Multinational Enterprises and Global Capitalism - Research Paper Example

?Running Head: Multinational Enterprises Multinational Enterprises [Institute’s Multinational Enterprises The aims of a multinational vastly differ from that of a local business. While a local business may be aiming to expand throughout its country of operation and earn a respectable amount of profit, a multinational aims more globally. It aims not only to make profits that are larger than those of a local company are, but it aims to make its presence felt throughout the country (Martyn, pp. 72, 1972). When a company seeks to satisfy the demand of international consumers for its product, by starting a commercial enterprise in those areas as well, it is known as direct foreign investment. In addition, there are several reasons for why a multinational may choose to undertake foreign direct investment. One of these reasons is that the company has been very successful in selling its product with success and efficiency, and has been successful on satisfying the demand for this product to a full extent in the area of its origin. After seeing its success in that area, perhaps the exhaustion of demand within the area, the company may be tempted to open up a second location in a different country. The main reason in this case would be that the company would be seeking to satisfy the demand of consumers elsewhere, at that point. It will see a profitable business investment to open up a new location near these new potential customers, because it predicts a similar response from them as it got in the country it was originally operating in. This new group of customers would be an attractive basis for foreign direct investment for any company, and once it has evaluated the possible risks associated with the possible expansion, it will surely consider the expansion as feasible, profitable and the next logical step to their expansions and operations (Jones, pp. 74, 2005). A company will not expand to a county in which it does not perceive demand for its product (Seymour, pp.104, 1987). For example, one can consider a company, which produces food products, which use ham as the main ingredient. This company may be extremely successful in a non-Muslim country like the United States. Here, consumers in all age groups as well as several different socio economic statuses may love its product. This would logically mean that once the company finishes expanding within the areas of the US where it finds functioning feasible, it could expand to and invest in even the less developed countries, because it knows by experience that its product is well accepted by people of lower-middle income statuses as well. This logic will not apply in those countries, however, which have a majority of Muslim population. This is because, even though the acceptance of the company’s product has proven to be high amongst previous consumers, these new Muslim consumers would not warm up to them because their ingredients include pork, which they do not eat. In this regard, even when a product has been popular in several countries, the company will have to make several other inquiries before it can assume whether it is a good idea to undertake foreign direct investment in a newer area. In other words, the product needs to be tested in any region to where the multinational corporation (MNC) wishes to expand, because without that, the FDI will have very slight chances of yielding a successful result. Another reason is the political stability that is present in that country. Political stability is an important factor to consider for any MNC when it chooses to undertake foreign direct investment (Yoshitomi, & Graham, pp. 30, 1996). This is because it has a large bearing on how smoothly the company is able to operate in that area with hindrances, strikes and other interruptions, which often result in large losses, which make a large profit out of their daily operations. The political stability of the country is an important factor because it affects the consumer market of the country. With a lot of political instability, the consumer demand for the company’s product will be both unpredictable. The company will have a difficult time trying to manage inventory, and in trying to create a month-to-month budget with much accuracy. In a developed country, for instance, the political situation is often such that one cannot predict stability for the country. Not to mention, the unstable conditions of the country would make it extremely difficult for the country to find a stable and efficient workforce. In this way, the company’s daily operations and turnover costs will greatly vary from the ideal. For all these reasons, a company finds it feasible to invest in a country when it finds that that country is politically stable. In other words, the political stability of the country increases the incentive for the company to operate there. Apart from this, another reason is that it may find it more profitable to operate in certain countries. The MNC may initially operate in countries, which have governments who charge extremely high taxes in their profit. This leads to a great reduction in the profit available for distribution for the company, which affects not only its shareholder value, but also its reputation amongst community of profit making enterprises. This is a large concern for many enterprises, which are forced to forfeit a large chunk of their profits to the government as per the laws of the country they operate in. This concern is often a major factor, which drives several firms to commit fraud in their financial reports. They understate their earnings in their financial statements that are available to the public and reviewed by the government, so that they have to pay relatively less taxes on their earnings. This type of fraud is a severe offence in the eyes of the law, and can land the company that commits the fraud with a severe penalty and bad reputation amongst stakeholders. Due to all problems, which high corporate tax rates cause, a multinational will be tempted to undertake foreign direct investment in countries where the tax rates are comparatively lower (OECD, pp.119, 2001). This will pave way for a more profitable venture for the company, as profit after taxes will be much higher, and it will thus be motivated to undertake such an investment. Another major reason is that it may anticipate a favorable inflow of capital and technology for that country into that business (Goldberg, pp. xviii, 2008). This refers to how a company is able to absorb the culture and thus the beneficial tips and business-related techniques that are well known in that country. For example, a company functioning in a less developed country would find it very feasible to invest in a country like the US for this reason. This is because such a foreign direct investment would provide a rich learning experience and a valuable growing experience for the company. The company would be able to observe its very successful and plentiful US competitors, and learn the ropes on how to conduct a successful and thriving business. Especially those companies who are relatively new in the industry, and are still gathering enough experience and knowledge required to conduct a thriving business, would greatly welcome this kind of learning experience. Apart from this, other inflows are also advantageous, such as an inflow of the latest technologies and capital into the company. If the company originates from a country, which is not very developed in terms of technology, it would welcome the chance to operate in a country which is a world leader in technological development, or a country which is known for its efficient implementation of technology in the course of business. This opportunity would teach the company to use technology in its operations in a way that is beneficial to the efficiency of the business. It would teach the company the usefulness of these technological facilities, of which it previously was not aware. Once the company has learned about these facilities, and learned to employ them in its operations, it can even implement their use in its enterprises, which are operating in other countries. Furthermore, it can even bring these technologies back to its country of origin, and cause not only the company, but the country a lot of benefit. Due to these benefits, a multinational will find it very beneficial to undertake investment in a foreign country. This list of reasons is not an exhaustive one. There can be several other motives. The company may be looking for a country, which offers cheaply available skilled labor, which is easy to find in countries where the market is flooded with people with the same qualification or training (Basu, & Srinivasan, pp. 27, 2002). It may be looking for a country where the raw materials it uses are available, so that it can save costs on importing those materials from abroad. Furthermore, the company may simply be looking for a change of scenery, hoping to try its luck in another country after previous ventures in other countries did not fare successful. While foreign direct investment has its fair share of disadvantages, it is proven to usually be a profitable decision on the part of the multinational, and the government should try offering incentives to companies that take such risks. References Basu, A., & Srinivasan, K. 2002. Foreign direct investment in Africa. International Monetary Fund. Goldberg, I. 2008. Globalization and technology absorption in Europe and central Asia. World Bank Publications. Jones, G. 2005. Multinationals and global capitalism. Oxford University Press Martyn, H. 1972. Multinational business management. Ardent Media OECD. 2001. Corporate tax incentives for foreign direct investment. Organisation for Economic Co-operation and Development Publishing. Seymour, H. 1987. The multinational construction industry. Routledge Yoshitomi, M., & Graham, E. M. 1996. Foreign direct investment in Japan. Edward Elgar Publishing Read More