The Rise of Multinational Companies - Essay Example

Topic: Lecturer’s Introduction Transnational and multinational companies mainly arise in the quest of companies to improve on marketing, reduce production costs, and explore potential areas for expansion of the production base as well as to utilize various opportunities arising in foreign countries. They bring along with them several benefits to the host countries in form of taxes and provision of employment to the natives. However, there are several disadvantages that are brought in the host country by these companies such as overexploitation of natural resources. The multinational companies form alliances in order to improve on service delivery and to achieve a common goal. Multinational companies Multinational companies are those companies with branches in several countries. A multinational company is a main company that produces in foreign countries through its branches or partners situated in several countries. The policies of the branches and partners are directly controlled by the parent company which sets strategies for all the activities of the company that go beyond the boundaries of the host countries. These include; product marketing, personnel, financial matters as well as production strategies. The policies may have host country orientation or parent country orientation (Feldman, 2008, pp.22-27). A multinational company may be owned by citizens of one, two countries or more. Multinational companies come up due to the following factors; A company situated in a particular country may be producing enough to satisfy the domestic market, and the managers are compelled to look for extra market. In another situation, a company may establish branches in different countries in order to reduce the cost of transporting raw materials in order to reduce the final cost of the products that is added to the consumer price. A company may also establish branches in countries that import its products in order to escape import tax that may be enforced by the importing country against foreign companies. An example of this is when external levy was enforced against outsiders by the European Community, companies from the United States engaged in Foreign Direct Investment in order to evade these tariffs (Howard Perlmutter, 1969). Fluctuating exchange rates are also a factor that leads to the establishment of multinational companies in order to avoid losses that are associated with these rates. This phenomenon arises when companies produce at a high value of the local currency and then the value falls during exportation. They opt to establish a subsidiary industry in the importing country. Competition is also a factor that gives rise to multinational companies. A company X in one country may be producing the same products as another company Y in a different country, both competing for a common market Z. Company X may tackle this competition through purchasing company Y and other such companies in several countries, thereby becoming a multinational company. An example is when both Monarch in Germany and Opel in Canada were purchased by GM which gave rise to GM Germany and GM Canada respectively (Geoffrey, 2004). Lower costs of production may encourage companies to establish in different countries from the parent country. These low costs may be attributed to cheap labor in those other countries as well as low taxes or subsidies. Transnational companies A transnational company is a multinational company that operates globally, without a particular country of parentage. It has unlimited boundaries globally. Its organization and management differs from one country to another. The company is developed through a complex integrated of all its affiliates worldwide. Knowledge and skills are shared amongst the affiliates with each of them learning from all the global operations. They are globally incorporated companies having a decision making system involving two or more nations. These nations are connected by ownership and exert some influence over the rest of the members. Transnational companies mainly have at least 25 percent and above of its production outside one country. The companies harmonize invention, intentions, and product promotion and administration services on a number of continents. To achieve this, they make their investment in the capabilities of other nations, e. g purchasing or constructing industrial units in a foreign country to carry out diverse aspects of their industry. They take advantage of the labor market available worldwide as they engage in foreign direct investment. Advantages of transnational and multinational companies They have a tendency to acquire a strong footing into the global market. This is because the companies’ marketing is based on many countries which may be distributed in strategic areas within the globe. Multinational companies may provide services to various business people who travel widely, and customers’ confidence in the services provided may help in strengthening the marketing base of the products. For example the South African rail transport company (Spoornet) that has affiliates within the Southern and Northern Africa regions has established a strong market base since exporters and importers from the Northern Africa (Côte d’Ivoire) have confidence transporting their goods all through from North to South Africa through its affiliates in Bukinafaso, Cameroon, Zambia, and Mozambique (Marianne Powell, 2005). Multinational companies establish their branches in the countries where the cost of production is normally low compared to the parent country. They consider factors such as; availability of cheap labor, availability of raw materials and low cost of distribution. They are therefore in a position to enjoy low overall cost of production. Different foreign countries offer varying tax breaks. The multinational companies are advantaged in the sense that they enjoy several tax breaks from various governments. Multinational countries also benefit from a variety of new technologies in the different countries that they establish branches. This can assist them to advance in the overall production especially if the acquired technology is introduced in to the rest of the branches in the other countries. With governments in the host countries benefiting from the commodities produced by the foreign countries for consumption by citizens, governments may appreciate through assistance in the companies to acquire grants, especially if the product is essential to the citizens, and its availability is limited, such as medical equipment and drugs. Disadvantages of transnational and multinational companies In some cases, multinational companies face problems that are associated with regimes of the host countries. Political instability is a major problem that is currently affecting multinational companies, especially in war torn countries such as the multinational companies in Iraq. Multinational companies have been facing problems associated with sanctions imposed by international organizations on the host countries that fail to adhere to the agreed terms and conditions by member states. In such a case, multinational companies can not export their products normally. In war torn countries, multinational companies face difficulties due to the indiscriminate attacks that lead to looting and destruction of property. Many governments have no measures to protect multinational companies from destruction; hence they end up incurring heavy losses during turbulence When host governments impose quotas on imports, multinational companies are faced with difficulties, especially if part of the raw materials to be used in the production process has to be imported. This hampers production and is a major threat to a multinational company. For example, if a company uses radio active materials, there is a possibility that the company will face difficulties in certain quarters. The issue of management is a major drawback in multinational companies. With several countries participating, harmonization of the management team is a difficult task even though policies are controlled from the parent country. Adaptation of the policies has to be in line with the subsidiary policies of the host governments. In no way can a multinational company become autonomous in a foreign country. This forms a major drawback since branches in foreign countries have to adhere to the prevailing circumstances of the host governments. Communication breakdown is also a major problem for multinational companies that are distributed in regions that are located a wide distance apart. This hampers management, since for effective management to exist; communication between all the branches has to be reliable and consistent. Transnational and multinational companies carry along with them several advantages to the host countries. These include; The governments of host countries collect a considerable amount of taxes from the multinational companies, adding up to their total tax collection. Multinational companies assist in poverty eradication through provision of employment opportunities for the natives. This assists in the improvement of the standards of living, as well as the host countries’ Gross Domestic Product. With the multinational companies introducing new skills in to the labor market of the host country, they contribute towards improving the skills of the local industry, and this consequently improves local production. In this context, local industries are challenged to produce quality products. The emergence of multinational companies in a particular country brings with it the desired quality for products. This comes as a result of multinational companies that ensure international standards are met in production. This brings closer goods of high quality closer to the citizens. Local resources within the host country are utilized to the desirable levels. Many host countries may poises the raw materials, but lack the capacity to convert them in to usable products. This utility is achieved through the initiative of multinational companies extracting them and producing products that are useful to the natives at minimal costs since the cost of transportation of the raw materials as well as the finished goods is low. With multinational companies engaging in production within a host country, the status of the host country in the international market improves. The host country becomes known especially if it produces products that are not readily available in the global market. Disadvantages of transnational and multinational companies to the host country There is normally the tendency for over utilization of the available natural resources, since the multinational companies aim at making maximum profits from their venture. With many of the branches of the multinational company depending on so many external factors such as political stability of the host country, there is a possibility of the parent company collapsing resulting in mass unemployment if the subsidiaries are closed in the host countries. Multinational companies in South Africa The United States has the largest number of multinational companies with subsidiaries in South Africa. By now, there are more than 500 United States companies in South Africa. There was a rise in foreign investments in South Africa since 1995 due to the emergence of new investment prospects as well as the favorable environment created by the South African government’s legal and economic reforms. For example, South Africa government restored the United States foreign tariff credit on investment. This impacted positively on the United States multinational companies in South Africa. On top of this, South Africa offers cheap labor, which enables foreign companies to invest in the country. The multinational companies mainly concentrated on manufacturing. This is because South Africa is a haven for raw materials as well as market for the multinational companies. In the absence of a language barrier between the United States and South Africa, it was easy for American multinational companies to establish. More over, the South African authorities as well as the business system are very much alike those of the United States. South Africa is easily accessible from the United States with reduced corporate tax which makes it a preferable destination for multinational companies. South Africa earns 4% of its Gross Domestic Products from multinational companies of the United States (Raymond J. Mataloni 1999). Some multinational companies from the United States include; Coca-Cola, Caltex and Dow chemicals. Unilever is a multinational company which from the Anglo-Dutch origin. For more than a century, the company has been operating in South Africa. South African Government policy on the multinational companies The South African government has no prohibitions for foreign companies. Multinational companies are also not restricted to establish industries in certain areas within the country. This is an encouragement for the companies since they can locate their industries on the most appropriate sites, especially near the source of raw materials. The existing barriers are enforced on both domestic and foreign investors. However, a foreign company is supposed acquire registration as an external company prior to registration of immovable property in the name of the company. (USA Government, 2008) The government policy on equity ownership is encourages multinational companies to invest in South Africa. The code of good practice allows acquires of points of equity possession without necessarily having to transfer equity. This means that foreign companies can own all the equity in their branches. The multinationals are subject to the exchange control of the central bank since they are measured as the domestic companies. The government policy on empowerment of blacks in South Africa has resulted in a change of management of companies in South Africa. This was introduced through the Codes of Good Practice in 2007. They were geared towards expanding black possession of the financial system that was initially a under the control of the whites. This was a way of bringing equality to all the companies investing in South Africa through empowering the blacks economically. Companies which do not adhere to this rule risk losing licenses (Steven, 2008). Forms of alliances Companies continuously form alliances that are aimed at helping them offer better services in an efficient manner. The main forms of alliances are evident in the international communication service providers. Global alliances have contributed greatly to re-organization of the global market structures. Alliances can be either equity oriented or non-equity associations. Alliances can be Global, where by the offer products for the international markets. The alliances may also take the form of subcontracting alliances whereby the main company subcontracts Small Medium-size Enterprises. There are several forms of global alliances in the communication companies (Charlie, 2007, p.78). The Concert communication services alliance between MCI and British Telecommunications. This alliance was formed with a goal of offering telecommunication services internationally. They have a central point of getting in touch with their customers which is charged with network administration as well as customer service. The two companies enjoy the autonomy while each set prices for the products offered. Global One alliance was formed with an objective of ensuring the best services for telecommunications are provided globally. It is an alliance between three companies; Telekom from Deutsche, Sprint, and Telecom from France (Charlie, 2007, pp.66-72). The objectives of the alliance was provision of all the services as may be deemed appropriate by the global venture board, which is the main point of reference for all the affiliates. Other alliances in the telecommunication industry that have been formed in the global context include; world partners, the federation of cable and wire communications as well as Uniworld, which targeting the multinationals within Europe. Conclusion Transnational and multinational companies are beneficial to the host countries in terms of economic development through provision of employment to the citizens. Governments should embrace the establishment of multinational companies due to the benefits derived, although there are minimal disadvantages. Formation of alliances is important in order for multinational companies to improve on products and services delivery. Companies that form alliances hardly fail in their endeavors to form a successful network globally, and are able to counter any competition that may face one of the affiliate companies in its area of jurisdiction. Bibliography 1. Charlie S. (2007) the Rise of Multinational Companies: an Overview of Development, 2nd edition, London: Century Business. 2. Feldman K. (2008) International Business: Building Blocks of World Economies, Rockhampton: CQU Press. 3. Geoffrey M. (2004) “Trans-boundary Trade: Difficulties Encountered,” International Business Journal, vol. 3, no. 2, August, pp. 79-87 4. Howard P. (1969) “Advances in Telecommunication: Effective Service Delivery” Journal on Communication. vol. 5, no. 3, September, pp. 36-78 5. Marianne P. 2005, Multinational Companies in the Railways, viewed 27 Nov. 2008, 6. Raymond J. M. 1999, U.S. Multinational Companies and Operations, viewed on 27 Nov. 2008, 7. Steven S.2008. South Africa sees progress in black empowerment, viewed on 26 Nov. 2008, 2008, 8. USA Government, 2008. Openness to Foreign Investment: Investment Climate Statement – South Africa, viewed on 27 Nov. 2008, Read More