Multinational Companies and Their Impact on the Host Countries - Term Paper Example

MULTINATIONAL COMPANIES AND THEIR IMPACT UPON THE HOST COUNTRIES 2009 One of the main tendencies characteristic of the world economy at the present stage of its development is its globalisation. This phenomenon is of dubious character, and whereas some think that this process is highly beneficial as it provides opportunities for developing countries, as well as advantages for both producers and customers, there are also critics who speak of risks connected with globalisation and emerging as a result of insufficient social and environmental responsibility of global companies. (Globalization, Minima Moralia, and the Responsibilities of Multinational Companies, 2004) Regardless of one’s attitude towards globalisation one has to admit that it has been spreading inevitably, and during this process, the international and corporate rivalry for economic resources and markets is constantly increasing. Globalisation has certainly resulted in the necessity to introduce new strategic approaches in many branches of the economy. Ever since the notion of globalization became an integral part of international business, there has been a question what influence do multinational companies produce upon the local companies. Both positive and negative effects of their presence at the local markets have been pinpointed, and this issue still remains controversial. Talking about their positive impact, one would certainly name multinational corporations spreading newest technologies, know-how and products into the host markets, creating workplaces and ensuring the wider selection of goods and services for the customers. However, the presence of international companies might also affect the host market in a negative way by causing the collision of interests: the first and foremost issue is that the local companies now have to come up with new strategies of getting competitive advantage. This issue demands ethically based approach on the part of all businesses involved, as well as the local governments. (The effect of multinational companies on development, 2000) Whereas for the customers, the expansion of multinational companies might be “a boon” as they now get “wider choices”, for many local businesses the arrival of the global giants is very hard to stomach and might even be a “death sentence.” (Dawar & Frost 1999) According to Dawar and Frost, there are two key questions that every manager of a local company should ask before thinking how to deal with multinational competitors: (1) how strong are the pressures to globalise in the given industry and (2) how internationally transferrable are his/her company’s competitive assets. Answering these two questions is the only way to correctly evaluate the competitive advantage of the company’s global rivals and to better understand one’s own assets that can ensure competitiveness in the market. (1999) One of the aspects of these new strategies is agglomerative tendency. International alliances of companies are created, which are aimed to achieve a competitive advantage over their common rivals in the world market. Multinational companies are also the product of globalisation, so they find themselves under its influence and should act accordingly. In modern business world it is no longer enough only to have access to cheap supply, work labour and IT – these are not sufficient to ensure the company’s competitive advantage. The main problem is how to combine these all in such a way so that to beat the company’s rivals, in other words – what strategies are to be used in order to succeed. Local companies often have advantages compared to multinationals when it comes to the products where essential role is played by satisfying consumers’ varied tastes that depend on their social characteristics or cultural preferences. In this case, global companies are less likely to satisfy the customers by providing them with standardised products. For example, McDonald’s, when fist entering the Eastern markets, experienced considerable shortage of profit, and it was not until the company elaborated their excellent strategy of invading foreign markets that they began gaining popularity with the local customers. Integration economic activity has achieved an especially powerful impulse for its development with the spread of globalisation. The constantly growing level of international competition makes it necessary for the companies to search for the ways to combine their efforts in order to gain considerable advantage on the market. Therefore, such an organisational strategy as creating new business structures of global character has become especially important nowadays. Striving for higher degree of integration has reflected itself, for example, in the upheaval of merging of such banks and companies as Citibank and Travellers, WorldCom and MCI, Daimler and Chrysler, British Petroleum and Amoco. The peculiarity of such business processes is their international character, therefore there emerges the phenomenon of transnational cooperation. There are several basic forms of international business organisations which actualise business strategic goals, among them are licence contract, coproduction, franchising, know-how contract, joint venture, multinational company, different kinds of alliances, etc. In this report we will focus upon multinational companies and strategies they use in the conditions of globalisation. Multinational company is one of the most complex forms of international business, as it uses international approach when searching for foreign markets and places for manufacturing, and presupposes the development of global business strategy which covers the company’s economic activity both in the home country and in the international market. The main features of multinational companies in the sphere of strategic management are: orientation at achieving common strategic goals and objectives; existence of a common managerial hierarchy and control centre; using a global approach to business with the aim to find new market opportunities and resources (economic, human, material, financial…); aiming to search for some common features of all geographically diverse markets. Multinational corporations have improved their forms of management and company’s organisation, as well as controlling their commercial, technological, productive and human potential. As for strategic considerations of the multinational companies in the conditions of globalisation, they are certainly formed under the influence of such companies’ goals. As these goals comprise global development of the firm’s business, cost reduction, and growth of income (and all these are planned to be achieved with the help of international resources), the strategies are also diverse and correlate with these objectives. Let us consider each objective of multinational companies and the strategies they use in the conditions of globalisation. 1. Forming new markets and gaining access to the existing ones abroad. This goal is achieved by means of overcoming legal restrictions connected with entering foreign markets, and forming new markets taking into account the expedience of sales channels, etc. 2. Gaining access to new resources (the companies get the possibility to use cheaper or simply more useful resources of other countries by means of international integration via their foreign enterprises. Of especial importance nowadays is the access to informational and technological resources, as well as human resources). Therefore, the strategies the company uses are: getting to know the peculiarities of the foreign country’s politics, culture and economy, as well as characteristics of its business environment (local laws, etc.) (Generally it can be called “knowledge of the market”). Also, the company aims to train the personnel it hires for working in these countries and devolve to them knowledge in the spheres of marketing, management, know-how, modern technologies, etc. Marin & Verdier say that “the most dramatic change in the nature of the corporation [in the conditions of globalisation] is that human capital has become the new stakeholder in the firm. Rather than plants and machines, human capital and talent are today the new assets of the firm”. (Marin, D. & Verdier, Th., 2002, p. 2) As a rule, one of the most important reasons for a company to go abroad is cheap labour (Globalization and the Spread of Poverty, 2001), and though some people blame multinationals for underpaying foreign workers, their wages are still much higher than those of the local companies (Transnational companies, 2003), and moreover, as Mann says, “Multinationals cannot be blamed for the economic condition of the locality where the jobs are. They are there to take advantage of a global inefficiency: very little work in some parts of the world, very expensive labor in other parts of the world”. (Mann, B., 2003) As A. Hijzen has is, multinational enterprises have often been “accused of practicing unfair competition when taking advantage of low wages and labour standards abroad (“home-country standard”). In some cases, MNEs have also been accused of violating human and labour rights in developing countries where governments fail to enforce such rights effectively (“universal standard”)”. (Hijzen 2008) 3. Gaining competitive advantage over the company’s rivals. A multinational company should aim to become increasingly competent in the spheres of marketing, management, technology, etc. Moreover, the company should strive for getting as much information as possible from its competitors on the market (the strategy of benchmarketing may be of use (Benchmarketing, 2005; Benchmarketing – managing or spying, 2003)). Moreover, one of the most beneficial strategies is to develop partnership with local companies. (Perrin, J., 2003) One more strategy helping to achieve this goal is the acquisition of the competitive companies. (Mueller-Stewens, G., Spickers, J., Deiss, Chr., 1999) 4. Boosting performance. The examples of strategies commonly used by the multinational companies to achieve this goal are the rationalisation of production or expansion of production. These lead to the reduction of costs as the volume of production grows. Moreover, there are also such technologies as introducing know-how, opening new primary markets, international labour division, etc. 5. Decreasing risk. The strategies used are, for example, regional diversification of the production process, entering new perspective markets, using diversified sales channels, etc. As we can see, the key element of multinational companies’ strategy in the conditions of globalisation is knowledge. D. Barkan et al. emphasize its importance for every strategy of multinational companies: their success depends upon whether the company’s personnel have this knowledge and, still more important, can use it. (Barkan, D. et al., 2002, p. 46) It is generally acknowledged that unless the company had achieved success in its home country there is no use for it to enter the global market. That is why the gradual character of strategic development is natural. Knowledge should be accumulated within the company, and entering each next stage is possible only provided that all the company’s workers have these knowledge and skills necessary for the processes happening at this stage. Though it can be presumed that there can never be invented any “universal” strategy bringing success to all multinational companies without exception, there are certain rules that each company should follow when entering the world market, and the main of them are perhaps not to go global before you succeed locally and make sure you have enough information for performing abroad. As Sawhney has it: “Getting to global requires companies to think globally, source globally, make globally, sell globally, and learn globally”. (Sawhney, M., p.1) Bibliography 1. Benchmarketing. 2005. Retrieved on May 9, 2009 from WUBES database: 2. “Benchmarketing – managing or spying?” The school of national elite. 2003. The Elitarium Project. Retrieved on May 8, 2009 from: 3. Dawar, Niraj and Frost, Tony. “Competing with Giants: Survival Strategies for Local Companies in Emerging Markets”. Harvard Business Review. March-April 1999, P. 119-129. 4. “Globalization and the Spread of Poverty”. Guardian Online. June 11, 2001. retrieved on May 11, 2009 from: 5. Globalization, Minima Moralia, and the Responsibilities of Multinational Companies. 2004. Retrieved on May 8, 2009 from Novartis Foundation for Sustainable Development database: 6. Hijzen, Alexander. Working conditions in the foreign operations of multinational enterprises. August 2008. 7. Mann, Bill. “The Economics of Globalization”. Fool.com. January 29, 2003. Retrieved on May 7, 2009 from: 8. Marin, Dalia & Verdier, Thierry. Globalization and the ’New Enterprise’. September 2002. rerieved on May 28, 2005 from: < http://www.vwl.uni-muenchen.de/wirtschaftsarchiv/Papers/2002/0207_marin.pdf> 9. Mueller-Stewens, G., Spickers, J.,Deiss, Chr. Mergers & Acquisitions. Markttendenz und Beraterprofile. Stuttgart, 1999. 10. Perrin, Jane. Challenges of Globalization. 2003. Retrieved on May 11, 2009 from ACNielsen Global Services database: 11. Sawhney, Mohanbir. Getting to Global. Retrieved on May 7, 2009 from: 12. “Transnational companies”. The Economist. 2003. Retrieved on May 11, 2009 from: 13. The Effect of Multinational Companies on Development. 2000. By Novartis Foundation for sustainable development. Retrieved on May 9, 2009 from: Read More