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Multinational Organizations

A multinational organization is a company which has its

headquarters in one country but has assembly or production
facilities in other countries. Coca Cola, Nike and BP are examples of
Advantages of multinational companies
Multinationals create jobs which boosts the local economy and more
workers to tax.
They bring expertise in that skills of workforce are improved, some
may use IT that would never have before or other skills now
deemed basic by the western or developing world.

Multinational companies can benefit from economies of scale
Multinationals are in position to benefit from economies of scale.
This means the cost per unit can be lowered through specialization
with a large workforce work can be divided up and people can do
their limited job expertly.
Technical economies can be gained with automated equipment, but
only when fixed costs of machine can be spread out over outputs.
Purchasing economies can be achieved, for example by buying in
bulk companies can obtain supplies and materials at a cheaper cost
per unit.

Reasons for a Company to Become a Multinational
There are some reasons why companies wish to become
To increase market share companies may find they are at
saturation point in the domestic market and need a new outlet.
They may start by exporting to other countries but eventually they
will want to be production overseas. Coca Cola started this way
following US soldiers around the world after WW1.
To secure cheaper premises and labor cost of land and labor will
be cheaper in developing countries. Sweatshops in the Far East are
an example of cheap labor, whereas production plants opening in
the old Soviet Bloc nations like Poland, Bulgaria etc are examples of
cheap factories.
To avoid tax or trade barriers different nations have different
levels of corporation tax and may have different barriers to entry.
The Japanese only allow a small percentage of foreign cars to be
sold in Japan to protect their own industry.
Government grants many US companies were attracted to the UK
in the 80s due to government giving them money to open up
operations here.

In the 1980's, the economist John Dunning developed a theory that
explains why companies would invest abroad and become
multinational corporations (MNCs). This theory was named the
eclectic theory. However, today it is more widely known as the OLI
model, due to the three factors that are thought to spike foreign
1) Organizational Advantages
2) Locational Advantages
3) Internalization Advantages

Coca-Cola is an example of a company with a significant
organizational advantage. Its trademark is well-known and enough
to sell soft-drinks in numerous countries across the world. According
to James W. Harrington, a professor in geographical economics at
the University of Washington, organizational advantages also cover
company specific factors such as product quality, delivered price,
marketing sophistication, distribution networks, low-cost inputs and
superior production technology.
Natural resources in Greenland are becoming easier to access.
Mining companies locating there, such as Nuukfjord Gold, have a
locational advantage. Low wages, local tariffs and other trade
barriers are also factors that would make it sensible to locate in a
foreign country.
Internalization, i.e. owning foreign operations, is sensible when a
company seeks to retain all expected profits or wishes to control the
quality, marketing and local growth strategies. Being represented
and taking responsibility abroad may also make it easier to sway
local decision makers. Finally, according to the economists Jeff
Madura and Roland Fox, having a presence in several countries can
increase the knowledge of and access to new financing and
investment opportunities.
Other Forms of International Business
Encyclopdia Britannica defines a MNC as a company that is
registered and operates in more than one country at a time.
Generally the corporation has its headquarters in one country and
operates wholly or partially owned subsidiaries in other countries.
Thus, companies that have a joint venture abroad, established a
foreign subsidiary or acquired an existing operation in a foreign
country are considered MNCs.
In their book International Financial Management, Madura and Fox,
describes three alternatives to becoming a MNC.
First, a company can simply choose international trade. Thereby,
the company exports its goods and/or imports material or tools. The
advantage of international trade is that it is relatively cheap to pull
out, if it turns out not to be profitable. However, international trade
can be risky, as earnings may decline due to protectionist reforms
of tariffs and other trade barriers, exchange rate fluctuations or
sudden logistical constraints. E.g. exporters of perishable goods
were negatively affected when air freight was made impossible in
large parts of Europe by the volcanic ash cloud from Iceland's
Eyjafjallajokull, in April 2010.
The second alternative is licensing. Via licensing a company allows
other firms to produce, sell and market its products in foreign
markets. According to The Economist, it is reckoned that the NBA
earns millions of dollars by licensing their merchandise to local firms
in China. According to James W. Harrington, licensing has the
advantage that it requires very little investment and provides an
opportunity to harness the increase in return that the foreign
partner may be able to create via superior technology, creativity
and/or customer relations. On the other hand, the originating firm
loses control of product quality.
Finally, a company can choose to become a franchisor. According to
Madura and Fox a franchisor provides a specialized sales or service
strategy, support assistance and possibly an initial investment in
the franchise in exchange for a periodic fee. The advantages and
disadvantages of franchising are quite similar to licensing. However,
the specialized sales and service strategy offers some control over
sales conditions.

The Multinational Corporation's Choice of Country
When a company looks abroad and seek to open a subsidiary, the
attributes of the country should be thoroughly analyzed. Taking a
look at the OLI model is not sufficient, e.g. a wider array of
macroeconomic factors need to be taken into consideration. Both
the current and future state of the local political, economic, social
and technological environment should be thoroughly assessed. In
economic theory this is called a PEST analysis.

What Are the Different conditions or laws to be followed
by Multinational companies?

Increasingly, multinational companies produce and sell products in
multiple countries. The rules and regulations that apply in one
country may not apply to another nation where the business
operates. Several international organizations set guidelines for
multinational businesses. However, these guidelines form more of a
recommendation than hard-and-fast laws that a multinational
companies must follow. Many multinational companies have
implemented these guidelines to standardize accounting, labor,
environmental and other issues that affect the multinational
Different countries have different rules and regulation. If any company
want to operate business in any country then they should follow the
the international rules as well as that country rules like in Pakistan if
any company want to business in Pakistan then they should be register
under the corporate law of the Pakistan and follow the rules and
regulation of Pakistan as well. If you want to made manufacture
industry or business in Pakistan then you have to follow factory act or
labor law of Pakistan.
For example manufacture of wine in foreign country is legal but in
Pakistan it is illegal. In Pakistan multinational companies follow the
condition they should produce halal products.
But in India multinational company follow their country rules and laws.
Like before some time kfc sale beef in India which is against the
religion of Hindus. Then kfc has stopped the sale of beef in India. In
India the multinational company follow there labor law.
Multinational companies firstly see the political, economic, social and
technological environment of that country in which they want to start
there business then made their own rules according to them.

International rules which are made by the mutual concert of all
countries. All multinational companies should follow that rules.
Following are the organizations.
World trade organization
All these organizations made International rules and laws. Like w.t.o
made the multinational rules of trade all the multinational companies
bound to follow these rules. After international rules the multinational
company follow the country rule in which the start or want to start
their business and then made their own rules according to the suitable