in new unexplored markets like China, India, and the Middle East. Such expansions are aimed at accessing the domestic country’s natural resources, availing the advantages of cheap labor, sale of products for profit maximization, and the overall growth and development of the business. However, the irony of the condition is with the recession that has hit globally, will we see the birth of internationalization of firms or would we witness companies that will be ready to take up the challenge of universal growth?
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