How Firms Become Multinational Enterprises



A significant move is taking place on the globe economy today; previously each nation got different and relatively isolated economies from each other by different barriers to cross border trade. But now we are significantly moving towards an unbiased global monetary system in which different countrywide economies are blending along which is referenced as globalization. Impartial global monetary system has taken effective involvement of numerous companies from various countries in the international market; the switch towards globalization has been accelerating presently, and it looks set to transport forward.

Multinational Enterprise

An business that operates and has its resources and facilities in more than one country excluding its home country is named as multinational organization, such firms has have offices, factories, retailers and etc. , in several countries and usually have centralised head office where they co-ordinate global management.

The swiftly expanding global economy creates many factors and opportunities for business worldwide. It creates opportunities for business to increase their resources, earnings and market, this make many companies to be globalized for example Wal-mart, Coca-Cola, Exxon Mobil, Levi Strauss, and Royal Dutch Shell are a few of the most successful multinational organization on earth. But nonetheless many significant distinctions exist between national market segments along many relevant factors which need to be overcome to be successful globally.

Why Organizations become Multinational Enterprise?

As an venture operating in an International Business environment provides many new openings to a company than functioning in a home environment. An internationally operation provides an enterprise usage of new markets, resources and many other benefits, mainly it also widens the options of strategic movements of the firm against its competitors. Let's discuss the reason why for the companies becoming a Multinational corporation elaborately.

The Eclectic Paradigm

An effective approach to the study of the internationalization of business was provided by John H. Dunning. The Eclectic paradigm was a dominating framework for detailing the explanation for the lifestyle of Multinational companies and the determinants of overseas immediate investment.

Dunning mentioned three factors to the eclectic paradigm

i. Ownership-specific advantages

The enterprise which invests in a international country has a competitive advantages and out-competes the companies that operate in the united states where the investment is done. The multinational enterprise has advantages of Intangible belongings like trade name, brand, and patents. The company has advantages of reputation, technology and skills of management.

ii. Location-specific advantages

This advantage is based on the geographical position of the company; according to this many positive factors like resources, cheap labour, host country's legislation and political stability are for sale to the multinational enterprises.

iii. Internationalization-specific advantages

When a company enlarge its procedures internationally, by acquiring the property of the property that are abroad its get this internationalization gain. The company gets a new market, reduces the production cost and will keep its skills and capabilities internal to the firm.

The Product life cycle theory

The product life circuit theory was framed by Raymond Vernon, this illustrate that initially stage of the product life routine the production and all of those other operations of the merchandise takes place in the home country. First the product will be portion the neighborhood market and then world market, when the product gains reputation the production gets relocated in foreign countries to get from lower labour cost and the other benefits available in sponsor nation. At a spot of time the united states which invented the merchandise becomes an importer of this product. The very best example because of this is the technology and creation of personal computers by IBM. This is also an important cause for firms to become multinational enterprise.

The Internationalization theory

The market imperfections approach to Foergin immediate Investment is normally known as internalization theory. The Internationalization theory was developed by Buckley and Casson. This theory declares the main factors behind which the businesses become a multinational enterprise due to market imperfection. Because of market imperfections, the monopolistic advantage of the firm may be used to widen worldwide to again competitive gain. A company overcomes market imperfections by creating its market by the method of internalisation through this the companies become a multinational companies.

Resource seeking

The firms develop into a multinational enterprise to seek and secure natural resources like raw materials, minerals and individuals resource. This can help the firms to lessen the labor cost and development cost.

Market seeking

The multinational enterprises emerge to identify and exploit new market segments for their products. This process is accompanied by the businesses to beat trade barrier and also to reduce high move cost.

Efficiency seeking

The firms try to enlarge globally to obtain the efficiency benefits they obtain from the host country like cheap labour make, for example multinational enterprise obtain low priced but labour extensive making in many Parts of asia.

Capabilities seeking

The businesses follow strategic businesses by buying existing organizations or assets in foreign countries, this can be an way by the company to get adequacy to be able to preserve and improve its competitive position internationally. These are the major reasons for a firm to become a multinational venture.

How businesses become multinational organization?

Once a company take on Foregin Direct Investment(FDI) it turn into a multinational organization, a multinational companies have substantial immediate investment in foreign countries. FDI (Foreign Direct Investment) identifies the permanent contribution like management, relationship, technology transfer and etc. , between a overseas country and a host country. FDI has turned into a vital accept of global current economic climate, many nations liberalized the rules for FDI and numerous web host economies has have reduced trade barriers for foreign countries to do business in their land.

When a company decides to enter foreign market and develop to become a multinational venture then mainly there are six different settings to enter in.

Joint venture

Establishing a joint venture with a overseas firm has been a feasible setting of enter to the globe market. Setting up a company that is jointly held and handled by two or more firms is called as joint venture. A firm can gain advantages from an area partner's understanding of the host country's competitive conditions, culture and politics system. Through this jv a firm can gain by showing development cost and high risk of coming into a overseas market with the local partner.

Wholly Owned or operated Subsidiaries

When company owns 100 percent of the stock then it is referred to as wholly owned subsidiary. If a company wants to compete based on its technology then this would be the most preferred entry setting. Many high-tech firms prefer this method of accessibility for overseas growth. Building a wholly possessed subsidiary in a foreign market can be done by establishing a new procedure for the reason that country or by acquiring a recognised firm and using that organization to operate.


Licensing is very attractive way for the companies which lack capital to build up overseas operation. Licensing is an arrangement by a firm to grant the privileges to intangible property to some other entity for a time frame and in exchange a cost is recharged by the licensor. The benefit of licensing would be that the firm does not need to tolerate the setup cost and risk involved with opening a international market.


Franchising is actually a particular form of licensing where franchiser markets the intangible property and offer business assistance to the franchisee. The best example for a firm using franchising strategy is McDonald's. Employing this a company can build-up a global procedure quickly at an inexpensive and risk.


Most of the companies start their internationalization as an exporter. Exporting reduces the expenses of establishing creation operation in the sponsor country. By manufacturing the product in a centralised location and exporting it to world market; the organization may get the picture of substantive range economies from its global sales quantity.

Turnkey Projects

This is a way of exporting process technology to foreign countries. Under turnkey task, for a international client the builder designs, construct the complete manufacturing unit and also teach the operating personnel. After doing the agreement, the service provider hands over the key to a plant that is ready for full procedure hence this process is named turnkey. Turnkey jobs are normal in substance, petroleum refining and steel refining industries, which require costly, complex creation techniques.


Abstaining nationwide trade obstacles and advancement in communication, information, and transport technologies are the primary factors which influence the development towards internationalization. These changes have enabled organizations to use worldwide and emerged different nations market into an individual global market. The features of the growing global current economic climate should be utilised for the welfare of the people all around the globe.


Buckley, P. J. and Ghauri, P. 1993. A Theory of International operations: The Internationalization of the firm-A Reader, pp 45-50.

Elkahal, S. 1994. The Internationalization of trade: Release to International Business, pp. 65-70.

Hill, C. W. L. 2000. Accessibility strategy and tactical alliance: International business-competing in the Global Marketplace, pp. 426-448.

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