Why And How Do Firms Become Multinational Economics Essay

The term transnational consists of two different words, ‘multi ‘ and ‘national ‘ . Multi means many while the word national refers to states or states. Therefore a transnational company means a company that has caput quarters in one state but which has operations in one or more states.

While analyzing the outgrowth and development of Multinational Enterprise ( MNEs ) , it is clear that MNEs quickly spread since the Second World War due to investings in resource based activities and import replacing fabrication in South East Asia. Before the World War, MNEs were limited to the U.S which accounted for non more than 18 per centum of the planetary stock of outward FDI in 1914, that was a portion much lower than that of the largest place state, UK with more than 45 per centum ( Dunning, 1983 )

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Analyzing why do houses go transnational:

The determiners for houses to go transnational are viewed comparative to several state ‘s absolute ( Adam Smith, 1776 ) and comparative advantage ( David Ricardo, 1817 ) . The former advantage provinces that the state should hold a strong capableness to present a good or service whereas the latter provinces that it should be superior to the same good or service produced in other state.

To protect themselves from the hazards and uncertainnesss of the domestic concern rhythm ; if the economic system of the state is slow or demand is falling down in one state and opportunities are at that place to win in another state. By puting up operations in another state, transnational companies can decrease the negative effects of economic swing in the place state. It is widely used by Nipponese as it is a signifier of international variegation, for illustration Nipponese MNEs have found that their place economic system has been in economic slack since 1990s but their US operations have done rather good.

Increasing world-wide demand for goods and services. For illustration many MNEs have targeted United States because of its big population and high per capita income. In 2001, China entered universe trade organisation and this was accepted by the market and made China more attractive for MNEs. By puting up operations near to the foreign client, these companies can cut down transit cost, avoid operating expense disbursals such as charges of holding mediators to manage the merchandise and take advantage of local resources. This procedure is known as “ internalisation ” of control.

Firms become MNEs to increase foreign competition and a desire to protect their place market portion. Using a “ follow the rival ” scheme, a turning figure of MNEs set up operations in the place states of their major competitors..

It is a opportunity to take advantage of technological expertness by fabricating goods straight instead than leting others to make it under a license understanding. In recent old ages some MNEs have concluded that it is unwise to give another house entree to proprietary information such as patents, hallmarks, or technological expertness and they have allowed current licensing understandings to sink.

Another chief ground is Foreign Direct Investment ( FDI ) which is a major index for the growing of transnational endeavor and as a mixture of Greenfield investing, amalgamations and acquisition, hence FDI acts to transitory concern rhythms. “ The aggregative stock of FDI in the universe economic system has doubled to more than 10percent of the entire end product within the last two decennaries, hence within this lifting tendency there are several regional characteristics meriting attending ” . ( Barrel and Pain, 1997 )

FDI in eastern Europe has gained advantage of geting entree to high degrees of technological expertness and opportunities of deriving from the wider diffusion of technological exchange associated with the individual European Market ( Bora, 2002 )

Firms become transnational in order to take advantage of lower labor costs that consequences from the houses enhanced ability to ‘divide and govern ‘ : by bring forthing in assorted states houses divide their work force, thereby obtain lower labor cost. As capitalist open up new markets overseas, they besides locate production installations overseas, peculiarly in settlements or former settlements ( Helpman, 1985 ) . After all, where labor costs are lower than in the place states of the MNEs, thereby minimising returns to labor and maximising net incomes.

“ Efficiency-seeking FDI is to apologize the construction of established resource based or market seeking investing in such a manner that the puting company can derive from the common administration of geographically spread activities. ” ( Dunning, 2008 ) . The purpose of efficiency-seeking MNE is to take advantage of different factor gifts, civilizations demand forms, economic policies and market constructions by concentrating production in a limited figure of locations to provide broad markets.

Market seeking houses will put in foreign markets when the local markets are saturated. These houses go transnational in order to keep the growing degree of the house when the rival has moved to foreign market and therefore local demand and demands for the same merchandises will be satisfied.

Strategic plus seeking houses invest in assets for the planning and reappraisal of the company. These investings are fundamentally based on research and development and use of new engineering for the development of new merchandises, hence achieve long term ends by MNEs.

The other grounds for any house to travel transnational are the three types of advantages profiting a transnational corporation are ownership specific, internalisation particular and location specific advantages. Ownership specific advantages are belongings rights or intangible assets, including patents, hallmarks, organisational and selling expertness, production engineering that form the footing for a company ‘s advantage over other houses. Internalization specific advantages include support from authorities ordinances and Torahs, compensate for the hereafter markets. Location specific advantages include entree to raw stuffs, inexpensive labor, engineering and substructure in order to transport out concern operations swimmingly.

Analyzing how do houses go transnational: .

Basically how a house becomes transnational is through the agencies and ways of FDI. FDI refers to an investing which is made to function the concern involvements of the investor in a company, which is in a different state distinct from the investor ‘s state of beginning. There are three types of FDIs, they are: Horizontal, Vertical and diversified.

Horizontal FDIs means the house puting in the same industry abroad as that in which a house operates at place, but in a foreign market. This means the abroad company which produces similar or same goods and services is taken over by the domestic house and therefore put in these houses. Hence, merchandise distinction is the critical component of market construction for horizontal FDI

Vertical FDI is classified into two signifiers as Backward and Forward FDI. Backward perpendicular FDI is an investing in an abroad company that provides inputs for a house ‘s domestic production procedures. Forward perpendicular FDI occurs when an oversea company sells the end products of a house ‘s domestic production procedures, this is less common when compared to backward perpendicular FDI. For illustration, US auto makers found it difficult to market their merchandises in Japan because most of the Nipponese auto traders have close and good relationships with Nipponese auto shapers, therefore it was hard for US to advance foreign autos. To predominate over this job, American auto traders embarked on a run to set up their ain web of franchises in Japan to market their merchandises.

In a pudding stone, one company owns a interest in a figure of smaller companies, which conduct concern individually. Each of a pudding stone ‘s direction concerns is worked independently of the other concern divisions, but the subordinates direction studies to senior direction at the parent company.

Amalgamations and take over ‘s are besides a portion of concern enlargement to achieve a position of MNE. For illustration, Lakshmi Mittal – Chief executive officer of Arcelor Mittal. , for illustration has moved his first measure of enlargement of his household concern of steel by purchasing assets of a run out steel house in Indonesia.

Joint venture is an understanding between two or more companies that portion the ownership of a concern project. In instance of Goodyear Tire and Rubber, it has involved in a 51 per centum owned tier fabricating joint venture with Pernos, a Malayan company.

Licensing understanding is a right given by one company to another company to utilize their assets such as hallmarks, right of first publications, patents or know-how for a certain sum of fee. For illustration, U.S MNC has entered into joint venture with a chemical, rayon and other fibre maker in Peru. Along with this understanding, the company negotiated a licensing understanding which states that royalty as a per centum of the procedure and engineering, and per centum of net incomes earned should be paid to the local spouse.

Franchising is another common method for the houses to travel international which involves small investing of capita, it is similar to licencing understanding. The franchiser is paid trueness fees and besides they receive a portion of portion of the company. Dominos, for illustration a franchising company has emerged as the largest nutrient concatenation.


Today ‘s MNEs success depends upon close relationship between domestic Bankss and FDI and entirely owned operations and their direction. Future success will decidedly affect international cooperation that aims to raise the overall fight of domestic industries.

Therefore when we consider all the above grounds and causes ‘why ‘ and ‘how ‘ houses become transnational endeavor it can be said that the houses construction, aims and ends, mark market and ethical values of the house are the chief grounds.


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