Why become a multinational company?
There are several reasons why businesses want to become a multinational company by operating in countries other than their home country.
Let’s take a look at advantages and disadvantages of being a multinational company.
Advantages of being a multinational company
The advantages of becoming of a multinational company include:
1. Increased customer base. Expanding internationally allows businesses to increase the number of customers. Having more clients around the world will lead to a substantial growth in sales revenue as quantity sold increases. Mergers, acquisitions, takeovers and Joint Ventures (JV) with companies in host countries are the fastest way of acquiring new customers and boosting revenue in the shortest possible time.
Example 1: Many businesses such as KFC, McDonald’s, Coca Cola, Disney, Apple or Starbucks have expanded into China and India to benefit from the world’s largest markets. The population of India and China combined accounts for almost half of the world’s population.
2. International brand recognition. Expanding into foreign countries allows businesses to increase the global recognition of their brands. Consumers in those countries may prefer to buy from well-known companies when they decide between foreign and local goods. Increased international brand recognition can be achieved by using appropriate global marketing strategies. Higher brand recognition globally allows multinationals to charge premium prices for their globally-recognized brands and products.
3. Closer to main markets. By being closer to its foreign customers, both multinational companies and their consumers can benefit in a number of ways. For example, companies are able to receive better market information which will result in producing products that fit local tastes and expectations. This will result in higher customer satisfaction, which will then lead to repeated purchases and increased customer loyalty.
4. Lower costs of production. Multinational companies can benefit from lower costs of production by operating in the countries where labor is inexpensive. Cheaper labor is a result of a vast supply of available workers, or when unemployment in the country is high. Lower rent resulting from lower demand for commercial property will also be cheaper minimizing production site costs. Transportation costs of raw materials into the factory and finished goods out of the factory, and energy costs will also be lower allowing for cost savings. All of these can make the local production cheaper. Additionally, the local governments in host countries that are going through the process of industrialization may offer TAX incentives which will further increase profits.
Example 2: The labor costs in Germany in France are one of the highest in Europe. This caused many German and French auto and clothing manufacturers to relocate production facilities to overseas countries with cheaper labor costs.
5. Opportunities for economies of scale. By selling in many countries around the world, multinational businesses require large scale production. And due to higher production levels, multinationals benefit from economies of scale. By being able to exploit various internal economies of scale, this makes them very competitive comparing with national and local companies.
Example 3: The Coca-Cola Company is a perfect example of a business that truly benefits from global economies of scale which causes its average production costs to dramatically fall. The company purchases materials in bulk such as water, sugar, corn syrup, aluminum, glass, etc. It obtains low interest rates from banks when it borrows huge sums of money. And, it reduces its marketing costs by using the same advertising to target global audience while selling exactly the same product with identical packaging regardless of the country.
6. Better access to resources. Being located closer to sources of raw materials helps with improving reliability of supply chains. The host countries may offer better quantity and quality of land, and other primary industry resources may be easily found. Infrastructure may also be better which will reduce transportation time and result in cost benefits.
7. Avoiding import restrictions. Trade restrictions exist in many countries around the world to restrain international trade. Multinational companies can avoid protectionist practices such as import tariffs, quotas and embargoes by producing directly inside a host country.
8. Spreading risk. Multinational companies can spread risks internationally by operating in several different countries at the same time. It is because they are not depending upon one market to drive their sales revenues – revenue sources come from many markets. If unfavorable market conditions happen in one country, then the impact on the overall business will not be that substantial as other market are doing fine.
Example 4: Unfavorable market conditions may include natural disasters, extreme weather, health epidemics, terrorist attacks, military conflicts and wars, political instability and so on.
Disadvantages of being a multinational company
The main threats causing potential problems for multinationals include:
1. Ignoring cultural differences. By nature, multinational companies are not very sensitive to the cultures of respective host countries. It is because they sell standardized products, charge the same price, use the same packaging and use one promotional campaign regardless of the country. By lacking cultural understating and appreciation for local customs, a multinational company may not be accepted by local customers.
2. Lack of knowledge about the local market. Having poor information about host countries may lead to fewer sales hence lower sales revenue. It is because the products sold by multinational companies to local customers may be mismatched with what the market really wants. It may result in not meeting the market’s demand and ultimately losing market share against local competitors.
3. Communication barriers. Communication may be poor between the company’s subsidiaries located in each of the foreign markets amd the headquarters located in the home country. Many factors can cause communication barriers including language barriers, different times zones or even poor access to the Internet and mobile networks. Also, these barriers can make communication with the local workforce very difficult which may result in low productivity and producing poor quality products.
4. Shortage of skilled labor. Majority of the workforce in underdeveloped or developing countries may be low-skilled. Knowledge and expertise of local employees will be low, therefore expensive training programs will require additional investment. Also, this will require multinational companies to bring their own workers and managers from the home country who are more expensive.
5. Strict regulations. Differences in laws and regulations as well as different quality standards and expectations between countries will surely make it hard for the multinational companies to operate smoothly. As requirements often vary country-to-country, or even within one country, substantial amount of resources will need to be deployed to cater to local differences.
6. Little brand awareness. In order to enter the market and make first customers aware of the products, multinational companies will have to spend a lot of money on advertising. Informing the local population not only about the company but also trying to persuade local customers to choose its products may take a lot of time and effort. It will require substantial spending on promotion which shall be supported by prior market research and test marketing.
7. Poor coordination. The larger the business, the more difficult it is to manage it. In case of multinational companies, there are a lot of aspects of daily running of the business that have to be properly coordinated between the headquarters in the home country and different regional divisions located throughout the world. Coordination within the multinational group will ensure that required products are delivered to customers on time, conflicting policies are not adopted and the company maintains cohesive brand image.
8. Currency fluctuations. Changes in exchange rates can impact the profits of the multinational company either positively or negatively. Managing the impact of foreign currency fluctuations on net cash flow is a serious issue that multinational corporations face. The more geographically diversified the business is, the higher the currency risks will be.
9. Hostile business environment. Local competitors might retaliate through marketing tactics to defend their market position. Also, local customers who show high level of brand loyalty to existing local businesses may refuse to buy products from multinational companies. There might also be more scrutiny and threats from local pressure groups which can lead to bad publicity for the multinational company.
10. Political instability. It may be caused by many various factors including conflicts between different political parties, insufficient economic resources, riots or sudden changes occurring in a country. Instability of the country may severely negatively impact operations of multinational businesses causing serious delays or even stoppages.
Solutions to some of those problems may be found through local Joint Ventures (JV), Strategic Alliances (SA), franchising or use of local agents. For example, if a multinational company forms a Joint Venture (JV) with a local company in the host nation then the problems of language barriers, cultural differences and lack of knowledge of the local market may be solved easily.
It is worth remembering that setting up operations in foreign countries is not without risks. The environment in the host country may be or may become hostile and pose a threat to the success of any multinational company.
