Politics of the Multinational Firm
This article will focus on the issues that multinational corporations (MNC) face as they attempt to develop their business in foreign countries. Supporters of MNCs believe the organizations are an asset to the economy by providing jobs, income and technology to underdeveloped countries. However, critics argue that there are some negative consequences of having a MNC operating in underdeveloped countries. Leaders in a MNC have to face different obstacles from those encountered by their domestic counterparts. These leaders must be able to manage their operations in an environment that is usually different from their home. International human resource management strategies play an important role in assisting MNCs with overcoming some of the risks associated with doing business in another country.
A multinational corporation (MNC) has a presence (e.g., facilities, human resource capital) in at least one other country besides the one it originated in. Many organizations have offices or facilities in many different countries, with one centralized office that manages the international projects. Most major MNCs are in the United States, Japan, or Western Europe (e.g., Exxon, GM, McDonalds, Coca-Cola, Toshiba, and Honda). Supporters of MNCs believe that they are an asset to the economy as they provide jobs, income, and technology to underdeveloped countries. However, critics argue that there are some negative consequences to having an MNC operating in an underdeveloped country. For example, there is the potential for MNCs to have too much political influence over the governments in these countries, exploit the countries, and create a loss of jobs in their home countries. This article will explore the different dynamics and influences an MNC has and discuss the types of political issues that it has to overcome.
A corporation can be considered a multinational if the parent company is owned by nationals in two or more countries, the managers of the parent company are nationals of several countries, or the business strategy is focused on maximizing profit by doing business at a global level. According to Root (1994), an MNC is a company that participates in foreign production through partners located in several countries, has direct control over the policies of its partners, and is considered geocentric.
There are three stages that an organization may experience as it evolves into a multinational firm: export, foreign production, and multinational status. During the export stage, the organization is in the beginning stages of conducting business globally and relies on exporters to handle most of its transactions. However, as the sales expand, many corporations will decide to produce their goods in a foreign country in order to save on transport costs. At this point, the organization enters the second stage, which is foreign production. During this stage, an organization makes a choice between two different methods of foreign production, licensing or direct foreign investment. What are the differences between the two methods?
- Licensing This method is usually the first choice because it is easier than direct foreign investment. Licensing occurs when an MNC grants another company the right to manufacture and distribute a product under the MNC's trade name in the target country. The licensee pays a fee in exchange for the rights. Since there is little investment required, licensing has the potential to provide a large return on investment. Licensing tends to be a viable option to enter a market when either the exporter does not have sufficient capital, the foreign government's import restrictions preclude other ways to enter the market, or a host country is not comfortable with foreign ownership.
Advantages of this method are that there is no capital expenditure requirement, it is not risky, and payment is a fixed percentage of sales. Disadvantages are that the MNC does not have any managerial control over the licensee because it is independent, and the licensee can give the multinational's trade secrets to a potential competitor.
- Direct Foreign Investment Direct investment refers to the ownership of facilities within a foreign country. It requires large amounts of resources and high levels of commitment from both sides. This type of market entry can occur through either acquisition of an existing enterprise or the creation of a new enterprise. It requires the transfer of capital, technology, and personnel resources. Direct ownership can provide a high level of control over the operations as well as the opportunity to better know the potential customers and competitive environment.
MNCs may select this method when they want to:
- Grow. The organization reaches a point where it realizes that it is not growing. Therefore, there is an incentive to identify new markets so that it can continue to make a profit.
- Bypass protective instruments in the target country. American MNCs set up subsidiaries in order to avoid the common external tariff imposed by the European market.
- Prevent competition. An MNC may buy a foreign company so that it will not become a competitor.
- Reduce costs. Labor costs differ depending on the country. Many MNCs will establish facilities in countries that have qualified workers who will work for lower wages. For example, many American MNCs have outsourced their customer service and technology functions to India.
The final stage is becoming a full MNC. An organization has reached this level when it begins to handle the administrative and operational activities such as production, marketing, financing and staffing in a foreign country. As a rule, an MNC has at least 25% of its total sales coming from foreign sales.
Leaders in an MNC have to face different obstacles from those encountered by their domestic counterparts. These leaders must be able to manage their operations in an environment that is usually different from their home environment. According to Phatak, Bhagat, & Kashlak (2005), there are five dimensions that an MNC must master in order to be successful in a foreign country. Four of the five dimensions are economic, political, legal, and cultural.
Many countries have attempted to eliminate barriers to free trade. Initiatives such as the Treaty of Rome and the General Agreement on Tariffs and Trade (GATT) were created in an effort to enforce free trade between countries. The work of these initiatives led to the creation of the European Economic Community. This entity was very successful and led to what is now known as the European Union (EU). The main objective of the EU continues to be the promotion of free trade among the membership as well as the living standards of the people in the union. Major developments that helped promote free trade include the establishment of the World Trade Organization (WTO) and the creation of regional trade blocs such as the North American Free Trade Agreement (NAFTA).
The WTO was established to enforce the GATT. This organization has a panel of trade experts who assist in settling disputes. The WTO selects the panel from a list of trade experts supplied by member countries, and the two countries involved in the dispute agree upon the membership of the panel. Decisions made by the trade...
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