Multinational Company (MNCs) - A corporation with facilities and other assets in at least one
country other than its home country.
Positive aspects:
- Provide investments
- Provide jobs
- Development and infrastructure
- Transfer of technology
- Acces among countries
Negative aspects
- Decapitalization of countries
- Create income inequality
- Exploit poor workers/countries
- Shirt of responsibilities
- Dependency of countries
MNC Goals and conflicts
Goal MNC → Maximize shareholders wealth → Maximize value of entire MNC
Corporate Governance
System by which a company is directed and controlled
→ Do managers act in the best interest of the shareholders? → Agency problem:
→ Principal contracts some else (agent) to take actions on the principal's interest
→ Conflict with the agent's own interest → Incentives are not aligned.
Costs of agency problems
- Direct costs
- Monitoring agent
- Compensations of agent
- Indirect costs
- Free cash flow hypothesis
- Managers decide in favor of other stakeholders
Agency problems/costs are higher for MNC than for purely domestic companies, because:
- Monitoring of distant managers
- Culture
- Complexity of operation and communication
, Centralized/Decentralized Management
A centralized managementstyle can reduce agency costs because it allows managers of the
parent direct control of foreign subsidiaries and therefore reduces the power of subsidiary
managers. The alternative is a decentralized management; this style is more likely to result
in higher agency costs because subsidiary managers may make decisions that do not focus
on maximizing the value of the entire MNC, but ik gives more control to those managers who
are closer to the subsidiary’s operations.
Pro’s decentralized management:
- Subunit related knowledge and experience
- Higher management can focus on the bigger picture
- Efficient decision due to short chain of command
- Cultural skills
- Local network
Cons decentralized management:
- Less control
- Focus on subunit may cause suboptimal decisions
- Fragmented subunits
- Higher costs
- Inefficiencies due to duplication of activities
Absolute/Comparative advantages
Absolute advantage:
A country enjoys a n absolute advantage over another country in the production of a product
when it uses fewer resources to produce that product than the other country does.
Comparative advantage:
A country enjoys a comparative advantage in the production of a good when that good can
be produced at a lower cost in terms of other goods.
Product cycle theory
As a firm matures, it may recognize additional opportunities outside its home country.
Accommodate local demand → Accommodate foreign demand → Establish
presence in foreign country.
How to conduct international trade
- Import & export
- Licensing; provide technology like copyrights, patens and earn royalties
- Franchising: provide specialized sales or service strategy, support assistance and
initial investment and earn fees
- Joint ventures: joint ownership with foreign company.
- Acquisition of existing operations; quickly gain access/control over foreign operations
and infrastructure/market share.
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