UNIT 1- MNC´s Flashcards
1
Q
Why do multinationals exist?
A
- Comparative advantage: production factors (resource cost such as labor and materials) may be lower in one place than another.
- Closeness to market: it may be more logical to produce close to the client depending on the type or size or movability of the product/service.
- Ease of doing business: it may be easier to do business in one place than another. Things like political stability, legislation, corruption, infrastructure quality may create incentives to move production abroad.
- Government incentives: such as grants and lower tax rates.
- Access to resources: it may be logical to produce close to resources rather transport the resources to the home country. E.g., oil companies try to refine product near to extraction points due to high transportation costs.
- Access to knowledge and skills: Some areas have special skills or business experience (aircraft design around Moscow, software programmers in Bangalore, start-up experience in Silicon Valley) which a firm may want to access.
- Stability to resist economic shocks: due to its diversified nature a MNC may be able to compensate for lost revenue in one market with increased growth in another.
2
Q
Positive aspects of MNC´s
A
- Leaders of modernization- involving transfer of technology and most advanced business practices
- Job creators- bring higher paid jobs to communities with few other growth opportunities
- Investment providers in local communities
- Vehicles for progress- bring progressive business practices and respect for equality and human rights to local markets
- Beneficial to humanity (trade is good)- it creates wealth opportunities for all
3
Q
Negative aspects of MNC´s
A
- Exploitation of local population- take advantage of lower labor costs or weaker regulations
- New competition- local businesses may go out of business
- Damages to local economy- outsourcing factory labor to developing nations damage the economy of the company´s home country (The rust belt in the US)
- To powerful- controlling so many resources and influence mean that MNC´s are often more powerful than democratically elected governments
- Hard to know what they are doing- to complex- e.g., many don´t pay the correct levels of tax
- Wealth creation is uneven- in hands of a few wealthy individuals
4
Q
Good factors about MNC´s
A
- Leaders of modernization
- Job creators
- Investment providers
- Vehicles for progress
- Transferor of technology
- Beneficial to humanity
5
Q
Bad factors about MNC´s
A
- Agents of imperialism
- Human rights abusers
- Cultural dictators
- Bureaucratic and slow to adapt
- Destroyers of innovation
- Creators of dependency
6
Q
FDI
A
- Setting up operations in a foreign market
- Buying companies into foreign markets and transferring know-how or management skills
7
Q
Trade costs
A
- Transport costs
- Formal and non-formal tariffs
- Different regulations or standards
- Other country-specific issues such as corruption or monopolistic practices
8
Q
Important factors to consider when considering a horizontal mn model
A
- Economic costs
- Access to resources, materials and suppliers
- Availability of skilled labor
- Good quality infrastructure
- Bureaucracy and corruption
- Economies of scale- the markets will become “smaller”- cost per unit increase
9
Q
Licensing
A
License a local producer in the foreign market to make or offer the product/service
10
Q
What is better? FDI or licensing?
A
Depends on what production factors are being used
- Intangible assets such as brands, technology, know-how and other firm specific skills- licensing too risky- don´t want to share the key reasons to their success
- Also hard to find a partner who can produce with the quality you want
11
Q
Trade issues regarding a horizontal model
A
- Eliminating the trade between market A and B- may have an impact in their “home” market A
- Affecting employment
- Affecting other companies that supply the company
- Reducing the trade balance between country A and B
12
Q
Summary- horizontal mn model
A
- Increased costs of having extra operations VS eliminating trade costs
- Losing economies of scale in home operations VS creating economies of scale in new foreign operations
- Larger markets will attract more MNCs
- Higher trade costs will create incentives for horizontal expansion
- Big advantages from economies of scale may be a disincentive to horizontal expansion
13
Q
Vertical mn model
A
Different parts of the process need different resources.
- Some parts are very labor intensive (require a lot of workers)
- Some parts are very energy intensive
- Some parts require lots of space
- Some parts need to be close to certain resources (water, etc.)
break up the operations to places fit for the tasks
14
Q
Disintegrations cost
A
- The costs of transport
- Additional management required in the international factories
- Different ways of working in different cultures
- Risks of losing control over quality
15
Q
Trade issues regarding the vertical mn model
A
As the product is possibly being re-imported into the home market for final assembly and shipping, this vertical expansion doesn´t affect trade in the same way as the horizontal expansion.
