Benefits of operating an MNC globally


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Benefits of operating an MNC globally

  1. 1. Name : FARAI MUSHININGAREG NO: R082530XPROGRAMME: BTHM IVCOURSE: INTERNATIONAL FINANCEQUESTION:How can Multi-national companies benefitfrom their global presence?
  2. 2. Eitman et al 1986 defines multinational companies as those firms which operate in more than threeforeign countries but headquartered in their country of origin. This kind of businesses has becomeincreasingly important as a facilitator of international trade and as manufacturer in host countries whereits affiliates are located. The emergence of multinational firms has helped in smoothening internationaltrade between countries. These firms usually benefit from their presence globally. Following is anattempt to analyze how they benefit from their operations in foreign countries. Risk spreadingRoot 1987 suggests that the major reason why multinational firms are increasing their presenceinternationally is the risk factor which has proved to be of a great concern to investors due to volatilityof national economies. This has forced firms to become proactive by spreading their firms to othercountries which may be better than others in terms of being affected by cyclical fluctuations in theeconomy. Economies which are not widely diversified tend to be more sensitive to changes in the worldmarket, while those widely diversified are less likely to be affected. Due to this, these international firmsthey benefit from operating globally because the risk is diluted due to their presence in several countriesin which some may not be affected at all. Firms which operate in only one country are likely to sufferfrom business cycles within a domestic market and hence the need to go international so as to benefitfrom foreign economic policies which may be favorable to their business operations.Imperfections in national marketsStonehill et al suggests that the world economy is an imperfect market which creates opportunities tofirms which engage in international trade. Firms which operate in several countries benefit fromdifferent rate of returns on investment. One business operation is not perfectly the same whenperformed in a different country in terms of profitability and hence multinational companies benefitfrom these differences because they will be in a position to relocate or invest in countries where there
  3. 3. are higher returns on their investments, unlike in a situation where they rely on the local environmentwhich may be not that profitable to operate in. In some cases their investments may be immobile suchthat they are not able to disinvest and try something else due to sunk costs they incurred. If the businessoperates some branches internationally, favorable environment abroad may help sustain localoperations which at times may not be profitable at the moment but pregnant with opportunities in thenear future. This reason has helped many firms in sustaining their local operations hence their existenceup to date. Examples of such firms which benefited from such arrangements include Econet wirelesswhich was affected negatively by the economic down turn in Zimbabwe but the effect was helped byforeign markets like South Africa and Botswana which were stable.Raw material endowmentsDue to the imperfections in the pricing of raw materials, multinational firms benefit fromoperating in several countries. One of the major benefits is access to cheap labor and rawmaterials. Developing countries have proved to be the source of much of these scarceresources which are crucial in the production of goods and services. Multinational firms benefitfrom such exploitation of resources internationally, unlike when their source of such resourcesis based on importation which may be costly due to trade restrictions which may be presentbetween the source country and the local country and hence an arrangement to operate fromsuch sources may result in a significant decrease in operational costs. Most multinational favorAfrica and part of Asia because of low costs in energy, and less stiffer penalties in pollution dueto the fact that these countries are in developing stages and they try by all means to promoteinvestment so as to get rid of their social ills such as high unemployment rates among others.
  4. 4. Readily available marketsShapiro 1989 sites readily available markets as one of the benefits enjoyed by multinationalcompanies. Multinational firms usually locate themselves near their markets which are ready tobuy their products and hence guaranteeing sales. Besides the fact that they may be concernedabout markets they also benefit from low costs of distribution of their products as they areproduced in the market and hence making it easy and less expensive to distribute the goods orservices to the respective markets. Many firms prefer to locate their plants near their targetedmarkets because they may not suffer in cost of advertising because the market may be readilyavailable and require less effort to communicate to the potential buyers who might havealready been experiencing shortages of such products, unlike when a firm is operating only in adomestic market which may be very mature.Opportunity for diversificationDiversification involves increasing product offerings and portfolio, multinational firms benefitthrough this because they can be able to provide goods which may be not allowed in their localcountries. Most of the Muslim countries are very radical towards production of certain goodsand hence may deny them an opportunity to their local firms to engage in the sale of suchproducts. By being a multinational firm you are in a position to do selective distribution ofgoods and hence being in a position to have a wider product range. This product range is alsocrucial because it spreads risk over a wide area and hence reducing over reliance on a singleproduct which is risky, because it may be affected by market forces in a negative way and henceexposing the firm whole to economic fluctuations.
  5. 5. Balance of payment and exchange rate policy of a countryGunter and Giddy 1986 sites balance of payment positions of trading countries as one of themajor sources of benefits enjoyed by multinational companies. The different positionexperienced by different nations has proved to generate specific benefits to international firmswho will take advantage of such positions. When a country has a negative B.O.P it means thatlocal products are expensive in the international market and hence imports are less expensive.Considering such environment prevailing a multinational firm operating in these two countrieswill have to stop producing the same product locally and channel the product being producedin the other country into the local market. Assuming that the position will remain like that, thefirm will make huge profits out of that situation. Even if the situation changes to the favor ofthe foreign country, the firm will adjust and start to make exports to that market and hencebenefiting from both situations which might prevail.On the other far end, multinational companies benefit from exchange rate fluctuations. Whenthe local currency firms against a trading partner’s, imports become cheaper and exportsbecome more expensive and this will result in the negative B.O.P and hence forcing thesituation explained above where multinational companies operating in these countries benefitdue to their presence in both countries.TechnologyMultinational companies benefit from their global presence because they can locate some oftheir branches where technology is readily available and at a cheaper cost. Some countries arewell advanced in technology than others and hence locating in such countries may help the firm
  6. 6. with new ways of producing goods at a lesser cost. The technology will then be repatriated tothe mother country and then be redirected to all the branches word wide. Countries such asJapan and China have advanced in technology to such an extent that the cost of producing aproduct in these countries is far less than anywhere in the world. Multinational companies takeadvantage of such imperfections in the world market of technology and hence benefit fromtheir global presence as they are able to access such resources.Cheaper capitalMultinational 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 fromaccessing cheaper capital in markets with lower interest rates. Some markets are characterizedwith higher interest rates and hence they are more expensive than others. Multinationalcompanies take advantage of such imperfections and hence access capital at such lower cost. Insome countries they may have less requirements for a firm to access finance and only firmsoperating in several foreign countries may benefit from such cheap capital.Other benefits enjoyed by multinational companies include cheaper way of advertising throughbrand creation, tax havens by some governments and escape from stiff competition in domesticmarkets which may have been exhausted by other competitors. Multinational firms are provingto be of great importance as they are helping the nations in achieving their goals.
  7. 7. References1.Eitman and Stnehill (1986) Multinational business . Addisson-Wesley. Massachusett. USA2.Dufey and Giddy (1986) 50 CASES IN FINANCE . Addisson-Wesley. Massachusett. USA3. Levi,M (1990) international finance 2nd ed McGraw-hill New York4.Root (1986). Internatitional trade and investment 6th ed, cincinat: southwerstern.5. Solnik, B.(1991) International investments 2nd raeding mass. Addisson-Wesley. Massachusett.USA