A Multinational Enterprise - Essay Example

A Multinational Enterprise In the 21st century globalization is a term that has taken over lives of local and national firms. Companies, economies, markets, countries can’t simply isolate themselves from rest of the world now. Globalization has made the whole world a village, where access of products and services are without boundaries. Similarly the world has seen emergence of multinational enterprises in the past few decades. In this particular paper discussions will be made on why local and national firms become multinational enterprise and how they achieve this status. A firm or an organization is a partnership between two or more people to do business together. This business could be production or delivery of service to earn profit. Their operations include economic activity to produce products or services and then sell them to middleman or end consumer to earn profit. (Cyert and March, 1992)Firms could be local or national delivering its products and services to a very smaller audience or to the whole country. They do not have any foreign investment or delivery of product and services to other countries in any form. A multinational enterprise can be defined as a corporation that produces products or deliver service in more than one country. Over the years many definitions of multinational have come into academia as there has always been a conflict on defining them in one way. One of the definitions declared Multinational enterprise as “An enterprise that engages in Foreign Direct Investment (FDI) and owns or controls value adding activities in more than one country” (Dunning and Lundan, 2008) Some of the famous multinational enterprises known by all include Microsoft, Nokia, Coca-Cola, Nike, IBM, Proctor and Gamble, and Unilever. The biggest chunk of these corporations belongs to USA and then Japan. (Kogut and Zander, 2003) Now the firms and multinationals have been discussed, the main part of the essay to understand why and how firms become multinational enterprise will be discussed. In the first part of the discussion the article covered why firms become multinational enterprises and in the second part article will elaborate the “How” question. In the next part of essay firms will be refer to as national firms. National firms can only expand to a certain point, they can reach a certain number of customers, sell a certain number of products and eventually there comes a point when they can only earn a certain amount of profit. That is the point where they look to expand to other countries. This expansion is in search of more customers, sale volume, profit and a better market. (Markusen, 1995)Some of the examples of multinational show that many companies expanded their operations to other countries because they could find cheap labor over there. For instance Livi’s and Nike moved their clothing factories to India, China and Pakistan in 90’s because the land, tax and labor was cheap over there. However they started selling products in these countries long after the production. Initially production was only moved to produce cheap products for western countries to earn high margins. The cost of producing a product and then selling it to other countries on higher margin is one of the attractions to expand internationally. (Navaretti et al., 2004)Some decades ago it was believed that cheap labor and cheap raw material could be the only reason national firms multinational, but this view has been argued now. Recently companies have moved their operations to other countries due to tax issues, new product markets and development, new markets for service delivery, and new customers. (Ethier, 1986)It can be assumed that main and basic reason for a national firm to become international is to earn more profit, but there are several other factors that one needs to take into account other than just sale and profit. Sometime a firm takes the business to other countries because they can’t cope with extensive tax payments. Recent examples have been companies moving to countries such as Dubai where they are exempted from tax. International Cricket Council moved its office from London to Dubai due to sole reason of saving taxes. At the end it all ends up with companies earning more profit, but initial expansion is not solely for profit. Another major reason could be employment issues that a large company faces in its operations. For instance call centers are not moved from USA and UK to India, Pakistan, and Bangladesh because the labor is very cheap over there. The above stated factors could be the only or one of the many reasons for a national company to become multinational. For instance Nike was a local company launched in 1964 by an athlete and his coach. The company was originally launched and had its operations in Japan. In the very start the company operated as a distributor for shoes in Japan. It soon became quite successful locally and nationally. In just 2 years time the company decided to expand to other countries. In 1966 company opened its very first how store in America. By 1971 company became a huge success in America and started launching its own brand of patented shoes. By 1980 Nike was so successful that it captured 50% shoe market sale in the US market. In late 80’s company decided to expand its business by moving its factories to Asia pacific to save costs and earn high margins. Eventually it opened stores in Asia after production become successful, it also opened stores throughout Europe. But its major production remains in Asia. Currently Nike owns 700 stores in 45 different countries with 100’s of products and a significant share in sports goods around the world. Now the 2nd question of “How” these national firms become multinational enterprise will be discussed. It’s not a simple and stepwise process to define; rather it varies in case of different firms. However the article will cover this process from the point of view of most famous and known researchers. Some of the researcher defines it as a three way stage which starts with exporting of products to other country/countries. Once the export becomes successful enough to represent at least 25% in the total sales, the next step is taken. The 2nd process is to start production in the foreign country to save cost of exporting the products. The last step of proper organization of firm resources by planning, financing, and creating research and development wings to establish in the very country. (Biggiero, 2002)Although this process pretty much defines a company’s path to become international, it’s not that simple. The process includes dealing with new legislations, taxes, culture, labor issues etc. for instance when companies expand in India as multinational companies, by law they are required to train and teach Indians the tactics of business. If a food company moves from western to a Muslim country, they have to deal with issues like producing HH Halal products. It is also important to state that many times a company has to produce a completely different product or service to survive in another country. The success story of one country can’t simply be implied to the other. It may come as a surprise to many but not all companies go through such processes. Many companies are now a days starting business in different countries simultaneously. Although it requires huge investments but there are example of companies who have done this right from the very start. (Caves, 2007) Another process of becoming multinational is through acquisition and mergers with other companies. This requires huge investment and lot of research before acquiring another company or merging them into the business, but it cuts down costs as well. (Markusen, 1995) In this process a company simply buys a similar company in another country, by doing so they acquire physical, and management structure of the company. Their spending on such expenses becomes considerably low as they acquire a made-up system and become multinational. For instance Lucky Goldstar or commonly known as LG is a South Korean electronics company. It’s a recent success story in term of becoming a multinational corporation. The company was started in South Korea in 1958 and it produced electronic items such as radio, TV, and washing machines. It was very successful in its home country. In 1994 company decided to expand its business to other countries. It bought an electronic company in the US and started manufacturing electronic products there. It soon expanded to Asia and Europe as well. And it’s now it’s the world 2nd largest manufacture of television. There could be several other processes of becoming a multinational firm; the article has defined the ones that are most commonly known in best practices. References 1. BIGGIERO, L. 2002. The location of multinationals in industrial districts: knowledge transfer in biomedicals. The Journal of Technology Transfer, 27, 111-122. 2. CAVES, R. 2007. Multinational enterprise and economic analysis, Cambridge Univ Pr. 3. CYERT, R. & MARCH, J. 1992. A behavioral theory of the firm, Wiley-Blackwell. 4. DUNNING, J. & LUNDAN, S. 2008. Multinational enterprises and the global economy, Edward Elgar Pub. 5. ETHIER, W. 1986. The multinational firm. The Quarterly Journal of Economics, 101, 805-833. 6. KOGUT, B. & ZANDER, U. 2003. Knowledge of the firm and the evolutionary theory of the multinational corporation. Journal of international business studies, 34, 516-529. 7. MARKUSEN, J. 1995. The boundaries of multinational enterprises and the theory of international trade. The Journal of Economic Perspectives, 9, 169-189. 8. NAVARETTI, G., VENABLES, A. & BARRY, F. 2004. Multinational firms in the world economy, Princeton Univ Pr. Read More