AS 91380 (3.2): Demonstrate understanding of strategic response to external factors by a business that operates in a global context Part D – ROLE OF MULTINATIONAL BUSINESSES A multinational business is a company that has its headquarters in one country, but with operating branches, factories or assembly plants in other countries. A multinational (or transnational) is not one which just sells goods in more than one country. To be called a multinational, a business must produce goods or services in more than one country. Multinationals have come about because of globalisation, which is the integration of economic, social, technical and cultural aspects of the world’s economies. Globalisation has accelerated in recent years with the rapid growth of multinational companies and the expansion of free international trade. Free trade occurs when countries trade without any international trade barriers such as tariffs, quotas and bureaucratic procedures. There are three important aspects of globalisation: O increased trade in goods and services O increased movements of labour from country to country O increased movement of financial capital Most of the movement of goods, labour and capital is between the rich, developed countries of the world. But the fastest growing economies are in poorer developing countries. A global brand is a brand image that is recognised throughout the world, good examples being Coca-Cola, Google, McDonalds, Microsoft and Starbucks. Factors that have contributed to the growth of globalisation O Consumer tastes ~ most consumers are now willing to buy foreign products such as cars from Korea. Our demand for products from overseas is stimulated by advertising and our exposure to international marketing via the internet and social media. O Technological change ~ powerful communications technology and the internet have dramatically changed the way we purchase products. O Cost of transportation ~ the single most important factor in the falling cost of transportation has been the use of containerised transport. O Liberalisation of trade ~ trade protection has been reduced due to the operation of organisations such as the World Trade Organisation (WTO) and inter-country agreements such as Closer Economic Relationships (CER) between NZ and Australia, and the New Zealand and Thailand Closer Economic Partnership. O Emerging markets and competition ~ new markets have opened up in countries that have seen a growth in their national income. As businesses in countries such as South East Asia have become more successful they have been able to compete in western economies. O Reduction in the cost of communications and increase in their speed. Why become a multinational company? O So that the business can be closer to its main markets ~ this benefit includes lower transport costs. O To reduce production costs ~ often this reduction is due to lower labour rates. O To avoid import restrictions ~ by producing in the local country there will be no import duties to pay and no other import restrictions. O To gain access to natural resources in the host country ~ these might not be available in the company’s base company. O To take advantage of expanding markets in other countries ~ this should lead to an increase in sales and profits. Business strategy in an international market Multinational companies are increasingly targeting the whole or substantial parts of the globe as their potential markets. Large businesses that fail to respond to this change stand to lose out to much bigger international competitors that are benefitting from global economies of scale. A company can increase its global presence by establishing a physical base in foreign countries and hiring overseas specialists directly, or developing joint ventures with overseas partners. A joint venture involves an investment of funds, facilities and resources by two or more companies into a combined venture. It may be formed to run production facilities or establish a marketing and distribution presence in another country. Another response is to develop global power brands. A power brand is a strong brand that a company is particularly good at producing and marketing, and is well known in a range of global markets. The company focuses on the range of brands in which it has greatest competitive advantage and sells off its non-core brands. It enables them to sell a narrower range of leading brands into more and more geographical markets. Impacts of globalisation on the wider community in the home country O Markets that have previously been served exclusively by domestic businesses now face foreign competition. This can benefit consumers by bringing prices down. O Support services such as call centres have increasingly been outsourced to overseas suppliers. Apart from the cost savings, consumers can benefit from having access to round-the-clock service due to time zone differences. A disadvantage of outsourcing, or of moving manufacturing offshore, is that jobs may be lost from New Zealand to overseas countries.