Why Do Firms Become Multinational Enterprises?

Subject: Business
Type: Informative Essay
Pages: 5
Word count: 1292
Topics: Management, Marketing

Table of Contents

There is a reason as to why firms opt to become multinational enterprises. In simple terms, multinational corporations are firms whose modes of operation accommodate some countries. Admittedly, the current form of competition is stiff in such a manner that no single company can make reasonable profits while depending only on the domestic consumers. Nevertheless, that is not the only case since it also depends on the level of specialization upon which a particular firm applies based on market dominance. In other words, a monopolistic market can comfortably thrive nationally without any need to internationalize its activities owing to the market domination that guarantees the firm of its success. However, it is vital to accept the fact that monopolistic markets are slowly diminishing because competitors can also acquire the same expertise and materials that match the monopolistic competence hence triggering the need to expand the market in other countries. This paper evaluates the reason for firms to embrace multinational enterprise to shed light on the subject.

According to Buckley and Casson (2016, p.3), firms become multinational enterprises in an attempt to broaden the markets. Admittedly, the already established businesses with a firm financial basis cannot depend on domestic sales owing to the increased national competition from other enterprises. For that reason, a company has to look for other greener pastures outside the country where profit maximisation can be appropriate. An excellent example of firms that have successfully assumed multinational enterprises is Starbucks and Pepsi Co. In fact, PepsiCo enjoys benefits of an expanded market having wholly spanned its activities over more than two hundred countries. In the same case, Starbuck has recently succeeded in increasing its transactions in more than sixty-six nations hence serving as an excellent platform for the realization of high market share. It is also significant to hint a little bit about the German automobile manufacturing firms. Such companies include Mercedes-Benz, Audi, and BMW. Within a short period, such businesses have been capable of extending their functions to the United States of America and other countries, therefore, facilitating market expansion.

Businesses translate into multinational enterprises so that they can enjoy full access to raw materials. One fact about firms is that they only succeed in the presence of enough raw materials (Dunning, 2012, p.6). That is, in a situation where raw materials are inadequate, that serves as a direct ticket towards closure. According to Fang, Wade, Delios, and Beamish (2013, p.36) firm opts to expand their activities in more than one country to sustain and supplement the little raw materials they have at hand. The United States of America is not an exception in that example. Apparently, critical United States petroleum companies tend to adventure around the world searching for new oil sources in a bid to keep their business going. A company such as Exxon boasts the success it has amassed just because of translating into a multinational corporation. In such a way, it secures some of the relevant subsidiaries globally so that they can a play in sustaining the major business lines if the company.

The reason for firms to become multinational enterprises is to acquire new technology. The underlying true issues of technology are that no single nation can manage to secure all the technological platforms necessary to propel its financial prosperity forward (Teece, 2014, p.21). Another important consideration, in this case, is that technological advancements keep on changing as time goes. To put it in another way, the technological discovery of today might become obsolete tomorrow directly because discoveries are made overnight. Xerox best fits in that example to bring to light the aspect of technology search. Recently, Xerox has cooperated with the United States in the attempt to introduce an office copier, a technology whose primary mastermind was Japan. As a result, the combination of Japanese and US technology in response to office copier gave birth to Fuji Xerox hence appreciating the need for firms to become multinational enterprises.

Rugman (2012, p.9) posits that firms become multinational enterprise to evade regulatory and political challenges. In a country where political instability is the talk of the day, it is not possible for a severe firm to depend entirely on the national transaction for excellence. On the other hand, some of standards and regulations are so strict such that if the company cannot efficiently make profits. For example, the Japanese assembling firm transferred its activities to the United States because it was possible and useful to cope with America’s import quotas. In the same case, the company was able to reap generous benefits as it had already avoided political risks that faced Japan at that time.

According to Goerzen, Asmussen, and Nielsen (2013, p.439), diversification serves as an essential reason for firms to become multinational enterprises. Diversification, in this case, assumes a geographical perspective whereby the company can quickly contain adverse economic trends that might befall a specific nation. One of the benefits of geographic diversification is that it can curb the cases of inflation that might influence the economic activity of a business in a single country (Hennart, 2012, p.173). As can be expected, the financial progress of different countries is diverse hence assisting multinational firms in dealing with economic difficulties of various nations.

How Firms Internationalise

Al-Fadhat (2017, p.34) maintains that firms can internationalise through conglomeration. In such a case, a single corporation enjoys the ownership of a stake in many smaller companies whereby businesses are conducted differently. The naked reality of this aspect is that each conglomerate works separately from one another while allowing the subsidiary managers to report to the top management within the bounds of the parent company. Therefore, through conglomeration, a firm can comfortably become a multinational enterprise. The joint venture is another means by which corporations internationalize. In the case of collective of the investment, the involved companies enjoy the ownership of the enterprise. For example, Pernos entered into a joint venture with Good year tire and Rubber hence adding up to the ability of the two companies to realize high returns; as a result internationalization

Internationalisation of firms is possible through licencing. Licencing implies the rights given to a particular business to use the assets of the other (Rask, 2014, p.153). By assets are meant intangible things such as patents, copyrights and trademarks. Importantly for such a deal to be complete, issuance of such licenses has to incur an individual fee. For instance, MNC, an American firm recently came to an agreement with fibre manufacturers in Peru concerning the production of chemicals. The central theme of the deal targeted licensing aspect whereby the United States had to pay a specified fee to the local partner in response to the issuance of copyrights.

Companies can internationalise using franchising. Franchising takes care of the firm’s ability to invest in capital, hence making its similar to the licencing agreement (Alon, Ni & Wang, 2012, p.383). However, in this case, the franchise seems to benefit a lot from the contract, as he has to receive a significant portion of the company’s shares as well as royalty fees. In fact, through franchising, Dominos has beaten the odds and remained the most significant food chain. Briefly, firms can adopt Franchising to feature in the international markets successfully.

In conclusion, there is the need for domestic markets to assume roles of multinational enterprises. It is evident that Companies that consider internationalization reap substantial financial rewards. That is because of taking care of market expansion, shared technology, and full access to raw materials among other considerations. On the other hand licencing, franchising and conglomeration serve as best means by which firms can become a multinational enterprise. Briefly, companies should take advantage of the international market to increase their financial base.

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  1. Al-Fadhat, M.F., 2017. The rise of internationalized capital: ASEAN economic governance and Indonesian conglomerates (Doctoral dissertation, Murdoch University).pp. 28-39
  2. Alon, I., Ni, L. and Wang, Y., 2012. Examining the determinants of hotel chain expansion through international franchising. International Journal of Hospitality Management31(2), pp.379-386.
  3. Buckley, P.J. and Casson, M., 2016. The future of the multinational enterprise. Berlin, Germany: Springer.pp.1-8
  4. Dunning, J.H., 2012. International Production and the Multinational Enterprise (RLE International Business). New York: Routledge.pp.2-11
  5. Fang, Y., Wade, M., Delios, A. and Beamish, P.W., 2013. An exploration of multinational enterprise knowledge resources and foreign subsidiary performance. Journal of World Business48(1), pp.30-38.
  6. Goerzen, A., Asmussen, C.G. and Nielsen, B.B., 2013. Global cities and multinational enterprise location strategy. Journal of International Business Studies44(5), pp.427-450.
  7. Hennart, J.F., 2012. Emerging market multinationals and the theory of the multinational enterprise. Global Strategy Journal2(3), pp.168-187.
  8. Rask, M., 2014. Internationalization through business model innovation: In search of relevant design dimensions and elements. Journal of International Entrepreneurship12(2), pp.146-161.
  9. Rugman, A. ed., 2012. New theories of the multinational enterprise (Vol. 33). New York: Routledge.pp.3-14
  10. Teece, D.J., 2014. A dynamic capabilities-based entrepreneurial theory of the multinational enterprise. Journal of International Business Studies45(1), pp.8-37.
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