Multinational Enterprise Flashcards
What is a multinational company?
A MNC is a company that has activities spread across different countries. These can include exports, imports or production activities. It usually consists of a parent company located in the home country and several foreign subsidiaries.
What is the MNC’s goal?
The most common objective of an MNC is the maximization of shareholders wealth
What type of constraints can interfere with MNC’s goal?
Environment, Regulatory and Ethical Constraints.
What are the most used explanations for why firms become motivated to expand their business internationally?
Theory of Comparative Advantages,
Imperfect Markets Theory,
Product Cycle Theory.
What is the Theory of Comparative Advantages?
Each nation should specialise in the production and export of those goods that it can produce with the highest relative efficiency and import those goods that other nations can produce relatively more efficiently.
Why has the Theory of Comparative Advantages become somewhat irrelevant?
Classical theory implies that countries differ significantly from one another in terms of resource endowments and of economic skills for these differences to be at the center of any analysis of corporate competitiveness. These theories have become somewhat irrelevant since most core economies have become more integrated, and differences among corporations have become increasing more irrelevant than differences between nations.
What is the Imperfect Markets Theory?
In the real world the markets are imperfect. This makes some production factors somewhat immobile. There are often costs and some restrictions related to the transfer of labor and other resources. Because markets are imperfect, firms often realize possible advantages offered by another country in terms of its resources. This leads to incentives to seek out foreign opportunities.
What is the Product Cycle Theory?
Firms became established in the home market as a result of some perceived advantage they would have over existing competitors. Because information about markets and competition is more readily available at the home, a firm is more likely to first establish itself in its home country. Foreign demand for the product can be satisfied initially by exporting it. As time passes, the firm may feel the only way to retain its advantage over competition in foreign countries is to produce the product in foreign markets, thereby reducing transportation costs.
What are the factors that gave rise to MNC?
Search for Raw Materials
Market Seeking (archetype of modern MNC)
Cost Minimization
Knowledge Seeking
Keeping Domestic Customers
Exploit Financial Market Imperfections
What is outsourcing?
Outsourcing happens when production is “given” to another domestic firm.
What is offshoring?
Offshoring happens when production is “given” to a foreign subsidiary.
How can environment constraints impact the MNC’s goal?
Each country enforces its own environment constraints (e.g. building codes, disposal of waste materials). Some countries may enforce more restrictions on subsidiaries whose parent company is from a different country.
How can regulatory constraints impact the MNC’s goal?
Each country enforces its own regulatory constraints pertaining to taxes, currency convertibility rules and other regulations that can affect cash flows of a subsidiary.
How can ethical constraints impact the MNC’s goal?
There is no consensus standard business conduct that applies to all countries.
