AS A Level Business: Multi-National Companies

• At the most basic level, most businesses either take the form
  • Sole trader businessesPartnershipsLimited liability companies
• However, beyond this businesses can also take other traits as they operate
• One of these traits is that they can become a multinational company
• Multinational companies are also known as Transnational companies

Characteristics/Features

• These are large limited liability companies with branches in other countries and a headquarters in one country.
• Control is centralized and products have very similar features
• for example Zimplats (Implats), Coca Cola, Shell and BP.
• Multinationals usually come into being when a business expands into other countries either by chance or design
• Usually, the headquarters is the profit centre i.e. all profits are calculated there although subsidiaries may also do their own accounting
• Finished products are often transferred from one subsidiary to another on an inter-company internal basis, for example, raw materials are moved from country A and processed by another subsidiary in country B
• Activities are highly coordinated, usually at the instigation of the headquarters, in order to maximise efficiency, reap the benefits of economies of scale, avoid duplication and foster specialisation
• Usually the growth/formation of a multinational company is driven by push factors from the company’s home country and pull factors in the host country in which the multinational establishes its presence
• Push factors include
  1. Tough and restrictive laws and regulations in the home country for example when it comes to environmental requirements
  2. Tough competition
  3. High labour costs and militant labour unions spurred by a high cost of living
  4. Unfavourable macroeconomic/operating environment
• Pull factors which attract multinationals to into other countries include:
  1. Readily available cheap resources
  2. Low labour costs
  3. Availability of new markets
  4. A desire to circumvent tariff restrictions imposed by the foreign government on foreign goods
  5. Less restrictive legislation and regulations
  6. Sometimes the foreign government in a quest to attract foreign direct investment introduces incentives like tax holidays
  7. Readily available cheap sources of energy
• Because multinational companies are located in various countries with diverse cultures, infrastructure etc
• They face a lot of potential obstacles/constraints during the course of conducting operations
• These problems include:
  • Poor communication links with head offices especially if they are located in remote areas where fibre is not available, they will have to do with expensive VSAT internet
  • Cultural barriers that can have real impact on operations
  • Language barriers especially if people from the headquarters are brought in to work in subsidiaries
  • As the business grows coordinating the entire empire becomes difficult

Advantages

To host country

• Multinational companies bring several advantages to the host country including the following:
• They create employment.
• Improve infrastructure.
• Increase the country’s GDP and standard of living.
• Improves the skills of the host country’s workforce through training.
• Brings the latest technology to the host country.
• Bring in foreign currency.

To the company

• Multinational companies enjoy several advantages themselves as a result of their nature.
• These include:
• Cheap raw materials.
• Spreads the risk of failure by spreading it to different countries.
• Circumvents trade barriers.
• Cheap labor
• Enjoy economies of scale.

Disadvantages

To host country

• The exploitation of labour.
• Social cost and environmental degradation.
• Companies remit back their profits to parent companies thus reducing the benefits of an increased standard of living.
• Political interference in some countries.
• Brings in unfair competition onto local infant industries/business which might be forced to close as they will be unable to compete
• Dilution of local cultures as people become exposed to the culture of the MNC’s original country, for example, semi-nude images

To the company

• Multinational companies also suffer from certain disadvantages as a result of their nature
• These include:
• Increased risk of loss of the company due to political instability
• Complex legal requirements from country to country.
• Complex macroeconomic environments.

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