Multinational enterprise

What is a Multinational Corporation (MNC)?

A multinational corporation (MNC) is a company that operates in its home country, as well as in other
countries around the world. It maintains a central office located in one country, which coordinates the
management of all its other offices, such as administrative branches or factories.

It isn’t enough to call a company that exports its products to more than one country a multinational
company. They need to maintain actual business operations in other countries and must make a foreign
direct investment there.

Characteristics of a Multinational Corporation

The following are the common characteristics of multinational corporations:

1. Very high assets and turnover

To become a multinational corporation, the business must be large and must own a huge amount of
assets, both physical and financial. The company’s targets are high, and they are able to generate
substantial profits.

2. Network of branches

Multinational companies maintain production and marketing operations in different countries. In each
country, the business may oversee multiple offices that function through several branches and
subsidiaries.

3. Control

In relation to the previous point, the management of offices in other countries is controlled by one head
office located in the home country. Therefore, the source of command is found in the home country.

4. Continued growth

Multinational corporations keep growing. Even as they operate in other countries, they strive to grow
their economic size by constantly upgrading and by conducting mergers and acquisitions.

5. Sophisticated technology

When a company goes global, they need to make sure that their investment will grow substantially. In
order to achieve substantial growth, they need to make use of capital-intensive technology, especially in
their production and marketing activities.
6. Right skills

Multinational companies aim to employ only the best managers, those who are capable of handling
large amounts of funds, using advanced technology, managing workers, and running a huge business
entity.

7. Forceful marketing and advertising

One of the most effective survival strategies of multinational corporations is spending a great deal of
money on marketing and advertising. This is how they are able to sell every product or brand they make.

8. Good quality products

Because they use capital-intensive technology, they are able to produce top-of-the-line products.

Reasons for Being a Multinational Corporation

There are various reasons why companies want to become multinational corporations. Here are some of
the most common motivations:

1. Access to lower production costs

Setting up production in other countries, especially in developing economies, usually translates to

Due to their large size, MNCs can take advantage of economies of scale and grow their global brand. The
growth is done through strategic manufacturing/service placement, which allows the corporation to
take advantage of undervalued services across the globe, more efficient and inexpensive supply chains,
and advanced technological/R&D capacity.

2. Proximity to target international markets

It is beneficial to set up business in countries where the target consumer market of a company is
located. Doing so helps reduce transport costs and gives multinational corporations easier access to
consumer feedback and information, as well as to consumer intelligence.

International brand recognition makes the transition from different countries and their respective
markets easier and decreases per capita marketing costs as the same brand vision can be applied
worldwide.

3. Access to a larger talent pool

Multinational corporations are also known to hire only the best talent from around the world, which
allows management to provide the best technical knowledge and innovative thinking to their product or
service.
4. Avoidance of tariffs

When a company produces or manufactures its products in another country where they also sell their
products, they are exempt from import quotas and tariffs.

Models of MNCs

The following are the

1. Centralized

In the centralized
model, companies put
up an executive headquarters in their home country and then build various manufacturing plants and
production facilities in other countries. Its most important advantage is being able to avoid tariffs and
import quotas and take advantage of lower production costs.

2. Regional

The regionalized model states that a company keeps its headquarters in one country that supervises a
collection of offices that are located in other countries. Unlike the centralized model, the regionalized
model includes subsidiaries and affiliates that all report to the headquarters.

3. Multinational

In the multinational model, a parent company operates in the home country and puts up subsidiaries in
different countries. The difference is that the subsidiaries and affiliates are more independent in their
operations.

Advantages of Being a Multinational Corporation

There are many benefits of being a multinational corporation including:

1. Efficiency

In terms of efficiency, multinational companies are able to reach their target markets more easily
because they manufacture in the countries where the target markets are. Also, they can easily access
raw materials and cheaper labor costs.

2. Development

In terms of development, multinational corporations pay better than domestic companies, making them
more attractive to the local labor force. They are usually favored by the local government because of the
substantial amount of local taxes they pay, which helps boost the country’s economy.
3. Employment

In terms of employment, multinational corporations hire local workers who know the culture of their
place and are thus able to give helpful insider feedback on what the locals want.

4. Innovation

As multinational corporations employ both locals and foreign workers, they are able to come up with
products that are more creative and innovative.

Why the demand for a currency is downward sloping

When the exchange rate of a currency increases, other countries will want less of that currency. When a
currency appreciates (in other words, the exchange rate increases), then the price of goods in the
country whose currency has appreciated are now relatively more expensive than those in other
countries. Since those goods are more expensive, less is imported from those countries, and therefore
less of that currency is needed.

The equilibrium exchange rate is the interaction of the supply of a currency and the demand for a
currency

As in any market, the foreign exchange market will be in equilibrium when the quantity supplied of a
currency is equal to the quantity demanded of a currency. If the market has a surplus or a shortage, the
exchange rate will adjust until an equilibrium is achieved.

For example, suppose Westeros is a trading partner of Hamsterville, and the currency of Westeros is the
Westeros Gold Dragon (WGDWGDW, G, D). Currently, the exchange rate is 20 WGD20WGD20, W, G, D
per Hamsterville snark (SNSNS, N). At this exchange rate, Hamsterville wants to sell 100 SN100SN100, S,
N, but Westeros only wants to buy 30 SN30SN30, S, N. Therefore, there is a surplus of SNSNS, N.

Like any surplus, this will place downward pressure on the price. If the exchange rate is flexible, then the
exchange rate will decrease until the quantity supplied is equal to the quantity demanded.

Common misperceptions

We are used to thinking about buying things with a currency, so many new learners are confused about
what the price should be in the market for a currency. Buthe price of an orange is never given in
oranges; it’s given in some other currency. Just like an orange, a dollar can’t be bought with itself, but
instead it needs to be bought with some other currency.

A common misperception is to confuse

1) the things that cause shifts in the supply or demand of a currency with
2) Changes in quantity supplied or quantity demanded.
To keep this straight, ask yourself “why is this change happening?” If a change is happening in response
to a change in the exchange rate, then you are moving along a curve. If a change is happening in
response to something else, the entire curve shifts.

It might seem like a time saver to take short-cuts on labeling graphs, but this is never a good idea. Take
your time labeling the foreign exchange market carefully using the elements of a market:

 Demand - the demand for the currency that is being exchanged