Corporations By Abdul Halim Book: International Business Theory and Practice 2nd Edition (Ajami et al, 2006) WHAT IS INTERNATIONAL BUSINESS?
In its purest definition, international business is
described as any business activity that crosses national boundaries. Types of IB Foreign trade. Visible physical goods or commodities move between countries as exports or imports. Trade in services, such as insurance, banking, hotels, consulting, and travel and transportation. Portfolio investments are financial investments made in foreign countries. The investor purchases debt or equity in the expectation of nothing more than a financial return on the investment. Resources such as equipment, time, or personnel are not contributed to the overseas venture. Direct investments are differentiated by much greater levels of control over the project or enterprise by the investor. The level of control can vary from full control, when a firm owns a foreign subsidiary entirely, to partial control, as in arrangements such as joint ventures with other domestic or foreign firms or a foreign government. DEFINITION OF A MULTINATIONAL CORPORATION Multinational firm is one that is structured so that business is conducted or ownership is held across a number of countries or one that is organized into global product divisions. Types of Organisations Howard Perlmutter looks MNC by the decision makers of an organization and differentiates among ethnocentric, polycentric, and geocentric organizational types: Ethnocentric organizations are those that are focused in a home or domestic environment and therefore exclude MNCs. Polycentric organizations have investments, operations, or markets in several countries but do not integrate the management of these international functions. Geocentric organizations are integrated and have a world perspective regarding the breadth and reach of possible organizational operations. Advantages Gained by MNCs Superior Technical Know-how Most large MNCs have access to higher or advanced levels of technology, which was either developed or acquired by the corporation. the MNC a strong competitive advantage in the international market, because it results in the production of efficient, hi-tech, low-priced products and services that command a large international market following. Large Size and Economies of Scale
Most MNCs tend to be large. Some of them, such as
Wal-Mart and ExxonMobil, have sales that are larger than the gross national products of many countries. The large size confers the advantage of significant economies of scale to MNCs. Lower Input Costs Due to Large Size
Bulk purchases of inputs enable MNCs to bargain
for lower input costs, and they are able to obtain substantial volume discounts. The lowered input costs imply less expensive and, therefore, more competitive finished products.
Wal-Mart is able to sell its products at low prices
relative to its competition due to both its bulk purchasing and its effective inventory control. By understanding which products are selling effectively, Wal-Mart combines low-cost purchasing with the effective movement of inventory to achieve competitive advantage in the retail consumer products market. Ability to Access Raw Materials Overseas Many MNCs lower input and production costs by accessing raw materials in foreign countries. In many of these cases, MNCs supply the technology to extract or refine the raw materials, or both. Ability to Shift Production Overseas
To increase their international competitiveness,
MNCs relocate their production facilities overseas, thereby taking advantage of lower costs for labor, raw materials, and other inputs, and, often, utilizing incentives offered by host countries. Scale Economies in Shipment, Distribution, and Promotion The large volumes of freight they ship permit them to negotiate lower rates with the shippers. Distribution and promotion costs are also lower for MNCs because of their high volumes of production. Brand Image and Goodwill Advantages Many of the MNCs possess product lines that have established a good reputation for quality, performance, value, and service. This reputation spreads abroad through exports and promotion, which adds to an MNCs arsenal of potent weapons in the form of brand image or goodwill, which it is able to use to differentiate its own products from others in its genre. Access to Low-Cost Financing As a result of their size, MNCs require large amounts of financing, and generally they are excellent credit risks. Therefore, they are the favoured customers of financial institutions, which lend to them at their best rates. The lower cost of financing for the MNCs adds to their competitive strength. Financial Flexibility MNCs also have an advantage in being able to manipulate their profits and shift them to lower-tax locations. This greater financial leverage can be used to artificially lower prices to enter new markets or to increase market shares in existing ones.
MNCs also utilize several financial mechanisms with
the objectives of shifting profits and manipulating taxes. Information Advantages Multinationals have a global market view and are able to collect, process, analyse, and exploit their in-depth knowledge of worldwide markets. They use this knowledge to create new openings for their existing products or to create new products for potential market niches. Managerial Experience and Expertise
Because MNCs function simultaneously in a large
number of very different countries, they are able to assimilate a wealth of valuable managerial experience. This experience provides insights into dealing with different business situations and problems around the globe. Diversification of Risks The simultaneous presence of MNCs in different countries allows them to more effectively bear the risk of cyclic economic declines. Generally these cycles are not the same among different countries. Thus, losses in one country can be offset by gains in other countries. Disadvantages Faced by MNCs
Business Risks
Since MNCs conduct business outside the
borders of their own countries, they deal with the currencies of other countries, which renders them vulnerable to fluctuations in exchange rates. Host-Country Regulations The MNC has the difficult task of familiarizing itself with these regulations and modifying its operations to ensure that it does not overstep them. Different Legal Systems MNCs must operate under the different legal system of different countries. In some countries the legislative and judicial processes are extremely cumbersome and contain many nuances that are not easily understood by non-natives. Political Risks Host countries are sovereign entities and their actions normally do not admit any appeals. This political risk, as it is known, increases in countries whose governments are unstable and tends to change frequently. Operational Difficulties Unwritten business practices and market conventions often prevail in host countries. MNCs that lack familiarity with such conventions find it difficult to conduct business accordance with them. Cultural Differences Many find that their expatriate executives are not able to adjust to the local culture, both personally as well as professionally.
Student'S Name: Megala A/P Subramaniam I/C No: 010425-06-0906 Programme: Professional Diploma in Management Class Date: 20&21 NOV 2021 Intake Date: JUN 2021