Multinational Corporations (MNCs)

Multinational Corporations (MNCs)

• MNCs operate businesses in multiple countries
• Examples of MNCs include Apple, McDonald's, and Coca-Cola
• MNCs differ based on size, country of origin, business nature, overseas business volume, production locations (e.g., Apple and China), control/ownership (e.g., McDonald's), and organizational structure
• MNCs typically originate from rich countries

Foreign Direct Investment (FDI)

• FDI is unrelated to the FBI

FDI into the UK

• The highest FDI is when the economy is growing rapidly

Types of Multinational Expansion

• Horizontally integrated multinational: this expands by growing its current operations
• Vertically integrated multinational: this expands by operating up and down the supply chain
• Conglomerate multinational: this expends by taking over completely unrelated businesses

Reasons to Go Global to Reduce Costs

• Lower input prices or greater availability of labour
• Higher productivity through labour skills, entrepreneurial and managerial skills, and learning by doing
• MNCs gain access to low-cost local markets such as Nissan in the UK
• Economies of scale are achieved, lowering per-unit costs
• Going global helps in reducing transaction and transport costs
• MNCs can take advantage of government policies

Relocating Manufacturing to Developing Countries

• Relocating a manufacturing plant to a developing country with abundant raw materials typically reduces labour costs, transport costs of raw materials, and taxes.
• Relocating a manufacturing plant to a developing country would not reduce Transport costs of the product

Reasons to Go Global to Access New Markets

• Increased demand and spreading risks
• Exploitation of advantages over local firms is possible
• Advantages include ownership of superior technology, entrepreneurial and managerial skills, and R&D capacity leading to innovation
• It provides access to local technology, for instance, in Silicon Valley
• The experience offers learning from diverse markets

Danger of Going Multinational

• A possible danger of going multinational includes lower unit profits

Product Life Cycle and the MNC

• Launch phase (1): multinational spread is likely limited
• Growth phase (2): MNCs likely shift production abroad to retain cost competitiveness
• Maturity phase (3): MNCs increasingly seek markets abroad as growth in the home market slows
• Late maturity and decline phase (4): MNCs increasingly seek both markets and ever lower-cost production, such as in Indonesia

Exporting vs. Locating Production

• A company is most likely to export to developing countries during the launch phase rather than locating production there

Problems Faced by Multinationals

• Language barriers, selling and marketing challenges, and cultural issues
• Relations with host governments (e.g., oil companies) and relationships between subsidiaries
• Possible diseconomies of scale, which are easier to manage if subsidiaries operate independently

Global Strategy Trade-Off

• It involves balancing economies of scale through standardization against higher customization costs

Advantages of MNC Investment for Host State

• Employment opportunities and balance of payments (deficit or surplus)
• Technology transfer and tax revenues

Disadvantages of MNC Investment for Host State

• MNCs may move to improve profits, causing uncertainty
• Power and control exerted by the MNC over the host country
• Transfer pricing practices (using tax havens) and environmental concerns