Why Do National Firms Become M Essay

, Research Paper

Why do national firms become multinational. Critically Discuss.

We must first define between a national firm and one that is multinational. A definition of a national firm could be a firm that s market is mainly in the country it sells into and has no Foreign Direct Investment in any other country apart from the one in which it sells into. A multinational on the other hand is a lot harder to define because over time the very nature of a multinational has changed. For Example in 1958 Maurice Bye began to see and recognise multinational enterprises (MNE s) by the definition Multi-territorial firm indicating that a MNE was purely given the name by the amount of countries a company occupied. By 1960 this had already been updated with David Lilienthal new definition, Multinational Corporation that has become a recent standard definition. Academics see a multinational in greater depth and again the definitions are always slightly different, J.Dunning defines a MNE as an enterprise that engages in Foreign Direct Investment (FDI) and owns or controls value adding activities in more than one country (1992). Dicken on the other hand believes a Trans-national corporation is a firm that has the power to co-ordinate and control operations in more than one country, even if it does not own them. This illustrates the problems of defining a multinational although we can see that there are common themes. We can therefore assume for the purpose of this text that a multinational is” firm that has headquarters in one country, but with bases, manufacturing or assembly plants in others. However Quelch and Klein argue that Any company that establishes a site on the Internet automatically becomes a Multinational corporation. (Internet Encarta) Which would suggest that most large national corporations are in fact multinational because of the very fact that a website makes them Global and open to a foreign market but this is somewhat wrong because it does not fulfil the criteria of FDI in a country.

National firms become multinational for a number of key reasons, to take advantage of overseas resources and factors of production, to be closer to there market, to avoid legislation, to gain tax advantages, to weaken domestic unions, to increase global sales and to gain monopoly power over there competitors. Although multinationals can be defined into three categories, natural resources e.g. Petroleum and Mining, manufacturing e.g. Chemicals and consumer goods and lastly the service industry for example shipping and banking. We will look at the term multinational in its broadest sense because each fragment has its own individual reasons but all of them carry common themes

Many national companies will become in a sense multinational to make use of resources abroad, for example before world war two most foreign operations established themselves abroad to secure sources of raw material, developing countries were usually the recipient of world-wide FDI, mining companies like St John d el Rey set up operations in Brazil so that they could mine gold not only in the US but also in Latin America. You can argue that even today this idea of getting closer to your raw materials has not changed because it reduces overhead costs although it is less of a factor today because increased transport networks have made it increasingly easier to get to your raw materials. Recently what has become more prevalent is that MNE s have taken advantage of the cheaper labour costs of developing countries. For example, In the United States hundreds of corporations from automakers to electronics manufacturers have moved jobs from high-wage US facilities to low-wage plants in Mexico and other Latin American nations. (R.C.Longworth, The New Global Economic Order) What is essential though when companies become transnational is that although there may be cheaper labour in developing countries often they are not as skilled. This can often lead to poorer productivity, for example, labour is X times less than there home country, but at the same time productivity could be X times less. Here it would be pointless ploughing FDI into a new foreign adventure because there is no gain.

As Kenwood and Lougheed would argue there has been an international economic market from the 1820 s but perhaps industrial growth accelerated in the last quarter of the nineteenth century, the consumption of raw materials increased phenomenally. (The growth of the international economy 1820-2000,p11) It is impossible not to argue that with an international economy there will be companies that become transnational, to get closer to there market it is for this reason many national companies become multinational. It enables there product to become internationally available, moreover with premises closer to the market there are other advantages, for example they are able to cut transport costs, thus there product is in line with home competitors and not more expensive. Another key reason why many firms become multinational is that they are able to avoid legislation in there own country which may prevent firms getting too big. (Nancy Wall and Barry Martin) More significantly though firms often become multinational to avoid trade barriers this has been very noticeable with such far east countries who specialise in electronics and automotive products moving into Europe to avoid the Common External Tariff. For a national company