Multinationals create jobs which boost the local economy and more workers to tax. Multinationals are in position to benefit from economies of scale. To increase market share - companies may find they are at saturation point in the domestic market and need a new outlet. To secure cheaper premises and labor - cost of land and labor will be cheaper in developing countries. To avoid tax or trade barriers - different nations have different levels of corporation tax and may have different barriers to entry.
Multinationals create jobs which boost the local economy and more workers to tax. Multinationals are in position to benefit from economies of scale. To increase market share - companies may find they are at saturation point in the domestic market and need a new outlet. To secure cheaper premises and labor - cost of land and labor will be cheaper in developing countries. To avoid tax or trade barriers - different nations have different levels of corporation tax and may have different barriers to entry.
Multinationals create jobs which boost the local economy and more workers to tax. Multinationals are in position to benefit from economies of scale. To increase market share - companies may find they are at saturation point in the domestic market and need a new outlet. To secure cheaper premises and labor - cost of land and labor will be cheaper in developing countries. To avoid tax or trade barriers - different nations have different levels of corporation tax and may have different barriers to entry.
A multinational organization is a company which has its
headquarters in one country but has assembly or production facilities in other countries. Coca Cola, Nike and BP are examples of multinationals. Advantages of multinational companies Multinationals create jobs which boosts the local economy and more workers to tax. They bring expertise in that skills of workforce are improved, some may use IT that would never have before or other skills now deemed basic by the western or developing world.
Multinational companies can benefit from economies of scale Multinationals are in position to benefit from economies of scale. This means the cost per unit can be lowered through specialization with a large workforce work can be divided up and people can do their limited job expertly. Technical economies can be gained with automated equipment, but only when fixed costs of machine can be spread out over outputs. Purchasing economies can be achieved, for example by buying in bulk companies can obtain supplies and materials at a cheaper cost per unit.
Reasons for a Company to Become a Multinational Corporation There are some reasons why companies wish to become multinationals: To increase market share companies may find they are at saturation point in the domestic market and need a new outlet. They may start by exporting to other countries but eventually they will want to be production overseas. Coca Cola started this way following US soldiers around the world after WW1. To secure cheaper premises and labor cost of land and labor will be cheaper in developing countries. Sweatshops in the Far East are an example of cheap labor, whereas production plants opening in the old Soviet Bloc nations like Poland, Bulgaria etc are examples of cheap factories. To avoid tax or trade barriers different nations have different levels of corporation tax and may have different barriers to entry. The Japanese only allow a small percentage of foreign cars to be sold in Japan to protect their own industry. Government grants many US companies were attracted to the UK in the 80s due to government giving them money to open up operations here.
In the 1980's, the economist John Dunning developed a theory that explains why companies would invest abroad and become multinational corporations (MNCs). This theory was named the eclectic theory. However, today it is more widely known as the OLI model, due to the three factors that are thought to spike foreign investments: 1) Organizational Advantages 2) Locational Advantages 3) Internalization Advantages
Coca-Cola is an example of a company with a significant organizational advantage. Its trademark is well-known and enough to sell soft-drinks in numerous countries across the world. According to James W. Harrington, a professor in geographical economics at the University of Washington, organizational advantages also cover company specific factors such as product quality, delivered price, marketing sophistication, distribution networks, low-cost inputs and superior production technology. Natural resources in Greenland are becoming easier to access. Mining companies locating there, such as Nuukfjord Gold, have a locational advantage. Low wages, local tariffs and other trade barriers are also factors that would make it sensible to locate in a foreign country. Internalization, i.e. owning foreign operations, is sensible when a company seeks to retain all expected profits or wishes to control the quality, marketing and local growth strategies. Being represented and taking responsibility abroad may also make it easier to sway local decision makers. Finally, according to the economists Jeff Madura and Roland Fox, having a presence in several countries can increase the knowledge of and access to new financing and investment opportunities. Other Forms of International Business Encyclopdia Britannica defines a MNC as a company that is registered and operates in more than one country at a time. Generally the corporation has its headquarters in one country and operates wholly or partially owned subsidiaries in other countries. Thus, companies that have a joint venture abroad, established a foreign subsidiary or acquired an existing operation in a foreign country are considered MNCs. In their book International Financial Management, Madura and Fox, describes three alternatives to becoming a MNC. First, a company can simply choose international trade. Thereby, the company exports its goods and/or imports material or tools. The advantage of international trade is that it is relatively cheap to pull out, if it turns out not to be profitable. However, international trade can be risky, as earnings may decline due to protectionist reforms of tariffs and other trade barriers, exchange rate fluctuations or sudden logistical constraints. E.g. exporters of perishable goods were negatively affected when air freight was made impossible in large parts of Europe by the volcanic ash cloud from Iceland's Eyjafjallajokull, in April 2010. The second alternative is licensing. Via licensing a company allows other firms to produce, sell and market its products in foreign markets. According to The Economist, it is reckoned that the NBA earns millions of dollars by licensing their merchandise to local firms in China. According to James W. Harrington, licensing has the advantage that it requires very little investment and provides an opportunity to harness the increase in return that the foreign partner may be able to create via superior technology, creativity and/or customer relations. On the other hand, the originating firm loses control of product quality. Finally, a company can choose to become a franchisor. According to Madura and Fox a franchisor provides a specialized sales or service strategy, support assistance and possibly an initial investment in the franchise in exchange for a periodic fee. The advantages and disadvantages of franchising are quite similar to licensing. However, the specialized sales and service strategy offers some control over sales conditions.
The Multinational Corporation's Choice of Country When a company looks abroad and seek to open a subsidiary, the attributes of the country should be thoroughly analyzed. Taking a look at the OLI model is not sufficient, e.g. a wider array of macroeconomic factors need to be taken into consideration. Both the current and future state of the local political, economic, social and technological environment should be thoroughly assessed. In economic theory this is called a PEST analysis.
What Are the Different conditions or laws to be followed by Multinational companies?
Increasingly, multinational companies produce and sell products in multiple countries. The rules and regulations that apply in one country may not apply to another nation where the business operates. Several international organizations set guidelines for multinational businesses. However, these guidelines form more of a recommendation than hard-and-fast laws that a multinational companies must follow. Many multinational companies have implemented these guidelines to standardize accounting, labor, environmental and other issues that affect the multinational companies. Different countries have different rules and regulation. If any company want to operate business in any country then they should follow the the international rules as well as that country rules like in Pakistan if any company want to business in Pakistan then they should be register under the corporate law of the Pakistan and follow the rules and regulation of Pakistan as well. If you want to made manufacture industry or business in Pakistan then you have to follow factory act or labor law of Pakistan. For example manufacture of wine in foreign country is legal but in Pakistan it is illegal. In Pakistan multinational companies follow the condition they should produce halal products. But in India multinational company follow their country rules and laws. Like before some time kfc sale beef in India which is against the religion of Hindus. Then kfc has stopped the sale of beef in India. In India the multinational company follow there labor law. Multinational companies firstly see the political, economic, social and technological environment of that country in which they want to start there business then made their own rules according to them.
International rules which are made by the mutual concert of all countries. All multinational companies should follow that rules. Following are the organizations. World trade organization GATT Miga Icsid G10 All these organizations made International rules and laws. Like w.t.o made the multinational rules of trade all the multinational companies bound to follow these rules. After international rules the multinational company follow the country rule in which the start or want to start their business and then made their own rules according to the suitable conditions.