Question

Describe the role of multinational corporations in the global business environment and what are the challenges and key business drivers of a multinational corporation ?

Answer 1

As the borderless economy advances throughout major economic regions, most globally minded companies are expanding their businesses across national borders in order to maintain competitiveness. The number of MNCs operating in major markets, without regard to the level of technological development, is rapidly increasing. It is desirable from the basic industrial operation point of view that end user products should be manufactured as close as possible to the local market since it permits providing products to meet local users' needs, minimizes energy use for transportation, and hence reduces air pollution, and provides jobs to local people. The role of MNCs in the global community has to increase dramatically.

Foreign Direct Investment

Multinational corporations or enterprises are the primary source of foreign direct investments. Foreign direct investments have spurred innovation in various global or host countries in sectors such as the pharmaceuticals or biotechnology, automotive, information technology and electronic or electrical equipment sectors

Currently, global research and development and innovation are extensively carried out by multinational companies. Multinational corporations have and will in the foreseeable future determine the global innovation landscape by continued internationalization of their production, research and development and marketing activities

Knowledge Transformation

The dispersion of knowledge in international setting as carried out by multinational corporations present increased opportunity and greater advantage of international growth. Multinational firms have created various global innovation networks through collaboration and interaction with different organizations and companies outside their home areas thereby creating new knowledge. Due to knowledge sharing and transformation, the global innovation networks that have been established by different multinational firms have expanded their geographical locations. Multinational corporations are currently the main drivers of global innovation due to access and advanced knowledge creation, adoption and sharing. Multinational firms have also enhanced global innovation collaboration through knowledge sharing that eventually resulting in strategic alliances and global technological collaborations

Increasing International Company alliances

Since the end of the Cold War, the world economy has been strongly distorted by political intervention. Even though politically oriented trade frictions are being heightened at the government level between Japan and the United States, industrial leaders of the two countries are aggressively forming strategic alliances and promoting friendly collaboration. This tide of corporate level competitive interdependence and global alliance activity is gradually becoming a significant element in the world economy. Indeed it is paradoxical, but relying on corporate alliances and interdependence is perhaps a better strategy for increasing industrial strength than economic nationalism.

Challenges faced by MNCs

Market Imperfections

It may seem strange that a corporation has decided to do business in a different country, where it doesn’t know the laws, local customs or business practices of such a country is likely to face some challenges that can reduce the manager’s ability to forecast business conditions. The additional costs caused by the entrance in foreign markets are of less interest for the local enterprise. Firms can also in their own market be isolated from competition by transportation costs and other tariff and non-tariff barriers which can force them to competition and will reduce their profits. The firms can maximize their joint income by merger or acquisition which will lower the competition in the shared market. This could also be the case if there are few substitutes or limited licenses in a foreign market.

Tax Competition

Countries and sometimes subnational regions compete against one another for the establishment of MNC facilities, subsequent tax revenue, employment, and economic activity. To compete, countries and regional political districts must offer incentives to MNCs such as tax breaks, pledges of governmental assistance or improved infrastructure. When these incentives fail they are liable to face challenges which limit their chance of becoming more attractive to foreign investment. However, some scholars have argued that multinationals are engaged in a ‘race to the top.’ While multinationals certainly regard a low tax burden or low labor costs as an element of comparative advantage, there is no evidence to suggest that MNCs deliberately avail themselves of tax environmental regulation or poor labour standards.

Political Instability

Many multinational enterprises face the challenge of political instability when doing business in international markets. This kind of problem mostly occurs when there is an absence of a reliable government authority. When this happens, it adds to business costs, increase risks of doing business and sometimes reduces manager’s ability to forecast business trends. Political instability is also associated with corruption and weak legal frameworks that discourage foreign investments.

Key Drivers of MNCs.

Ownership Factors: Dunning argues that in order to be successful in an overseas market, the multinational firm must hold some advantages like technology, brand image, high amount of finance, superior distribution channel and better organization and management than local firms.

Location Factors: There may be a number of reasons that operate in the host country like no or less import tariff, cheap labour, low business rates, availability of specific resource, etc., which acts as reason for a firm to operate overseas.

Internationalization Factors: It relates to the extent of ownership, control and risk a firm can hold while going multinational. According to the entry mode ranging from exports to wholly owned subsidiary, the MNE chooses internalization where the market does not function properly or does not exist so as to drive the transaction expenses of the external route very high.