Internal vs. Foreign Markets: Multinational Companies

Internal vs. Foreign Markets

Develop internal markets within a country's natural geographic barriers. While foreign markets undergo internationalization (all productive or commercial activities in a context of globalization), the company performs outside its natural geographic markets. There are different degrees of internationalization:

• Exporting
• Direct investment (sales subsidiaries and production subsidiaries)
• Contractual arrangements for international cooperation (licensing, franchising, joint ventures, export consortia)

The Multinational Company

A multinational company is one that is not only established in its country of origin but also in other countries to conduct its business activities, including sales, purchasing, and production.

Benefits of Multinational Companies

• Employment generation
• Innovation: concern for R&D
• Concern for quality, ICT, human resources, etc.
• Political stability for the country in which it is installed
• In many cases, results in social change: education, health, participation of women, etc.

Disadvantages of Multinational Companies (Purely Economic Approach)

• The effects of local unemployment it generates
• Exploitation of natural resources without dealing with the externalities they produce with their activity
• Failure to reinvest profits in the community
• Non-competition on equal terms as governments, aware of the effects on the global economy, work to help with grants, contracts, etc.

As a result of multinational operations, relocation arises. This is the movement that some companies, often multinationals, make to move their workplace from developed countries to countries with lower costs, usually in the developing world.

Advantages and Disadvantages of Relocation

Advantages

For the Country of Origin

• Cost reduction, especially due to the lower price of labor. This is the main reason for companies to relocate.
• Relocated businesses can divert attention and efforts from mechanical tasks and focus on actions that have positive effects in their country of origin.
• Workers acquire a higher level of skill and expertise.
• Improved competitiveness of human resources.
• Improved ICT to facilitate better communication.

For the Recipient Country

• Increased export earnings.
• Job creation.
• Higher wages.
• Workers acquire a higher level of skill and expertise.
• Improved competitiveness of human resources.
• Improved ICT to facilitate better communication.

Disadvantages

• Withdrawal from the market.
• Lack of personal contact with customers.
• Lack of confidence from suppliers (due to culture, tradition, etc.).
• Lack of international recognition of qualifications.
• Importing country's technology gap in services.
• Differing legislation and business regulations across countries.
• Rising costs and transaction times in different services.
• Social issues in the country of origin, leading to concerns when there are layoffs or job uncertainty. This results in "drastic measures" in human resource policies to save jobs, a poor image, and a lack of confidence in the company and the overall system. This is also because there is a possible transfer to other places to find work and the need for rehabilitation and retraining. Therefore, the transition is not as simple as it may seem at first.