Cambridge AS A Level Business Studies/ ZIMSEC Advanced Level Business Studies/ Business Enterprise Skills Notes: Types of businesses: Multinational 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
- 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
- Tough and restrictive laws and regulations in the home country for example when it comes to environmental requirements
- Tough competition
- High labour costs and militant labour unions spurred by a high cost of living
- Unfavourable macroeconomic/operating environment
- Pull factors which attract multinationals to into other countries include:
- Readily available cheap resources
- Low labour costs
- Availability of new markets
- A desire to circumvent tariff restrictions imposed by the foreign government on foreign goods
- Less restrictive legislation and regulations
- Sometimes the foreign government in a quest to attract foreign direct investment introduces incentives like tax holidays
- 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
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.
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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