WHY LOCAL COMPANY BECOMES MNE?

MNE: Multinational Enterprise is a corporation that is registered in more than one country or which
functions in more than one country. A corporation that maintains assets and operations in more one
country.

Local Company: A company which provides goods or services to a local population. Though most often
used when referring to a locally-owned business, the term may also be used to describe a franchise or
corporate branch operating within a local area.

Example: Nike, Coca-Cola, Wal-Mart, BMW

Characteristics of MNC

1. World Wide operation

2.Creat maximum Operation
3.Advanced Technology.
4. High Efficiency.
5. Monopolistic Market
6.Product/service organization
7.Ownership and control.

Reasons to become MNE:

5 core drivers:

Political
Technological
Market
Cost
Competitive
Other reasons:

1. Market expansion produce in foreign markets either to satisfy local demand or to export to
markets other than their home market. US automobile firms manufacturing in Europe for local
consumption are an example of market-seeking motivation.
2. Raw material seekers extract raw materials whatever they can be found, either for export or for
further processing and sale in the host country. Firms in the oil, mining, plantation and forest
industries fall into this category.
3. Production efficiency seekers produce in countries where one or more of the factors of
production are underpriced relative to their productivity. Labor-intensive production of
electronic components in Taiwan Malaysia and Mexico illustrates this motivation
4. Knowledge seekers operate in foreign countries to gain access to technology or managerial
expertise. For example, Germany, Dutch and Japanese firms have purchased US located
electronics firms for their technology.
5. Political safety seekers acquire or establish new operations in countries that are considered
unlikely to expropriate or interfere with private enterprise. For example, Hong Kong firms
 invested heavily in manufacturing, services and real estate in the United States, Canada and
Australia in anticipation of the consequences of China's 1997 takeover of the British colony.
6. Economies of scale. Exporting is an excellent way to expand your business with products that
are more widely accepted around the world. In many manufacturing industries, for example,
internationalization can help companies achieve greater scales of economy, especially for
companies from smaller domestic markets.
7. Increase innovation. Extending your customer base internationally can help you finance new
product development
8. Improve profits. Many export markets are not as competitive as the U.S. and therefore price
pressures are far less ever wonder why a Jaguar car made in Coventry, England costs more in
Coventry than California? It is common practice for U.S. products to be sold at a higher price
(and margin) in many export markets software translated into German is much appreciated by
users in Germany and they will become loyal customers and pay a premium. A U.S. company will
often enjoy a far less competitive landscape if it goes to the trouble of localizing.
9. Competitive Strike. Market entry can prompt not by the positive characteristics of the country
identified in a market assessment project, but as a reaction to competitors moves. A common
scenario is market entry as a follower move, where a company enters the market because a
major competitor has done so
10. Government Incentives (i.e., cash). It is common for governments to incentivize their
countrys companies to export. This often results in many companies entering markets they
would otherwise not have tackled. The U.S. government offers a wealth of help when a
company decides to begin exporting.
11. Short-term security. Your business will be less vulnerable to periodic fluctuations and
downturns in the U.S. economy and marketplace.
12. Long-term security. The U.S. is a large, mature market with intense competition from domestic
and foreign competitors. Additionally, the U.S. currently has excess capacity so international
business trade may become a necessity if you want to keep up in an increasingly global
marketplace and enjoy the potential for cost savings
The challenges of becoming a MNC:

PROXIMITY TO THE TARGET MARKETS AND TO THE CUSTOMER

GLOBAL MANAGEMENT CONSTANTLY CHALLENGING.
SELF-DISTRIBUTION OR ASSISTANCE FROM DISTRIBUTORS?
THE VOLATILITY OF RAW MATERIALS REQUIRES DAIL ADJUSTMENT.
IDENTIFYING OPPORTUNITIES FOR BUSINESS DEVELOPMENT
PRESERVING THE STATUS QUO WHILE STRIVING FOR PROGRESS
 DIFFERENCE BETWEEN LOCAL COMPANY AND MNE?

Multinational Local Enterprises

Enterprises (MNEs)

Operating subsidiary located in Foreign countries Within the country

Headquarters All over the world In the country

Owned by Domestic and foreign shareholders Domestic shareholders

Managed from Global perspective Perspective of a single country

International Activities MNEs Local firms (export and import)

International risks Yes Yes

Faces major risks Foreign exchange risks and political risks Foreign exchange risk, credit risks

Other risks Like domestic but with complexities Cost of capital sourcing debt and equity, capita
credit analysis

Top management From Origin County Local

Talent Acquisition Best talent Moderate talent

Intervention with govt. Yes Occasionally

Market Broader and more expansive Narrow as within one country

Budget Comparatively big budget than local company Small budget

Human resources Managing people is more complex Comparatively simple than MNE
BOP Example:
The balance of payments (BOP) reflects all payments and obligations to foreigners vs. all
payments and obligations received from foreigners. It's a record of all financial flows in and out
of a country. In the United States, the Bureau of Economic Analysis calculates the BOP.

The BOP helps economists and analysts understand the strength of a country's economy in
relation to other countries. For example, a country with a large trade deficit is essentially
borrowing money to purchase goods and services, but a country with a large trade surplus is
doing the opposite.

In some cases, the BOP correlates with the country's political stability because it is indicative of
the level of foreign investment occurring there.

For example, if Americans buy automobiles from Japan, and have no other transactions with
Japan, the Japanese must end up holding dollars, which they may hold in the form of bank
deposits in the United States or in some other U.S. investment. The payments of Americans to
Japan for automobiles are balanced by the payments of Japanese to U.S. individuals and
institutions, including banks, for the acquisition of dollar assets. Put another way, Japan sold the
United States automobiles, and the United States sold Japan dollars or dollar-denominated assets
such as Treasury bills and New York office buildings....

Transaction within Current account:

The current account measures all transactions (other than those in financial assets and
liabilities) that involve economic values and occur between resident and non-resident entities. It
also includes offsets to current economic values provided or acquired without something of
economic value in exchange.

Merchandise Trade: Merchandise trade only includes trade in tangible goods, not
services nor capital transfers and foreign investments. Official merchandise trade
statistics measure the level, month-over-month and year-over-year changes in total
trades, exports and imports. Balance of merchandise trade is equaled to
total exports minus general imports. The balance of trade can be a "favorable" surplus
(exports exceed imports) or an "unfavorable" deficit (imports exceed exports). The
official balance of trade is separated into the balance of merchandise trade for tangible
goods and the balance of services

From US Perspective, imports of Nokia phones from Finland (-) export of ipods to
France (+)

***Balance of trade

Income receipts: (also called factor services) records payments for the use of factors of
production, including loans. Examples are interest and dividend payments.
 Fage yogurts US subsidiary makes profits and rebates them to Greece (-) Dividends for
US Bondholders of German stocks (+)(From U.S. perspective)

Services: exports - imports of services. (Non-tangible) Services are purchases and sales of
intangible items like tourism or transportation. You dont have to ship them and you cant store
them. In a broad sense services are products other than physical goods. There are two
differences between goods and services:

There is no physical object over which ownership rights can be established

A service cannot be traded separately from its production.
The production of a service is linked to an arrangement made between a producer in one
economy and a consumer in another economy prior to the time that production occurs.

From U.S> perspective, Drinks in Paris Bar (-) German tourist watching Broadway (+)

Bank, Insurance Company, shipping Raw materials.

Transfers: Transfers are basically gifts. The difference between transfers and
everything else is that transfers record money flows that are not exchanged for
anything. They include:

Official transfers,(+/-) which are mainly between governments, like foreign aid

Private transfers, which are mainly between individuals, like

remittances.(+)..ItalyEgyptIndia

Travel:

Medical:

Education:

Hajj:

From U.S. perspective Charity gift to Haiti (-) Greek sends money to relative in the US
(+)

***Balance of Current A/C

Transactions within the Capital and Financial
Account:
The capital account is part of a country's balance of payments. It measures financial
transactions that don't affect a country's income, production or savings. These transactions are
all non-produced, nonfinancial assets. They might produce an investment stream in the future.
In that case, they would be included in the financial account. They might eventually produce
income from goods or services. When that happens; they would be counted in the current
account.

The capital account includes international transfers of ownership. A great example is when a
U.S. company purchased a foreign trademark. It doesn't immediately produce a product or
income. A similar example is if a U.S. oil company bought drilling rights to an overseas location.

Another example is a foreign purchase of a U.S. copyright to a song, book or film. International
debt forgiveness is another example.

A cross-border insurance payment could be very large, but it only occurs occasionally.
Therefore, it goes into the capital instead of the current account.

Capital Account:

Capital transfers: Capital transfers that result in a change in the

stock of assets. Minor items non-financial non-produced (e.g.
copyrights etc.) C.T. means unrequited transfers of an asset of some
kind

Transfer of title to fixed assets, debt forgiveness, etc.:

***Balance of capital A/C

Financial Account:

Direct Investment: (+/0) Foreign Direct Investment, the purchaser is

acquiring an ownership stake of ten percent or more, big enough to
provide a voice in management. The key feature of foreign direct
investment is that it is an investment made that establishes either
effective control of, or at least substantial influence over, the decision
making of a foreign business.

Portfolio investment: (+) less than 10% share of foreign investor. Portfolio
investments are investments in the form of a group (portfolio) of assets, including
transactions in equity securities, such as common stock, and debt securities, such
as banknotes, bonds, and debentures.

Other investment: Other Investment is where bank lending shows

up. Trade credits and all other types of long-term and short-term
 borrowing abroad (except securities), including IMF credits and bank
credits (development corporation)

International monetary reserves:

Foreign assets under the control of the central bank
Monetary gold
SDR assets
Reserve position of the country in the IMF

****Balance of financial account:

Errors and Omissions:

Complete recording of transactions is impossible
Errors and omissions reflect the statistical discrepancy of recording the BOP transactions:
Difference between recorded credit statements and recorded debit statements
Reasons for errors and omissions:
Incomplete recording of transactions between residents and non-residents
Tax evasion
Time discrepancy between the occurrence of the transaction and its settlement
Unregistered international merchandise trade
Incomplete data about the escape of capital and about the financial transactions
in offshore centers

Overall balance:
Overall Balance is Current Account plus Financial Account plus net Errors and Omissions

ADD: Reserve Assets:

Are assets owned by the nations central bank, which it sells to come up with more foreign
exchange, or buys when it accumulates foreign exchange.

***Balance of payment***=0