Unit 1.6 Multinational companies

Question 1

What are economies of scale?

Answer 1

The cost-saving benefits of operating on a large scale, leading to a reduction in unit costs of production as an organization grows.

Question 2

What are internal economies of scale?

Answer 2

The fall in unit costs of production for a single organization as it experiences growth.

Question 3

What are financial economies?

Answer 3

Larger firms can obtain finance easier and at better lending rates due to their relatively low risk.

Question 4

What are production economies?

Answer 4

Fixed costs of production are spread out over a larger volume of output, boosting productivity and output.

Question 5

What are marketing economies?

Answer 5

Marketing costs per unit fall when sales volume grows as the larger firm can market its entire product range.

Question 6

What are purchasing economies?

Answer 6

Bulk purchase and delivery of raw materials, components, and stock reduces average costs of production.

Question 7

What are external economies of scale?

Answer 7

The fall in unit costs of production for all organizations as the industry experiences growth.

Question 8

What are internal diseconomies of scale?

Answer 8

Problems of coordination, control, and communication within a firm that lead to increased costs.

Question 9

What are external diseconomies of scale?

Answer 9

Factors that affect all firms in an industry, such as traffic congestion and higher rent costs.

Question 10

What is internal growth (organic growth)?

Answer 10

When an organization expands using its own resources, without involving other organizations.

Question 11

What is external growth (inorganic growth)?

Answer 11

When a business relies on third-party organizations for growth, such as mergers and acquisitions.

Question 12

What is a takeover?

Answer 12

A form of external growth that occurs when one company buys a controlling interest in another company.

Question 13

What is a joint venture?

Answer 13

An arrangement between two or more separate parties to pool their resources together to form a new legal identity.

Question 14

What is a strategic alliance?

Answer 14

When two or more businesses join forces to benefit from growth without fundamental changes to their long-term strategies.

Question 15

What is franchising?

Answer 15

An agreement between a business (the franchisor) giving legal rights to other organizations (the franchisee) to sell products under the franchisor’s brand name.

Question 16

What is globalization?

Answer 16

The growing degree of integration and independence of the world’s economies.

Question 17

What is a multinational company (MNC)?

Answer 17

An organization that operates, owns, or controls production and/or service facilities in two or more countries.

Question 18

What are the advantages of a joint venture?

Answer 18

1. Financial risks are shared. 2. Local firms help overcome cultural difficulties. 3. Resources are combined for synergies. 4. Benefits from economies of scale. 5. Firms retain their identities. 6. Avoid high legal costs of M&As.

Question 19

What are the disadvantages of a joint venture?

Answer 19

1. Business strategy execution is more decisive with acquisitions. 2. Diseconomies of scale may occur. 3. Difficult to terminate. 4. Possible conflicts due to different cultures. 5. Compromises can lead to suboptimal outcomes.

Question 20

What are the advantages of a strategic alliance?

Answer 20

1. Sharing expertise and resources. 2. Gaining synergies and economies of scale. 3. Firms remain separate legal entities.

Question 21

What are the disadvantages of a strategic alliance?

Answer 21

1. Vulnerability to partner mistakes. 2. Often short-term agreements. 3. Easier to enter and exit, leading to instability.

Question 22

What are the advantages of franchising?

Answer 22

1. Rapid, low-cost market expansion. 2. Franchisee motivation. 3. Access to ideas and suggestions. 4. Cost savings. 5. Increased buying power.

Question 23

What are the disadvantages of franchising?

Answer 23

1. Loss of control. 2. Profit sharing. 3. Legal expenses. 4. Differences in required business skills. 5. Managing growth. 6. Friction with franchisee.

Question 24

What are the reasons for the growth of MNCs?

Answer 24

1. Access to larger markets. 2. Benefit from economies of scale. 3. Spread risks. 4. Operate on a global scale. 5. Market development strategy. 6. Exploit growth opportunities. 7. Cost-saving benefits.

Question 25

What are the positive impacts of MNCs on host countries?

Answer 25

1. Employment opportunities. 2. Buy local materials, supporting local industries. 3. Increased competition improves local firms. 4. Transfer of technical knowledge. 5. Added tax revenue. 6. More consumer choice.

Question 26

What are the negative impacts of MNCs on host countries?

Answer 26

1. Destroy local competitors. 2. Local businesses lose market share. 3. Potential exploitation and pollution. 4. Cultural shifts may cause social tension.

Question 27

What is backward vertical integration?

Answer 27

Occurs when a business amalgamates with a firm operating in an earlier stage of production.

Question 28

What are conglomerates?

Answer 28

Businesses that provide a diversified range of products and operate in different industries.

Question 29

What is diversification?

Answer 29

A high-risk growth strategy involving selling new products in new markets.

Question 30

What is horizontal integration?

Answer 30

An external growth strategy that occurs when a business amalgamates with a firm at the same stage of production.

Question 31

What is lateral integration?

Answer 31

M&As between firms with similar operations that do not directly compete.

Question 32

What is a merger?

Answer 32

A form of external growth where two or more firms agree to form a new organization.

Question 33

What is the optimal level of output?

Answer 33

The most efficient scale of operation for a business, where average costs of production are minimized.