Why firms become MNCs? Define nature and characteristics of MNCs?

Multinational Companies (MNCs)

Lets be clear about what we mean by a multinational. This is a firm that extends beyond the borders of an individual nation and operates with affiliates and branches in at least two countries. A multinational organizes phases for producing goods and services to sell in different countries. For example: Many car companies have mastered the so-called international segmentation of production, which works like this: A Toyota vehicle assembled in San Antonio may have been designed at the Toyota design center in Australia; the vehicles aluminum-wheel components may have been produced in Delta, British Columbia; and its other components may have been produced in yet another location.

Why Firms Become Multinational

Companies become multinationals because they will benefit from organizational, internalization and location advantages.

There are many reason of companies to become MNCs Following: 1. One of the greatest organizational advantages is brand recognition, which at international levels of business is highly valued. 2. The company can spread risks. If the economy is slow or demand is dropping in one country, chances are it will be thriving in another! 3. One reason may be to compete with larger companies and maybe to receive economies of scale. 4. The market for many products if becoming more and more global-especially with the internet- and so it is another reason to multinational company to survive'. 5. The size of the market. There may be 1 million out of 60 million in the UK who want your product, where as there are billions in the world and so your market size would increase and so would sale. 6. A firm becomes multinational only when the head quarter or parent company is effectively owned by nationals of two or more countries. For example: Shell and Unilever, controlled by British and Dutch interests, are good examples. However, by ownership test, very few multinationals are multinational. The ownership of most MNCs is antinational. (e.g. The Smith-Corona versus Brothers case) 7. To have Technology Advantage expertise by manufacturing Goods direct rather than allowing other to take advantage of license. 8. To Reduce Cost by setting up units near Customer and avoid transportation cost & take advantage of local low cost & avoid middle man.

9. Firms also become MNC in response to increased competition and to protect world Market share Follow the Competitor strategy.

Advantages of a multinational corporation are

1. Multinational Companies are able to sell far more than other type of company. 2. Multinational companies can avoid transport costs. 3. Multinationals can take advantage of different wage levels in different countries (as in some countries only women and children work, so the wages can be low) 4. Multinationals can achieve great economies of scale. 5. Multinationals have less chance of going bankrupt than small companies. 6. Multinationals can carry out a lot of research and developmentss

Characteristics of Multinational companies

The following are the characteristics of the multinational companies: 1. The capital of multinational companies considerably large. Its assets and volume of sales are also quite large. The sales turnover of some multinational companies are much more then the annual budget of many developing countries. 2. It draws on a common pool of resources including assets, patents, trademarks, Information and Human resource. For example: Changes in European Cars are incorporated in USA Cars. Funds Required at Japan can be supplied from Europe if cheap. 3. MNCs and their affiliates are linked with common strategic vision. Each MNC will formulate their corporate plan in line with overall plan 4. The subsidiaries and headquarters of MNCs are linked by a common vision and mission. 5. MNCs prefer to relocate their operations in various based on low wage rates, low transportation costs, closeness to suppliers of raw materials and customers and threats posed by the other country governments. 6. Multinational companies operate globally. The parent company manufactures and sells its products and services through its subsidiaries established in other countries. Hence, they perform their business scale at the global scales. 7. MNCs draw more or less the same resources both at home country and host country. 8. MNCs resources include financial resources, human resources, material resources, information, patents, trademarks etc. 9. The subsidiaries of MNCs should respond to the significant environmental forces of both home country and host country. 10. Multinational companies are involved in the production distribution of goods and services at the international companies and level. They produce goods and sales them in one brand name of trademark all over the world.