Multinational cooperation

Multinational Corporations (MNC) derive at least a quarter of their revenues outside their home country. Many multinationals are based in developed nations. Advocates of multinationals say they create high-paying jobs and technologically advanced goods in countries that otherwise would not have access to such opportunities or goods. On the other hand, critics say multinationals have undue political influence over governments, exploit developing nations, and create job losses in their own home countries.

The history of the multinational is linked with the history of colonialism. Many of the first multinationals were commissioned at the behest of European monarchs in order to conduct expeditions. Many of the colonies not held by Spain or Portugal were under the administration of some of the world's earliest multinationals. One of the first arose in 1660: The East India Company, founded by the British. It was headquartered in London, and took part in international trade and exploration, with trading posts in India. Other examples include the Swedish Africa Company, founded in 1649, and the Hudson's Bay Company, which was incorporated in the 17th century. 

There are four categories of multinationals that exist. They include:

1. A decentralized corporation with a strong presence in its home country

2. A global, centralized corporation that acquires cost advantage where cheap resources are available

3. A global company that builds on the parent corporation’s R&D

4. A transnational enterprise that uses all three categories

There are subtle differences between the different kinds of multinational corporations. For instance, a transnational — which is one type of multinational — may have its home in at least two nations and spread out its operations in many countries for a high level of local response. Nestlé S.A. is an example of a transnational corporation that executes business and operational decisions in and outside of its headquarters. 

A multinational enterprise controls and manages plants in at least two countries. This type of multinational will take part in foreign investment, as the company invests directly in host country plants in order to stake an ownership claim, thereby avoiding transaction costs. Apple Inc. is a great example of a multinational enterprise, as it tries to maximize cost advantages through foreign investments in international plants. 

· Initially, the firm might license patents, trademarks or technology to a foreign company in exchange for a fee or royalty.

· The firm sees a potential for extra sales by exporting and uses a local agent or distributor to enter a foreign market.

· The firm may use exporting as a “vent” for its surplus production and might have no long-term commitment to the international market.

· As exports become more important, the MNE will set up an office for its sales representative or a sales subsidiary.

· The firm might set up local packaging and/or assembly operations.

Finally, the firm will set up a wholly owned subsidiary (FDI).

Why do firms become MNEs?

· To diversify themselves against the risks and uncertainties of the domestic business cycle;

· To tap the growing world market for goods and services;

· In response to foreign competition;

· To reduce costs;

· To overcome barriers to entry into foreign markets;

· To take advantage of technological expertise by manufacturing goods directly.

While a business can technically be considered a multinational corporation if it has offices in two countries, most multinational corporations have relatively large operations. These operations typically require a large staff of workers and managers, as well as contracts with service providers such as attorneys and accountants.

MNC Imports and Exports :because multinational corporations typically run large operations, they may need lots of supplies, products and materials. Consequently, these businesses tend to import products to serve their businesses as well as export products to other businesses. Multinational corporations also may import products from their own factories stationed in other countries or export products from a factory to a retailer in another country. While even an individual can import or export a product or two, a common characteristic of multinational corporations is the large volume of importing or exporting done by the company. Some small businesses become multinational corporations by expanding their businesses to include imports and exports.

Trading as a Public Corporation: Companies don't have to be traded publicly to become multinational corporations, but many of these corporations do go public. Publicly traded corporations make shares in their businesses available to investors. The investment money helps fund the company, and if the value of shares goes up, investors can share in the profits. This role in the stock exchange gives multinational corporations the ability to affect the economy of an entire nation. Some multinational corporations are traded in several nation's stock markets. Small businesses interested in becoming public corporations don't necessarily need to become huge. Public trading only requires that the company open its shares to a public audience, and many startups greatly expand when they choose to go public.

Partnerships and Affiliates :Since they're doing business across borders, many multinational corporations develop partnerships and affiliations with other businesses, non-governmental organizations and governments. Such affiliations might include the licensing of products or chains to individuals or businesses, partnerships with governments to fulfill local initiatives and affiliations with non-governmental organizations to help raise money for charitable causes.

Competing as a Small Business :Small businesses hoping to become multinational corporations generally need clear business plans as well as the capacity to expand operations, staff and business reach. That said, the internet has opened the world of multinational operations to all businesses. Some small businesses can compete in a global marketplace by selling on websites or connecting remotely to foreign locations. Internet businesses often have lower overhead, particularly if they don't have brick-and-mortar stores.

There are a number of advantages to establishing international operations. Having a presence in a foreign country such as India allows a corporation to meet Indian demand for its product without the transaction costs associated with long-distance shipping. Corporations tend to establish operations in markets where their capital is most efficient or wages are lowest. By producing the same quality of goods at lower costs, multinationals reduce prices and increase the purchasing power of consumers worldwide. Establishing operations in many different countries, a multinational is able to take advantage of tax variations by putting in its business officially in a nation where the tax rate is low — even if its operations are conducted elsewhere. The other benefits include spurring job growth in the local economies, potential increases in the company's tax revenues, and increased variety of goods.

A trade-off of globalization – the price of lower prices, as it were – is that domestic jobs are susceptible to moving overseas. Studies indicate that for each year between 2003 and 2015, imports were responsible for job displacements of 136,000 workers. This data underscores how important it is for an economy to have a mobile or flexible labor force, so that fluctuations in economic temperament aren't the cause of long-term unemployment. In this respect, education and the cultivation of new skills that correspond to emerging technologies are integral to maintaining a flexible, adaptable workforce. According to Bureau of Labor Statistics projections, a few of the fastest-growing industries in the United States are home health care services, outpatient care centers, medical and diagnostic laboratories, and information services; together, these industries are replacing many of the American jobs that were displaced by overseas manufacturing. Those opposed to multinationals say they are a way for the corporations to develop a monopoly (for certain products), driving up prices for consumers, stifling competition, and inhibiting innovation. They are also said to have a detrimental effect on the environment because their operations may encourage land development and the depletion of local (natural) resources. The introduction of multinationals into a host country's economy may also lead to the downfall of smaller, local businesses. Activists have also claimed that multinationals breach ethical standards, accusing them of evading ethical laws and leveraging their business agenda with capital.

Framework for global strategies: the FSA/CSA matrix : There are two basic building blocks in an international business course.

· Firm-specific advantages (FSAs): a unique capability proprietary to the organization

· It may be built upon product or process technology, marketing or distributional skills.

· Country-specific advantages (CSAs): country factors

· Natural resource endowments (minerals, energy and forests), the labor force and associated cultural factors, etc.

Dunning’s “eclectic” theory of MNEs: OLI framework

· Ownership factors (O): FSAs

· Location factors (L): CSAs

· Internalization factors (I): FSAs

· As we know Ownership factors (O): FSA (O)and Location factors (I), in practice, are integrated features of FSA management within the MNE that cannot be decoupled in strategic decision making

Benefits of Multinational Corporations

· Create wealth and jobs around the world. Inward investment by multinationals creates much needed foreign currency for developing economies. They also create jobs and help raise expectations of what is possible.

· Their size and scale of operation enables them to benefit from economies of scale enabling lower average costs and prices for consumers. This is particularly important in industries with very high fixed costs, such as car manufacture and airlines.

· Large profits can be used for research & development. For example, oil exploration is costly and risky; this could only be undertaken by a large firm with significant profit and resources. It is similar for drug manufacturers who need to take risks in developing new drugs.

· Ensure minimum standards. The success of multinationals is often because consumers like to buy goods and services where they can rely on minimum standards. i.e. if you visit any country you know that the Starbucks coffee shop will give something you are fairly familiar with. It may not be the best coffee in the district, but it won’t be the worst. People like the security of knowing what to expect.

· Products which attain global dominance have a universal appeal. McDonalds, Coca-Cola, Apple have attained their market share due to meeting consumer preferences.

· Foreign investments. Multinationals engage in Foreign direct investment. This helps create capital flows to poorer/developing economies. It also creates jobs. Although wages may be low by the standards of the developed world – they are better jobs than alternatives and gradually help to raise wages in the developing world.

· Outsourcing of production by multinationals – enables lower prices; this increases disposable incomes of households in the developed world and enables them to buy more goods and services – creating new sources of employment to offset the lost jobs from outsourcing manufacturing jobs.

Criticisms of Multinational Corporations

Companies are often interested in profit at the expense of the consumer. Multinational companies often have monopoly power which enables them to make excess profit. For example, Shell made profits of £14bn last year.

Tax avoidance. Many multinationals set up companies in countries with the lowest tax rate. They funnel profit through the countries with lowest corporation tax rates – e.g. Bermuda, Ireland, Luxemburg. For example: in 2011, Google had £2.5bn of UK sales, but only paid £3.4 million UK tax. A tax rate of 00.1% despite having a global-wide profit margin of 33%. (tax avoiding companies) This means the multinationals are ‘free-riding on smaller companies who cannot attain the same creative tax accounts.

Cash reserves – Apple has cash reserves of $216bn, 93% of which is overseas. This represents deadweight welfare loss. It is not being used for investment

Their market dominance makes it difficult for local small firms to thrive. For example, it is argued that big supermarkets are squeezing the margins of local corner shops leading to less diversity.

In developing economies, big multinationals can use their economies of scale to push local firms out of business.

In the pursuit of profit, multinational companies often contribute to pollution and use of non-renewable resources which is putting the environment under threat.

· ‘Sweat-shop labor’ MNCs have been criticized for using ‘slave labor’ – workers who are paid a pittance by Western standards.

· Outsourcing to cheaper labor-cost economies has caused loss of jobs in the developed world. This is an issue in the US where many multinationals have outsource production around the world.

Evaluation

· Some criticisms of MNCs may be due to other issues. For example, the fact MNCs pollute is perhaps a failure of government regulation. Also, small firms can pollute just as much.

· MNCs may pay low wages by western standards but, this is arguably better than the alternatives of not having a job at all. Also, some multinationals have responded to concerns over standards of working conditions and have sought to improve them.