Why Multi-National Companies Might Choose to Locate the Various Stages of Design, Development, and Production - Essay Example

The Role of Trade and Location Theory in Multinational Companies By + Introduction The role of multinational companies in conducting international trade has developed over time and has grown in large proportions. The last decade has seen significant developments in international trade economics. These developments have been attributed to major improvements in the way multi-national companies approach their production and marketing strategies to capture a wide market base and boost sales. Among these new trade theories, focus has been invested in the location of the economic activity and, particularly, the factors influencing these companies to choose specific countries for development, design, production, and marketing their products. Immediately after the industrial location theory captured the attention of economists, the latter began to ask specific questions about the approaches that multi-national companies use to integrate this theory into their businesses (Mayer & Gianmarco, 2007). These corporations have mainly focused on modelling their activities to be at par with the cost of inputs at the firm level, market size, economies of scale at the firm level and on shipping and other spatial as well as non-spatial transaction costs. This report elaborates the factors influencing multinational corporations to operate in various countries, the factors that determine the location of production facilities and the reasons why these corporations find it convenient to put up foreign facilities instead of operating locally with fellow producers. 2. Trade and Location Theory When it comes to the new trade and location theory, with focus on smartphone companies, emphasis on specialization and trade has always been driven by two main factors. First, fixed and exogenous features caused by the comparative benefits of factor endowment and second, the advantages originating from dynamic and endogenous features associated with increasing returns. The most important questions addressed by the location theory revolve around the producers of certain smartphones in specific locations and why the locations were chosen. For instance, as government policies always try to shift production, these companies must first scrutinize the basis for the primary location decisions to understand the effect of shifting incentives. As technological advancement in the smartphone business has gone global and it is the main mobile device to lookout for, the prices of these devices have come down and sales volumes are increasing rapidly. This has forced most smartphone companies to shift their manufacturing bases as well as niche markets to increase sales volumes and reduce their transportation costs. This modus operandi is attributed to the fact that mobile Internet access has increased and this surge in Internet accessibility has opened up doors for innovation. For example, Chinese smartphone companies have secured their market base within the borders of Africa while their production house is based in China. They have decided to launch Internet-enabled smartphones to help satisfy the growing demand for these products. Research from their sales statistics show that most smartphone buyers are aged between 17 and 35 and African youths have proved to blend in with the unique features of the smartphones (Mulupi, 2014). 3. Foreign Direct Investment Foreign direct investment (FDI) happens when a firm from a particular country acquires an operating stake, which is usually 10 percent, in an enterprise in another country. It can also take place when a financial flow arises between companies that come from different countries interrelated through ownership. The comparison between the two countries is done by verifying regularities in the countries from which the FDI is sourced and countries that receive the FDI. FDI illustrates measure changes in the assets of governing interests in equity capital between countries. By grouping flows over time by country, it is easy to obtain crude measures of how significant countries can host parent firm operations also known as outward stocks, and as hosts to partner operations (inward stocks). The figures below illustrate inward and outward FDI stocks for a large number of countries. In the left panel, the logarithm of FDI stocks seized by the sending country and regularized by the sending country’s GDP is plotted against the logarithm of the sending country’s GDP per capita. In the right panel, the receiving country plots the stocks of inward FDI held by the receiving country, normalized by receiving country GDP, against the logarithm of GDP per capita. In both panels, the most accurate linear predictor is shown as a line with the related coefficients displayed in the bottom right corner. Figure 1: Aggregate FDI Stocks and Development Source: (Tintelnot & Felix 2012) These statistics demonstrate that developed countries are more involved in both inward and outward flows than less developed countries, however the constructive relationship is much more noticeable for outward flows. The outliers in both figures demonstrate some of the deficits of FDI data as an analysis of real production activity. For instance, Liberia, Singapore, Hong Kong and Luxembourg have extraordinary levels of both outward and inward FDI stocks which reveal, in part, companies’ efforts to place ownership of worldwide assets in weak-regulation and low-tax countries (Yeaple & Stephen, 2012). 4. Host Country Policies The policies governing trade within a foreign country have a big impact on the production and marketing of the product. Obvious policies like corporate tax rates have a major impact on its desirability since it affects the overhead costs of multinational companies. This leads to uneven amounts of Foreign Direct Investments (FDI) which are comparative to the Gross Domestic Product (GDP) in low-tax countries like Ireland and high-tax countries like the Cayman Islands (Barefoot, Kevin & Raymond, 2011). On the other hand, a few countries put limitations on FDI by restricting wholly-owned companies from demanding technology transfer, regulating the repatriation of profits, and delegating a certain share of value-added be manufactured in the local market. With all other factors equal, states with more preventive policies toward FDI seem less attractive for FDI. Despite a worldwide inclination to the liberalization of procedures towards foreign direct investment, restrictions still exist in different ways in almost all countries (Nunn, Nathan & Daniel, 2012). Other characteristics of the policy environment of a country also have an impact on its attractiveness. Labor market organizations such as their corporate relationships affect FDI flows. For example, environmental regulation, institutions for contract implementation and capital market control, and trade policy affect multinational corporations’operations (Antràs &Pol, 2012). 5. Economic Environment The location of foreign direct investment can also be determined by a country’s economic environment. Natural and human resources as well as capital, for example, gold in South Africa and high-skilled labor in China, are still some of the key determinants of FDI location choices (Mayer, Thierry & Gianmarco, 2007). The significance factors of production (land, capital, raw materials, and labor) to multinational companies’ FDI location choices is dependable with the forecasts of the location theory. Factors of production are either intrinsic or created. For instance, a country with specialized human capital in a particular business attracts large inflows of FDI. In the case of smartphones, China has highly skilled personnel in smartphone technology, which makes it possible for them to produce affordable and efficient smartphones that can beat other competitors both in terms of price and durability. The rise of specialized human capital in a particular geographical location has contributed to the growth and development of prominent domestic corporations and has eventually been supported by the entry of foreign corporations. Consequently, specialized labor in China can be considered as a factor of production that is both created and dynamic. It is created in the sense that highly skilled workers enhanced their knowledge by working at various Chinese firms, and dynamic in the sense that the opening up of more businesses in the area stretched their skill-set and inflated specialized labor groups. Another vital economic influence on FDI is the size of a countrys economy as this determines location decisions. The size of the market size can be regarded as an indirect effect on transportation costs as it mirrors the ability of a firm to grow its customer base at a relatively low cost (Elhanan, 2006). The desirability of large countries is predominantly true when the economy is both large in terms of total size (GDP), and rich in terms of GDP per-capita. In addition, economic risk also influences FDI location decisions. Countries may struggle to attract FDI if they may have experienced extremely high rates of inflation and foreign exchange rate shocks. On the contrary, countries with high debts and those with intermittent fiscal crises are characteristically not beneficiaries of large FDI inflows. 6. Firm Strategy Strategic factors that have an impact on the location choices of multinational companies consist of the necessity to locate their enterprises near key clients or customers and to locate enterprises near key competitors to monitor their actions or to discourage the entry of key competitors (Nocke, Volker, & Stephen 2007). For instance, service firms like advertising agencies frequently locate their overseas operations near key clients. This strategy reveals some essential motives underlying the firms FDI location decisions. Although policy makers and economists often deliberate FDI flows comprehensively, it is important to keep in mind that these aggregate flows signify the sum of many decisions arrived at by individual MNCs. Since firms are of different natures in both structure and managerial capacities, clearly, their own national variables will be essential in influencing where they decide to locate their businesses (Mrázová, Monika & Peter, 2012). The heterogeneity of companies suggests that all the above-mentioned characteristics of locations can never be attractive to all firms in equal measure. Advertising agencies most likely may not take much concentration about the existence of natural resources such as iron ore, and also manufacturing firms might not care about natural resources or labor when they are trying to make decisions about where to locate their businesses (Elhanan, 2006). Therefore, when centering decisions on micro mechanisms that influence location choices, recent research on firm strategy has substantial potential to shed light on which location features can be considered by what type of Multinational Corporation. Likewise, by considering different categories of location choices such as the location of manufacturing plants, this enquiry should contribute valuable awareness into the circumstances under which various location characteristics may be more or less important. 7. Conclusion This report reviews the main focus behind international trade literature on multinational companies. It clearly addresses why some firms choose to become multinational and why these firms consider foreign affiliates rather than contracting with external firms. In summary, it can be concluded that the new theories of international trade and location that is linked to the description of multinational companies and their activities (Richard E. 2007). The firms’ activities are blended with the theories to boost production, lower costs and to reach a wide range of customers. The merit of operating across diverse regulatory systems is that it may influence the pattern of location and the focus of activity, which would arise from growing returns. The factors fueling multi-nationality cannot be integrated into a pattern of centrifugal and centripetal forces since they espouse the spread of multi-nationality and thus regulatory regimes (Defever, Fabrice & Farid, 2007). Bibliography Antràs, Pol and Davin Chor 2012. Organizing the Global Value Chain,” NBER Working Paper 18163, June. Barefoot, Kevin, and Raymond Mataloni 2011. Operations of U.S. Multinational Companies in the United States and Abroad: Preliminary Results from the 2009 Benchmark Survey, Survey of Current Business, November, pp. 29-48. Defever, Fabrice, and Farid Toubal 2007. Productivity and the Sourcing Modes of International Firms: Evidence from French Firm-Level Data. 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