1.6 Multinational companies

Full video class on YouTube, summary and notes on Instagram, class extracts on TikTok, text below. Have fun!

The main point of this class is to understand that MNCs and globalisation are interrelated and that both of them can be an opportunity and a threat at the same time.

Multinational/transnational company (MNC) — is any company that operates in two or more countries. Even though usually MNCs are huge corporations, it is not required to be “huge” to be considered an MNC. What matters here is the fact that a company operates is two or more countries.

Some of the reasons why companies might prefer to enter foreign markets and become multinational are listed below:

• Increased customer base: the more countries, the more people to sell to.
• Cheaper production costs: in developing and less developing economies, labour costs are traditionally lower. That was one of the reasons why in the past 50 years many companies entered Chinese and Indian markets and relocated their production to these countries.
• Global economies of scale: modern economy goes beyond the country borders. Many countries and regions are interrelated. The same is true about economies of scale: some of them can only happen on a scale, larger than one country.
• Avoiding protectionism: very often, the only way to avoid protectionism (measures that the government takes to protect local economy, for example tariff and quota) in a certain country is to register an enterprise in that country, thus becoming an MNC.
• Spreading risks: if a product fails in country A, it night be successful in country B.

Globalisation is a trend/process of integration of local economies into one global economy, whereby companies, organisations and people think globally, but act locally. Globalisation is one of the main reasons why MNCs emerged. As you know, McDonalds operates in many countries all over the globe and even though it’s more or less the same everywhere, there are still some local features, dishes and drinks in different countries, that are unique. This is what “think globally, act locally” is.

One important thing about globalisation is that it exists outside the business. It is a trend, or a process that businesses cause and that businesses are part of, but saying that “company X decided to globalise” is not accurate. Companies can decide to operate in a foreign market but it doesn’t mean that this company is making globalisation. Please remember that globalisation is a trend in the external environment, not an internal company’s decision.

There are several impacts of globalisation on people, companies, governments and other organisations, that cause both good and bad things, i.e can be an opportunity and a threat at the same time. Think about how the things below can be an opportunity and a threat at the same time:

• Cultural diversity: on the one hand, different cultures can blend and learn from each other, but on the other hand it is difficult for businesses to fit in different cultures, because they have different understandings of the same thing, different tastes and traditions.
• Level of competition: on the one hand, companies can enter a foreign market with lower competition, but on the other hand, companies will also face competition and “battle” for access to foreign markets with other MNCs.
• Ability to meet customer expectations: on the one hand, people’s tastes and fashions tend to blend and become very similar, but on the other hand, people in different countries still have their own unique features, desires, needs and wants and businesses have to adjust to them.
• Number of customers: on the one hand, the more countries, the more people to sell to, but on the other hand, it comes with a need to adjust to many different customer needs.
• Economies of scale: on the one hand, businesses have great choices of location and may choose a place that allows for the highest efficiency, but on the other hand, global supply chain management is a serious and time consuming task that might result in diseconomies of scale if it’s not managed well.
• External growth opportunities: on the one hand, companies have created opportunities for M&As on a global market, but on the other hand it means greater bureaucracy and having to deal with local governments and restrictions.
• Sources of finance: similar to the previous point, greater opportunities on the one hand, accompanied by greater challenges on the other hand.

Even though a company does not have to be a huge international conglomerate to be considered an MNC, the largest companies in the world are actually multinational. Below you can see comparisons between some of the MNCs’ market capitalisation and some of the countries GDP.

Finally, once you are familiar with what MNC is and how it’s related to globalisation, we can talk about the impact MNCs have on host countries (countries that MNCs enter).

On the one hand, MNCs bring higher tax revenues and boost host country’s GDP. Customers can benefit from increased choices of products that multinationals provide. MNCs create new employment opportunities in the host countries and usually provide secure workplaces. Once MNCs enter a certain country, this country becomes more integrated and connected with the global economy and other countries that can allow for new business networks and cultural exchange and other kinds of fruitful cooperation. Thus, MNCs, in general, present an opportunity to host countries’ governments and customers.

On the other hand, companies might make profits in a host country but send them back to their “home country”, which is called repatriation of profits. It does not mean that all MNCs do that, it largely depends on the government policy, but it might happen and it is a potential drawback. In addition to that, once MNC enter a host country, they might put smaller local businesses at risk, because it will be much harder for the latter to compete with the former. As a result, some local businesses, who could not withstand this competition, might have to shut down which might result in increased unemployment. In addition to that, once MNCs enter host countries, the country becomes more integrated with the global economy, but also more reliant and dependent on global supply chains and other countries, which means that isolation from the global economy (for example, as a result of sanctions for certain political decisions) might have a detrimental effect on economy of the host country, that is too reliant on global supply chains. Thus, MNCs, in general, present a threat to host country’s local businesses.

Make sure you can define all of these:

1. MNC
2. Transnational company
3. Globalisation
4. Host country
5. GDP
6. Market capitalisation
7. Repatriation of profits