Various reasons for the emergence of multinational firms:

SEARCH FOR RAW MATERIALS.

Some firms become MNCs to exploit the raw materials that can
be found overseas, such as oil, coal, minerals, and other natural resources.

MARKET SEEKING.

Some firms become MNCs to exploit foreign markets for their products.
Since the same product may be demanded in different countries, MNCs not only take
advantage of the marketing opportunities, but also gain from the economies of scale
obtained by selling large volumes across different foreign markets.

COST MINIMIZATION.

Companies also become MNCs to seek out lower-production-cost sites.

Specific skills needed for production may be available at lower costs in some countries,
and MNCs may locate plants specializing in specific aspects of production, such as
assembly or fabrication, in those countries.

KNOWLEDGE SEEKING.

Some firms enter foreign markets to gain information and experience

that are expected to prove useful elsewhere. Especially in industries characterized by
rapid product innovation and technical breakthroughs, firms obtain technical product and
process knowledge, which they leverage in other countries.

KEEPING DOMESTIC CUSTOMERS.

Suppliers of goods or services to MNCs often follow their

customers abroad to guarantee them a continuing product flow. In the process, these
firms also become MNCs.

EXPLOITING FINANCIAL MARKET IMPERFECTIONS.

Companies may find it advantageous to

reduce taxes and circumvent currency controls when operating in multiple foreign
markets. Doing so enables them to obtain greater project cash flows and lower costs of
funds compared to a purely domestic firm.

Various ways in which domestic firms enter international markets:

Entry

Benefits

Exporting

Minimal capital requirements and start-up

costs
Risk is low

Licensing

Minimal investment requirements

Faster market-entry time

Relatively low risk compared to other entry

strategies
Full sales potential of the product is not
realized
Profits are immediate
Foreign importer is in greater control of
Learn about present and future supply and
marketing, and thus the image, of the firms
demand, competition, distribution channels,
branded products in the foreign country
payment conventions, financial institutions,
and financial techniques in host country

Fewer financial and legal risks

Overseas
Production

Risks

Cash flow is relatively low

May be problems in maintaining product
quality standards
Foreign licensee may engage in unauthorized
exports of the firms products, resulting in
loss of future revenues for the licensing firm
Foreign licensee may become a strong
competitor when license agreement ends

The firm can more easily stay abreast of

Tremendous capital and top management
market developments, adapt its products and
commitment is required
production schedules to changing local tastes Financial and operational risks are greater than

and conditions, fill orders faster, and provide

those for other entry strategies
more comprehensive after-sales service
Companies face greater political risks,
Firm can exploit local skills, including R&D
including the risk of expropriation of plants
and facilities
Signals a greater commitment to the local
market, which in turn increases sales and
assurance of supply stability

Factors that help determine whether a firm will export its output, license foreign
companies to manufacture its products, or set up its own production or service
facilities abroad:
i)

PRODUCTION ECONOMIES OF SCALE.

If these are important, then exporting might be

appropriate.
ii) TRADE BARRIERS. Companies that might otherwise export to a market may be forced by
regulations to produce abroad, either in a wholly owned operation, a joint venture, or
through a licensing arrangement with a local manufacturer.
iii) TRANSPORTATION COSTS. These have the same effect as trade barriers. The more expensive
it is to ship a product to a market, the more likely it is that local production will take
place.
iv) SIZE OF THE FOREIGN MARKET. The larger the local market, the more likely local
production will take place, particularly if significant production economies of scale exist.
Conversely, with smaller markets, exporting is more likely to take place.
v) PRODUCTION COSTS. The real exchange rate, wage rates, and other cost factors will also
play a part in determining whether exporting or local production takes place.
vi) INTANGIBLE CAPITAL. If the MNCs intangible capital is embodied in the form of products,
exporting will generally be preferred. If intangible capital takes the form of specific
product or process technologies that can be written down and transmitted objectively,
foreign expansion will usually take the licensing route. If intangible capital takes the form
of organizational skills that are inseparable from the firm itself, then the firm is likely to
expand overseas via direct investment.
vii) NECESSITY OF A FOREIGN MARKET PRESENCE. By investing in fixed assets abroad,
companies can demonstrate to local customers their commitment to the market. This can
enhance sales prospects.