The most common form of international trade remains exporting, either directly into a foreign market or indirectly using agents and distributors based in that market. There are, though, limitations on export opportunities -there may be restrictions such as tariffs and quotas imposed on exporting by the recipient country, and also, on occasions, from the home government itself (as, for example, on arms sales to certain countries). There may also be political reasons why one country, whatever the economic benefits, would not trade with another country. In addition, the logistics of exporting certain products, such as bulky machinery, may mean that it is more economical to produce the goods closer to the markets.
Developments whereby companies get increasingly involved with the foreign market include:
- Management contracts, whereby a company sells its management expertise to an overseas company in exchange for a level of fees, often in conjunction with a licensing agreement, involve minimum investment.
- Licensing, which may be used when penetration of the overseas markets needs to be fairly rapid, where the political risk is high, and when the company does not wish to invest large amounts of money. It may also be used when it is difficult to invest directly in a country or the remittance of funds to the parent is difficult. There are, however, disadvantages to licensing -quality may suffer, profits may not be very high and there is the risk of producing a competitor both in the overseas market and (via export) in other markets.
It can be noted that there has been an increasing globalization of capital markets, allowing organizations to raise and trade capital relatively easily in overseas countries. This globalization has allowed a significant increase in foreign direct investment (FDI). These opportunities for FDI have allowed a significant growth in the development of multinational companies. There is no standard definition of a multinational company (MNC), but a working definition is: “an enterprise which owns or controls subsidiaries, service or production.
Facilities, in countries outside of that in which it is based”. The basic form of MNCs is a parent or holding company and several (wholly or partly) owned subsidiaries and sub-subsidiaries. You should note that it is control and/or ownership that is important in determining whether a company is an MNC -a company which merely imports/exports goods and/or services is not a multinational company. Where only a few countries are involved in the firm’s operations, the company is generally referred to as an international company, but when its operations span the globe it is typically referred to as a multinational company. The countries in which the subsidiary or facilities are based are known as host countries. MNCs are growing in number and size, with increases in output nearing 20% per annum. Whilst there are some medium-sized MNCs, there are also some very large companies (e.g. Ford) which have GNPs larger than several countries. Multinational companies include the Western world’s largest companies; their operations span the globe and they generate the bulk of international trade.