INTERNATIONAL BUSINESS

International Business

International Business

Item A:

Introduction

The multinational firm is one of the most pervasive types of firms in the global economy. If we define it as a firm with assets or employees in more than one country, there are more than 61,000 companies in the world that qualify as multinationals, and they control nearly half a million subsidiaries worldwide. Some of them are relatively small, and employ fewer than 250 workers. Others are sprawling organizations with more than 250,000 employees scattered across more than 100 countries. The 500 largest multinationals account for about 25 percent of world product, and nearly half of total world trade. Multinationals own most of the technology in the world, and they receive about 80 percent of all technological royalties and fees. Multinationals are becoming more important relative to the size of the global economy, about three times as prominent today as twenty years ago. More than 85 percent of all multinationals are based in the rich countries of Western Europe, the U.S., Canada, Australia, and Japan. During the last decade, new multinationals have emerged from countries such as South Korea, Taiwan, Spain, Mexico, Argentina, and Brazil.

It is precisely because of its sheer success around the world that the multinational firm is the subject of scrutiny and scathing disparagement. Critics of the multinational enterprise range from those accusing it of being an 'octopus', 'agent of imperialism', 'dog of capitalism', or 'cultural dictator', to those convinced that it is a 'dinosaur' on the verge of extinction because of its unwieldy size, bureaucratic inertia, and inability to adapt and innovate. The apologists of the multinational, perhaps fewer in number and less adept at finding colorful metaphors, call it a 'dolphin', 'leader of modernization', 'job creator', or 'boon to mankind'.

Managing a multinational enterprise requires a different set of conceptual tools than in the case of purely domestic firms. In particular, it is important to understand the fundamental economic, strategic, Organizational, and sociopolitical issues that have an impact on the process of international expansion of the firm, on the linkages between foreign subsidiaries and corporate headquarters in the home country, and on the relationship between the multinational firm and interest groups in the foreign countries, including the government, labor unions, and suppliers.

Economic Advantages of the Multinational Firm

Multinational firms exist because certain economic conditions make it possible for a firm to profitably undertake production of a good or service in a foreign location. It is important to distinguish between Vertical and Horizontal foreign expansion by a firm in order to fully understand the basic economic principles that underlie the activities of multinational firms. Vertical expansion occurs when the firm locates assets or employees in a foreign country with the purpose of securing the production of a raw material or input (backward vertical expansion) or the distribution and sale of a good or service (forward vertical expansion). The necessary condition for the occurrence of an act of vertical expansion by a multinational firm is that there is a comparative advantage in ...