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explain the concept of multinational businesses

Multinational Corporations

 

·      Very Large firms with headquarters in one country and subsidiaries in one or more other countries.

·      Companies with production facilities or other assets in different countries that makes business decisions in a global context

 

·      Often referred to as Transnational Corporations as they spread their operations across borders

·      Examples: General Electric, Microsoft, Exxon, Shell, Vodaphone, Toyota, Sony, Nestle and Volkswagen

·      Information Technology has made possible the ability for TNC to operate

·      TNCs production worldwide generated value added of approximately $16 trillion in 2010 – about a quarter of global GDP, 1/3 of world exports, 70 million people – 6 times the workforce than Australia

·      They are an important driver of globalisation, as they embody simultaneously the international transfer of capital, highly skilled labour, technology and final and intermediate products.

 

Why?

 

·      Growth and expansion plans: Firms expand into foreign markets to increase sales, market share and profit when they have saturated the market

·      Size of market: may wish to expand their customer base

·      Cost reduction: cheap labour and/or resources thereby helping the firm to achieve economies of scale. Also reduction in transport costs

·      Increase in International Competitors: domestic firm try to enter international markets to stay competitive by achieving economies of scale

·      Rise in Global consumers: consumers have similar tastes and fashions irrespective of country of origin

 

Economies of scale are the cost advantages that a business can exploit by expanding their scale of production.  The effect of economies of scale is to reduce the average (unit) costs of production.

 

·      Firms have a choice of exporting to foreign location or establishing a subsidiary through Foreign Direct Investment (FDI)

 

FDI

 

·      FDI occurs when a firm in one economy acquires atleast 10% ownership of foreign firms

·      Is an important link in globalisation

·      Linked to mergers, acquisitions of foreign companies in developed countries

·      Linked to construction of new facilities in Developing Countries ‘ greenfield investment’

·      Establishes long lasting links between economies

 

The Benefits of Foreign Investment

Foreign investment has allowed Australians to enjoy higher rates of economic growth, employment and living standards than could have been achieved from domestic savings alone. This is because it:

  • supplements scarce domestic savings – due to Australia's relatively small population, foreign investment has provided access to needed capital;
  • allows access to new technologies – foreign companies often transfer technology to Australia when they invest, making us more internationally competitive;
  • creates new businesses and employment – foreign companies setting up subsidiaries in Australia create jobs, leading to economic growth;
  • provides revenue to the government – profits of foreign-owned companies are taxed, spreading the benefits of these investments to all Australians; and
  • helps to drive productivity growth – it provides access to new technologies and increases the level of competition in the market.

A number of studies have examined the impact of foreign investment. In 2010 a study by Access Economics found that a 10 per cent increase in foreign investment in Australia would lead to a more than one per cent increase in GDP by 2020. An OECD study found that increasing foreign investment as a share of GDP is significantly and positively associated with productivity growth.

Benefits to recipient economy

 

·      transfer of technology and management skills

 

Benefits to the parent firm

 

·      boosting its global brand.

·      overcoming some of the disadvantages associated with exporting such as high transport costs, trade barriers such as tariffs and uncertainty regarding exchange rate movements

·      Reduction in cost due to proximity to market

·      Proximity to demand allows firms to adapt their products and services to different markets

 

 

Benefits to Economy of MNC

 

·      Likely to promote economic growth and improve economic welfare for the host economy

·      Inflow of investment which increases output, employment and income in the host economy

·      FDI promotes economic development by enabling the transferring of technology and skills from developed to developing countries

·      MNC brings new ideas and new techniques that can help improve quality of production

·      Profits of MNC will boost local economy’s tax revenue which can be used to fund government spending

·      Recent research has found that MNCs tend to pay more than local firms – on average double to local manufacturing wages

 

Disadvantages to Economy of MNC

 

·      Critics argue that MNCs are simply monopoly type firms that exploit less developed economies

·      A large MNC may exploit its market or monopoly and reduce local competition

·      Profits of MNC are likely to flow back to home country rather than staying in the host country

·      Offshoring: the practise of relocating production such as manufacturing plants or call centres to less developed economies to take advantage of lower labour costs

o   Firms gain by reducing its costs

o   Workers in host country lose their jobs and may find it difficult to find new employment

 

Like most structural change that occurs in economies, the long term benefits associated with improved productivity tend to outweigh the short term costs of structural unemployment

 

 

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Claire Bevan,
Feb 23, 2013, 5:23 AM
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