Question

Explain how transactions costs affect Multinational Enterprises (MNEs) operations?

Answer 1

The Multinational Enterprises are the organizations that extends employment contracts over national boundaries.They coordinate activities and functions across cross national interdependencies.These units located across different countries are more effciently managed and coordinated when they are working under an MNE than if they work independently.Transaction costs plays an important role while MNE operates in different countries.

Transaction costs are those expenses which are incurred in buying and selling a good or service.It refers to the labor required to bring a good or service in the market.Transaction costs are of various types such as search and information cost- the cost incurred in determining that the required good is available on the market and which good has the lowest price.In this case,the MNE while entering a market will indulge in market reseach and determine if the good it is going to produce has a future in the market and what would be its competition.

Bargaining costs- costs required to come to an acceptable agreement with the other party to the transaction which requires drawing up contracts.The MNE's often make contracts with various paties in the market such as the suppliers,the distributors and the marketers.These costs have a huge impact on the profitability of the MNE.

Enforcement cost-are the costs of making sure that the other party sticks to the temrs of the contract which is in the form of legal fees.

The MNE while entering a market will have to incurr huge costs in research process where it does SWOT analysis of the market and the effectiveness of this report decides the future strategies of the MNE.Next,it has to incurr costs in negotiating with the various groups present in the market and deciding on the share of profit between the company and the group and finally,it has to enter into contract and enforce those contracts as the partner it enter into an agreement with may deviate from the terms to maximize its own profit.

The MNE's while expanding into other markets has to decide on various alternatives and each of them has transaction costs associated with them as, the firm will have to decide whether it wants to enter into partnership and share the profits with an existing firm or it wants to setup its own manufacturing units and produce its own products.Each of these decisions will have different transaction cost associated with them which can impact the profitablility of the firm.It often takes the forms of vertical and horizontal integration.

Next,it decides on marketing and distribution process.Creating a distribution network which works efficiently and penetrating the market with the right marketing activities are most important functions of an MNE.The MNE's incurrs huge expenses on these activities as they help them capture the market share and increase its revenue.It may partner with already established local players who have knowledge about the market and thus manage to decrease its transaction costs and also establishing its image and name in the market.

Finally,it has to check that the partneships it has entered into are adhering to the terms laid in the contracts as these may deviate from it to maximize their own profits.