why operate globally?

1. Name : FARAI MUSHININGA
REG NO: R082530X
PROGRAMME: BTHM IV
COURSE: INTERNATIONAL FINANCE
QUESTION:
How can Multi-national companies benefit
from their global presence?

2. Eitman et al 1986 defines multinational companies as those firms which operate in more than three
foreign countries but headquartered in their country of origin. This kind of businesses has become
increasingly important as a facilitator of international trade and as manufacturer in host countries where
its affiliates are located. The emergence of multinational firms has helped in smoothening international
trade between countries. These firms usually benefit from their presence globally. Following is an
attempt to analyze how they benefit from their operations in foreign countries.
Risk spreading
Root 1987 suggests that the major reason why multinational firms are increasing their presence
internationally is the risk factor which has proved to be of a great concern to investors due to volatility
of national economies. This has forced firms to become proactive by spreading their firms to other
countries which may be better than others in terms of being affected by cyclical fluctuations in the
economy. Economies which are not widely diversified tend to be more sensitive to changes in the world
market, while those widely diversified are less likely to be affected. Due to this, these international firms
they benefit from operating globally because the risk is diluted due to their presence in several countries
in which some may not be affected at all. Firms which operate in only one country are likely to suffer
from business cycles within a domestic market and hence the need to go international so as to benefit
from foreign economic policies which may be favorable to their business operations.
Imperfections in national markets
Stonehill et al suggests that the world economy is an imperfect market which creates opportunities to
firms which engage in international trade. Firms which operate in several countries benefit from
different rate of returns on investment. One business operation is not perfectly the same when
performed in a different country in terms of profitability and hence multinational companies benefit
from these differences because they will be in a position to relocate or invest in countries where there

3. are higher returns on their investments, unlike in a situation where they rely on the local environment
which may be not that profitable to operate in. In some cases their investments may be immobile such
that they are not able to disinvest and try something else due to sunk costs they incurred. If the business
operates some branches internationally, favorable environment abroad may help sustain local
operations which at times may not be profitable at the moment but pregnant with opportunities in the
near future. This reason has helped many firms in sustaining their local operations hence their existence
up to date. Examples of such firms which benefited from such arrangements include Econet wireless
which was affected negatively by the economic down turn in Zimbabwe but the effect was helped by
foreign markets like South Africa and Botswana which were stable.
Raw material endowments
Due to the imperfections in the pricing of raw materials, multinational firms benefit from
operating in several countries. One of the major benefits is access to cheap labor and raw
materials. Developing countries have proved to be the source of much of these scarce
resources which are crucial in the production of goods and services. Multinational firms benefit
from such exploitation of resources internationally, unlike when their source of such resources
is based on importation which may be costly due to trade restrictions which may be present
between the source country and the local country and hence an arrangement to operate from
such sources may result in a significant decrease in operational costs. Most multinational favor
Africa and part of Asia because of low costs in energy, and less stiffer penalties in pollution due
to the fact that these countries are in developing stages and they try by all means to promote
investment so as to get rid of their social ills such as high unemployment rates among others.

4. Readily available markets
Shapiro 1989 sites readily available markets as one of the benefits enjoyed by multinational
companies. Multinational firms usually locate themselves near their markets which are ready to
buy their products and hence guaranteeing sales. Besides the fact that they may be concerned
about markets they also benefit from low costs of distribution of their products as they are
produced in the market and hence making it easy and less expensive to distribute the goods or
services to the respective markets. Many firms prefer to locate their plants near their targeted
markets because they may not suffer in cost of advertising because the market may be readily
available and require less effort to communicate to the potential buyers who might have
already been experiencing shortages of such products, unlike when a firm is operating only in a
domestic market which may be very mature.
Opportunity for diversification
Diversification involves increasing product offerings and portfolio, multinational firms benefit
through this because they can be able to provide goods which may be not allowed in their local
countries. Most of the Muslim countries are very radical towards production of certain goods
and hence may deny them an opportunity to their local firms to engage in the sale of such
products. By being a multinational firm you are in a position to do selective distribution of
goods and hence being in a position to have a wider product range. This product range is also
crucial because it spreads risk over a wide area and hence reducing over reliance on a single
product which is risky, because it may be affected by market forces in a negative way and hence
exposing the firm whole to economic fluctuations.

5. Balance of payment and exchange rate policy of a country
Gunter and Giddy 1986 sites balance of payment positions of trading countries as one of the
major sources of benefits enjoyed by multinational companies. The different position
experienced by different nations has proved to generate specific benefits to international firms
who will take advantage of such positions. When a country has a negative B.O.P it means that
local products are expensive in the international market and hence imports are less expensive.
Considering such environment prevailing a multinational firm operating in these two countries
will have to stop producing the same product locally and channel the product being produced
in the other country into the local market. Assuming that the position will remain like that, the
firm will make huge profits out of that situation. Even if the situation changes to the favor of
the foreign country, the firm will adjust and start to make exports to that market and hence
benefiting from both situations which might prevail.
On the other far end, multinational companies benefit from exchange rate fluctuations. When
the local currency firms against a trading partner’s, imports become cheaper and exports
become more expensive and this will result in the negative B.O.P and hence forcing the
situation explained above where multinational companies operating in these countries benefit
due to their presence in both countries.
Technology
Multinational companies benefit from their global presence because they can locate some of
their branches where technology is readily available and at a cheaper cost. Some countries are
well advanced in technology than others and hence locating in such countries may help the firm

6. with new ways of producing goods at a lesser cost. The technology will then be repatriated to
the mother country and then be redirected to all the branches word wide. Countries such as
Japan and China have advanced in technology to such an extent that the cost of producing a
product in these countries is far less than anywhere in the world. Multinational companies take
advantage of such imperfections in the world market of technology and hence benefit from
their global presence as they are able to access such resources.
Cheaper capital
Multinational firms may also benefit from availability of cheaper sources of finance and capital.
Due to different interest rates prevailing between nations, multinational firms may benefit from
accessing cheaper capital in markets with lower interest rates. Some markets are characterized
with higher interest rates and hence they are more expensive than others. Multinational
companies take advantage of such imperfections and hence access capital at such lower cost. In
some countries they may have less requirements for a firm to access finance and only firms
operating in several foreign countries may benefit from such cheap capital.
Other benefits enjoyed by multinational companies include cheaper way of advertising through
brand creation, tax havens by some governments and escape from stiff competition in domestic
markets which may have been exhausted by other competitors. Multinational firms are proving
to be of great importance as they are helping the nations in achieving their goals.

7. References
1.Eitman and Stnehill (1986) Multinational business . Addisson-Wesley. Massachusett. USA
2.Dufey and Giddy (1986) 50 CASES IN FINANCE . Addisson-Wesley. Massachusett. USA
3. Levi,M (1990) international finance 2nd ed McGraw-hill New York
4.Root (1986). Internatitional trade and investment 6th ed, cincinat: southwerstern.
5. Solnik, B.(1991) International investments 2nd raeding mass. Addisson-Wesley. Massachusett.
USA