Multinational Enterprises: An Overview

Posted on Oct 8, 2024 in Economy

Introduction

In analyzing Multinational Enterprises (MNEs), we first highlight five key features that distinguish these companies:

  1. Centralized management and overall strategy.
  2. Significant power in the industrial and economic landscape of major developed countries.
  3. Control over a substantial percentage of production and trade.
  4. Dominance in technology.
  5. Origin in the United States for a large number of these corporations with a global presence.

The most salient feature of MNEs is their central direction, which stems from the existence of a global strategy. This central direction is facilitated by modern communication tools, computing power, and the climate of “free trade” prevalent in international relations since the end of World War II.

Defining Multinational Enterprises

According to the United Nations panel tasked with developing a “code of conduct” for these companies, three elements qualify a company as a Multinational Enterprise:

  1. Branches in two or more countries.
  2. A decision-making system that allows for coherent policies and a common strategy.
  3. Branches connected by “bonds of ownership” or other forms, enabling significant influence, knowledge sharing, resource pooling, and shared responsibilities.

Based on these elements, we can define an MNE as: “A company producing goods and services, based in one country, that operates in other foreign countries, utilizing a common strategy aimed at maximizing profits.”

Expansion of Multinational Enterprises

MNEs’ presence in the global economy is increasing as they grow faster than the global economy itself. This uneven growth is attributed to two factors:

  1. The significant influence of oil companies after the energy crises of 1973 and 1978.
  2. The rapid pace of mergers and acquisitions, which increases the size of these companies.

Causes of the Emergence of Multinational Corporations

  1. Economies of Scale: MNEs seek economies of scale.
  2. Separation of Ownership and Management: The increasing separation between owners and managers after World War II. Throughout the 20th century, businesses were typically managed by their owners, focused on profit maximization. However, since mid-century, management in industrialized countries has shifted to professional managers, prioritizing business growth alongside profits.
  3. Taxation: Tax regulations in Western developed countries have generally encouraged the creation of reserves within enterprises and discouraged profit distribution, leading to expansion through growing reserves.
  4. The Third Industrial Revolution: Modern transportation and communication have shrunk the world, enabling subsidiaries of a multinational company to maintain constant and near-instantaneous contact with each other and the parent company.
Reasons for Expansion

a) Internationalization of Capital: Modern capitalism’s need for increased investment leads to production requiring wider horizons, forcing the internationalization of enterprises.

b) Profit Motive: Companies internationalize to improve profits. This pursuit is driven by two conditions:

  1. Foreign profits exceeding domestic profits for identical activities.
  2. Gaining advantages over native multinational companies in the countries of operation.

Domestic market saturation compels companies to seek new markets abroad to expand production and improve profits. However, to establish themselves in other countries, they must find a playing field that is different and superior to their country of origin, such as less competition, lower labor costs, tax benefits, and production facilities.

c) Product Cycle Theory: Vernon’s “Theory of the product cycle” compares production to human life stages. Just as humans experience birth, growth, and decline, products go through stages of innovation, growth, and maturity. According to this cycle, products are manufactured… (rest of the content continues)