IGCSE Business Studies - 6.2.2 Multinational Companies - Advantages

Introduction

Multinational companies (MNCs) are businesses that operate in many different countries. They have a global presence and often have operations in multiple continents. This section will explore the key advantages that a business gains by becoming an MNC.

Advantages of Becoming an MNC

1. Economies of Scale

One of the primary advantages of being an MNC is the ability to achieve economies of scale. This occurs when the average cost of producing goods or services decreases as the quantity produced increases. MNCs can benefit from:

• Bulk Purchasing: Negotiating lower prices for raw materials and components due to large order volumes.
• Specialisation of Labour: Dividing production processes into smaller, more specialised tasks, leading to increased efficiency.
• Technological Efficiencies: Investing in advanced technology that can be spread across a larger production base, reducing per-unit costs.
• Marketing Efficiencies: Lower marketing costs per unit due to wider distribution and brand recognition.

The formula for Average Total Cost (ATC) is: $$ATC = \frac{Total \, Cost}{Quantity}$$

By increasing the quantity produced, MNCs can lower their ATC, making them more competitive.

2. Access to New Markets

Becoming an MNC provides immediate access to new and potentially lucrative markets. This allows the company to:

• Increase Sales Revenue: Expand the customer base and increase overall sales.
• Reduce Reliance on Domestic Market: Diversify revenue streams and reduce vulnerability to economic downturns in a single country.
• Capitalise on Market Demand: Meet the specific needs and demands of different consumer markets.

This market expansion can lead to significant growth and profitability.

3. Resource Availability

MNCs can access a wider range of resources globally. This includes:

• Cheaper Labour: Locating production facilities in countries with lower labour costs.
• Raw Materials: Accessing raw materials that may not be readily available in the home country.
• Specialised Skills: Recruiting employees with specific skills and expertise from around the world.
• Financial Resources: Accessing capital from international financial markets.

This access to diverse resources can improve efficiency and competitiveness.

4. Reduced Political Risk

Diversifying operations across multiple countries can reduce the risk associated with political instability in any single nation. If one country experiences political turmoil, the MNC can continue to operate in other stable markets.

This diversification provides a level of protection against unforeseen events.

5. Tax Advantages

MNCs can potentially take advantage of tax incentives and favourable tax regimes offered by different countries. This can lead to lower overall tax liabilities and increased profitability. However, this area is subject to complex international tax laws and regulations.

6. Transfer of Technology and Knowledge

Operating in multiple countries facilitates the transfer of technology, knowledge, and best practices between different subsidiaries. This can lead to:

• Innovation: Sharing ideas and developing new products and processes.
• Improved Efficiency: Adopting efficient operational methods from different locations.
• Enhanced Expertise: Developing a more skilled and knowledgeable workforce.

This knowledge sharing can boost overall competitiveness and innovation.

Summary

Becoming an MNC offers significant advantages to a business, including economies of scale, access to new markets, resource availability, reduced political risk, tax advantages, and the transfer of technology and knowledge. However, it's important to note that being an MNC also presents challenges, such as increased complexity in management and coordination.