A N I NTRODUCTION TO

M ULTINATIONAL
E NTERPRISES

This report covers a short description on Multinational Enterprises including

its functions, characteristics and its advantages and disadvantages. The later
part covers its impact on the Economy along with its future on the changing
Global Business Environment

Karan Mathur
242007 WMG24
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An Introduction to Multinational
Enterprises
An MNE is a business entity which conducts its operations in various
countries with its various subsidies or/and affiliates. It possesses
considerable human resources, expertise, financials and technology and also
enjoys sustainable competitive advantage.

Multinationals are vital in firms and industries with four characteristics:

Large share of professional and technical workers

High levels of research and development relative to its sales
Products that are new and technically complex
High level of product differentiation and advertising

CHARACTERISTICS AND FUNCTIONS OF MNEs

A multinational company extends its strategy to all the parts of the world.
This global strategy is the actual
backbone of the MNE. This keeps
all branches working smoothly
A Multinational Enterprise is an
with the others and maintains the
cohesive nature of the company.
organization which owns a
Functions of MNEs can differ significant part of and operates
between companies, but we can facilities in the nations other
draw a few conclusions. than one in which it is originally
MNEs can take advantage of the based
environment that each region
offers. For example, if one
environment has cheap labor costs, it becomes easier and cost effective to
operate in that country or region. MNEs also function as a way to capture
newer markets. The company can understand more about what products or
services the area might be lacking when they are located in that area.

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The number of competitors for the MNEs includes not only those that are
domestic, but also those producing in the foreign market. This can bring
challenges of the market share, in addition, taxes, duties, and trade
restrictions also come into play. This may raise prices and it can cause
competing in the market to become very costly.

Global Trans-national
Cost Reduction

International Multi-national

Local Responsiveness

ADVANTAGES AND DISADVANTAGES OF MNEs

Engaging in FDI as a Multinational Enterprise has its advantages as well as

disadvantages in the areas of employing host-country locals for employees, the
location and exchange rate fluctuations.

Advantages:

The main advantage of using a host country local is that they are very
much familiar with the local environment, culture, language. This is
good as they require less training.
MNEs can enjoy lower tax rates in other countries for exports/imports.
MNEs may help the economy of the host country. They employ locals
in the firm or production plants if they also manufacture in the same
country.

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Disadvantages:

When hiring a host country local, their loyalty might be with their
country, rather than the company.
Local businesses can suffer as MNEs dominate the market due to high
financial resources.
With large organizations transferring operations in other countries,
jobs for people in developed countries is threatened.

THE RELATIONSHIP BETWEEN MULTINATIONAL

ENTERPRISES AND THE ECONOMY

There are 2 common types of integration horizontal and vertical.

Horizonal integration involves merger of two firms which are in the same
industry and the same stage of production, for example, the merger of Ford
and Jaguar in 1989. When two car manufacturers merge, it is likely to
experience economies of scale to a great extent.

Vertical integration involves firms that are involved in forward or backward

related production stages, i.e. they buy each others inputs or outputs. For
example, General Motors relationship with Allison Transmissions, a
manufacturer of heavy duty automatic transmissions.

To understand the huge impact of MNEs on the world, one must understand
their enormous size. MNEs account for nearly one-half of the worlds
industrial output and two-thirds of the worlds trade in industrial products.
The most successful MNEs uses technology to help them gain competitive
advantage in the industry. The internet is a major technological advancement
that allows organizations to communicate much quickly and more effectively.
Many MNEs even use the Internet to host/attend virtual meetings using
advanced softwares. E-Commerce can expand the reach of an organization to
every corner of the globe, both in B2B and B2C sales. As multinationals grow
more dependent on Internet, more time will be spent on policy-making. Some
governments around the world are already in a heated debate over the taxation
of e-commerce platform.

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RELATIONSHIPS OF MNEs WITH HOME AND HOST

COUNTRIES

When an organization decides to go global, it must take help from its home
country for support and much needed advice. However, it is also deciding to
take away jobs of home country citizens. This can create a negative image
about the company which is not easy to reverse. Also, MNEs will also be taking
away the capital inflow that they are creating along with taxes that were once
collected from companys sales. All these benefits get transferred to the host
country and for a less developed country, this translates to both capital and
technological inflow.

Relationships between the governments of the host and home countries is an

important issue facing many MNEs as they can affect the legal and economic
environment in many ways. They can also influence labor relations, trade and
transfer pricing.

The most vital points of discussion between the MNE and host country are
the following:

Employment
Technology or products on the MNE
Increased exports
Political or Economic Alliances

With increasing free trade agreements between countries, organizations are

looking to make use of this aspect expand further. When an organization
decides to venture abroad, it is necessary to conform the laws and regulations
of the host country.

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FUTURE OF MULTINATIONALS WITH CHANGING

BUSINESS ENVIRONMENT

With advantages is cost-efficiency and innovations, these future global MNEs

will accelerate the trend of reverse innovation, hence, they will bring more
effective and affordable solutions to the world. The cost of doing business is
always a major factor, hence, they enter the emerging markets as the costs are
higher is the developed markets. Chinese organizations have clear strengths,
i.e. they are flexible, move fast and make quick decisions. Culture plays a major
role in organizations trying to enter Chinese markets.

The governments are now trying to protect the companies of their own native
country by creating policies and laws which will make the operations difficult
for the MNEs from abroad. The MNEs are also trying to have regional
diversity among the top management to tackle differences among different
cultures. For example, the board members can consist of executives from the
US, Germany, India, Japan, etc.

Following are four trends that will affect Multinational Corporations over the
next 10 years:

The Changing Role of IT It is now becoming the center of

innovations and value creations
The Mobile Revolution Increasing widespread super-fast
connectivity will create opportunities and threats
The Changing Customer Relationship Social and technological
trends affect how customers interact with their suppliers
Commitment to Sustainable Future Organizations are now trying to
change the mindset from purely profit-driven to being committed for a
sustainable future

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REFERENCES

Global Business Management - ABEL ADEKOLA and BRUNO S.

SERGI
http://bigthink.com/videos/jean-pierre-rosso-on-the-future-of-
multinational-corporations
https://www.innovationpolicyplatform.org/content/multinational-
enterprises-mnes
https://leeiwan.wordpress.com/2007/06/18/difference-between-a-global-
transnational-international-and-multinational-company/