MNE is a company, operating in two or more countries, conducting research there and having a multinational (decentralized) production, management and ownership of the capital. When moving the part of MNE production abroad, there is a replacement of the foreign exchange with international production of subsidiaries (Drucker). In this case, international trade, firstly, is taking on new forms of intra-firm trade, and secondly, stimulates the further evolution of the already existing forms of intra-industry trade.
Intra-firm trade. It is inherent purely for a MNEs and occurs through the parent company import of products of its subsidiaries and parent company subsidiaries exports of products of the parent company.
Intra-industry trade. In the context of the monopolistic competition, MNEs international trade consists of two parts: intra-industry trade, consisting of a two-way exchange of similar differentiated products, and inter-industry trade - trade, consisting of the exchange of different products.
MNEs leads to growth of the share of intra-industry trade, which, in contrast to the inter-sectoral trade, doesn’t reflect a comparative advantage. There are two main causes of the intra-industry trade of differentiated products:
Economies of scale; its achievement requires a specialization on a few range of products, because we can’t at the same time reduce the fixed costs of the entire range of differentiated products.
Product differentiation; in each country goods are produced to meet the needs of consumers, but consumers are not similar to each other and therefore prefer products with slightly different characteristics.
Benefits from the intra-industry trade are linked, primarily, with the expansion of the market size. Country due to the import at the same time reduces the number of manufactured goods and increases the number of consumed goods, thus consumers get more choices. Also the impact of intra-industry trade on the distribution of the income is very small, and even scarce resources can win.
Next, we shall consider the main factors that encourage to engage in international trade, for both MNEs and other types of companies (forcing factors):
The internal market can achieve a competitive saturation, while there are foreign markets with higher profit opportunities (Doole 11). This is the main factor that is forcing any company to look to foreign markets. No matter how well the business is organized, sooner or later, it will face with the relative competitive saturation of the market. It is a relative precisely because the absolute saturation of the market can be different in different countries, due to cultural characteristics, political environment and the principles of business (Bradley 23). However, for most companies, the perception of such moment is critical, because one way or another the competition begins to affect the company's profitability indicators, below which it can’t go down. At this point, the company starts to pay attention to foreign markets with lower competition and higher profitability of the business.
The domestic market of the company can be attacked by global competitors (Doole 11). They can offer better products or lower prices. Such situation is so-called extrusion of the company from its home market. In today's world, the impact of major international companies in various markets is widespread and often become the norm. Of course, adapting the product to the needs of a particular country is a long process. This gives local businesses a lot of time for the formation of business processes and the development of its product line, which will be very competitive abroad. However, despite this, under the influence of various factors, such as the late adoption of the robust action by the local business or a large cash infusion from abroad lead to the fact, that the proportion of companies, operating in the domestic market, begins to decline under the pressure of international competitors. And if this trend will continue companies, operating in the domestic market, have no choice but to go on the market of their international competitors, to form their product lines and to find a niche on the foreign market.
The internal market can be narrowed, the company may feel the need to expand the consumer base to get the economies of scale of the production growth (the so-called "economies of scale") (Armstrong, Kotler 441). In addition to the saturation of the market and the appearance of a large number of players in the process, the market may also tend to narrow as the share of the market participants are not reallocated between each other, but gradually and evenly reduced. It can be caused by aging technology and the emergence of substitute products (substitutes) at the market. Substitutes take a market share not of a particular company, but a whole industry. Despite this, the world is full of countries with various levels of development and, in particular, the laggards, who will be happy to accept technologies, that are considered as obsolete in most developed countries. This situation is a good opportunity for companies to enter the international markets, and to introduce their technologies to it.
The company may decide to reduce its dependence on any particular market, to reduce the risk (Doole 13). Such situation applies only to large multinational companies, where management of the business loses borders of certain countries and treat the country as a business unit, generating a profit. It can be said that the management of the company based on the principle of reducing the political, economic and cultural risks, and risks of the business, depending on the particular business unit. As you know, the main "remedy" against such risks is a diversification of the business. A large number of business units, owned by the company, help to reduce the negative impact, that it can have on the entire business as a whole (Armstrong, Kotler 441).
Customers can expand their activities, going to foreign markets, which requires the organization of international services for such clients (Doole 14). If the businesses of two or more companies is tightly linked with business or functional relationships. Business relationships imply the economically expedient interaction of two local companies in foreign markets. While functional continuity process involves the production of goods between two or more companies.
Among the motivating factors are the following:
the extension of the product life cycle;
the development of the international specialization and cooperation in order to increase a business efficiency;
gaining recognition abroad and gain international prestige for the company and its products;
improve the liquidity of the company's assets by exploiting sources of foreign currency funds;
obtain additional commercial effect due to the preferential use of domestic factors in the production and resource potential of foreign markets;
the use of raw materials, science and technology, fuel and energy, labor and investment potential of other foreign markets with high degree of efficiency.
All above factors indicate the constant need of MNEs to be involved in international trade in order to develop their potential more fully and to improve its efficiency. Philip Kotler very accurately defined the necessity of the international trade: “A company that masters only its domestic market will eventually lose it” (87). International trade is the only way for continued growth for MNCs.
Works Cited
Armstrong, Gary and Philip Kotler. Principles of Marketing. Prentice Hall. 2009
Bradley, Frank. International marketing strategy. Canada: Pearson Education, 2005. Print.
Doole, Isobel. International marketing strategy. London International Thomson Business Press, 1997: 508. Print.
Drucker, Peter F. The Global Economy and the Nation State. Council on Foreign Relations Sep.-Oct. 1997: 167. Print.
Kotler, Philip. Marketing insights from A to Z: 80 concepts every manager needs to know. The United States of America: John Wiley & Sons, Inc. 2003. Print.
