Multinational Corporations
As the name suggests, a Multinational Corporation is one that has its facilities or operations running in any of the offshore country along with the domicile country. These companies usually have their headquarters in their home country and factories/offices in the different countries. All the global management is carried out from the head office which co-ordinates the activities in various countries. The reason for firms practicing international business can be taken from the following economic theories:
- Comparative Advantage: The law of comparative advantage refers to the lowest opportunity cost to produce a product. For Instance, a textile manufacturer in London may find it beneficial to set up a factory in Vietnam or China because of the cost and productive efficiency of labor of these countries. However, the administrative activities can be carried out in the home country itself.
- Imperfect Market Theory: Since factors of production are immobile, hence an entity may look for foreign opportunities.
- Product Cycle Theory: As a firm matures, it may recognize opportunities outside its domestic market so as to grow expand its presence.
Once a company decides to enter a foreign market, it may decide amongst to following methods to start his international business:
International Trade: This is the simplest way of engaging in international business where a firm can either enter into the foreign market by selling its product (exporting) or by obtaining low cost supplies from that country (importing). This method involves minimal risk as capital is free from any sort of risk avenues.
Licensing: Under this method, firm licenses another firm based in foreign country to use its technology, copyrights or trademarks in exchange of fees or any other benefit mutually discussed between the two companies. However, the major disadvantage associated with this method is that the domicile firm may not be able to ensure quality control in foreign production process
Franchising: Under this method, the parent firm provides support services, service strategy or production formula to another firm in exchange for security fees and royalty fees.
Joint Venture: Under this method, domicile firm enter the foreign market by engaging in a joint venture with firms that reside in those markets. The major advantage associated with this method is that it allows two firms to apply their respective cooperative advantages in a given project.
