How Differences in Cultural, Legal, Political and Economic Factors Affect Multinational Companies - Coursework Example

FACTORS AFFECTING MNCs Student’s name Professor’s name Course title Date Introduction When a business decides to go global in terms of business operations, it is important to consider changing the manner in which it undertakes its business operations. Achievement of objectives is contributed by different factors. Taking businesses to an international level entails proper planning, analysis and ability to take not only risks, but the ability to take calculated risks. A multinational company is a company that undertakes its business operations beyond the boundaries of a nation. However, before going global in terms of business operations, it is important to consider how cultural factors, legal factors, political factors and economic factors affect business operations. Multinational companies should understand how culture affects their business operations. Different cultures necessitate that businesses be undertaken differently. For example, different cultures negotiate for business dealings differently (Acheampong and Kumah, 2012). Legal factors like taxation rules affect business operations in terms of reduced profitability. This essay, therefore seeks to explain how differences in cultural, legal, political and economic factors affect Multinational companies. How differences in culture affects international businesses When a business decides to take its operations to international levels, it must consider changing its method of doing business. One of the factors a business entity should understand is the difference in culture. According to Mohe (2008), culture refers to a trend that shows assumptions held by a given society with respect to religion, ethics, forms of communication as well as social characteristics. With respect to international business operations, culture is an important aspect to consider. Differences in culture most at times affect the way business transactions are carried out besides also affecting business negotiations. For example, because McDonalds like adding pork into their menu in order to attain growth, McDonald had to change what to produce in India because for a fact, Indians and Muslims do not eat pork. Most often, in an attempt to attain a common business goal through negotiations, different business leaders approach the issues of negotiations differently. For example, business leaders of businesses doing operations in countries like Spain, US and parts of European nations, approach negotiations from a perspective where leaders seek fast closure to meeting set objectives (Görg et al., 2009). However, in other countries like Asia, Business leaders there engage in very lengthy stages of negotiations with an aim of solidifying partnerships before engaging in actual business operations. Culture, additionally affects negotiation strategies and other outcomes. For instance, in other countries, business negotiators approach negotiations from a win-win perspective, whereas other approach it from a win-lose perspective. According to Kurian (2015), successful business negotiations require not only an understanding of communication techniques, but also a clear understanding of the context in which the negotiations are being done in order to enter into profitable business contracts. Cultural differences affect engagements in business deals which consequently affect sales and profits in the long run. In fact, a study that was conducted by Mohe (2008), proved that a multinational company present in different cultures will always experience a smaller gap in terms of culture compared to a business operating in few different cultures. Additionally, the study notes that the result of the bridged gap is the learning experienced in different cultures. Culture affects the way in which employees relate with one another (Caligiuri, 2014). Understanding cultural diversity helps in rational decision making. The main reason why a business entity decides to take its business operations beyond the boundaries of a nation is to maximize profit (Acheampong and Kumah, 2012). Therefore, in order to achieve this, a company must understand the culture in the host country. Multinational companies benefit both the host country and the mother country. Multinational companies benefit the host country in terms of increased economic growth and technological advancement, whereas in the mother country, Multinational companies contribute to economic development through repatriation of profits. How legal differences affects international businesses The legal or rather the regulatory environment affects business dealings in any form of business. Businesses undertaking their operations at international levels are not an exemption too. For example, in India, Coca-Cola’s bottling plant was fully closed by the government in the year 2005 because of a regulation that was imposed by the Indian government in relation to water and beverage bottling. Among legal things that affect business is taxation. Governments usually impose taxes and other regulatory measure in order to promote economic growth besides shielding citizens from exploitation (Miller, Cross, and Hollowell, 2006). An understanding of legal regulatory measures helps in a adapting to the business environment and undertaking an account of activities in different regions Tax coding varies from one country to another and from one region in a country to another. Others support business operations, whereas others restrict the manner in which business operations are undertaken. Whenever taxes imposed are too high, sustaining operations in such countries becomes hard. High taxes affect production, sales and profits. Production costs increase which in turn means that, in order to break even, selling prices should be increased. Consequently, when selling prices are increased, sales revenue reduces which leads to reduced profit margins. Another legal factor affecting business operations is trade policies. They include monetary policies, government policies, and property rights policies, to name just but a few. According to Miller, Cross, and Hollowell, (2006), legal factors can either favor or kill business growth, especially in the case of multinational companies. For instance example, in certain countries like Iraq, trade policies affect how business activities are undertaken freely in certain areas. Operating under strict business policies leads to reduced business operations, which consequently lead to reduced profitability. How political differences affects international businesses The successful undertaking of business operations necessitates that operations be undertaken in a peaceful environment. Political stability boosts business operations in terms of creating a conducive environment for employees (Campisi and Caprioni, 2016). The conducive environment leads to increased productivity and consequent increase in sales. For example, parliaments in some countries can exert some form of pressure on the government to restrict establishment of businesses where some businesses are established whereas others are closed. For example, The India parliament passed a legislation to close environment polluting companies and a Coca-Cola bottling plant ended up being closed because of pollution issues (Mouriuen, 2007). It is therefore important to understand the role the government plays in creating and sustaining stable business environments. A good government encourages the growth of businesses by not allowing politics to intervene (Kline, 2005). There are various political elements affecting business operations. Firstly, environmental regulations affect business operations. The government can stipulate issues regarding how waste materials must be disposed and therefore an understanding of the regulations by international businesses is crucial. Secondly, bureaucracies vary from country to country and an understanding of the same is important especially for international businesses. Thirdly, regulations governing competition vary from government to government. Some governments stipulate the number of firms to operate in an industry, whereas others do not. For example, in some countries, services offered in certain industries should be monopolized while in other governments, open market systems are preferred (Kline, 2005). An open market system is where the factors of production are not owned by the state and prices in the market are freely dictated by forces of demand and supply. How Economic differences affects international businesses In international markets, the rate of economic growth affects business operations in terms of the demand and supply of goods and services. However, it is worth noting that the rates of economic growth vary from one country to another, with other countries experiencing high economic growth and others experiencing low economic growth. For example, the 2010-2012 Eurozone debt crisis led to slow economic growth in most European countries. However, in other European countries, the crisis led to economic growth (Boyle and McDonnell, 2013). This therefore means that the differences in economic growth affect different Multinational companies differently. An understanding of how such differences in economic factors affect business operations is important. Interest rates being one of the economic factors have an influence on business operations. When interest rates increase, the cost of production increases, which consequently leads to reduced sales revenue and profits (Boyle and McDonnell, 2013). Additionally, changes in exchange rates affect the profitability of business operations. Because there is need to prepare accounting statements, the principle of money measurement and consistency requires that the books of accounts be prepared in a common currency. In the process of translating profits and other monetary transactions from one currency to another, losses may be incurred. This therefore affects business operations. Therefore, since multinational companies have operations in different countries, for purposes of accounting and consolidation, it is important that translation of profits and other business operations be made from one currency to another currency. However, in the course of translation, a loss can be incurred. This negatively affects business profitability and reduces investor confidence in the business. Conclusion The understanding of the impacts of cultural differences, legal differences, political differences and economic differences are important in successful execution of business operations. Cultural differences, apart from affecting how business negotiations are done, affect how employees deliver too. When business operations reduce because of either affected negotiation powers or employee deliveries, the general performance of the company is affected. Reduced business operations lead to reduced profitability. Legal factors, being restrictions mostly imposed by the government, contribute to either economic growth or economic decline. This is because the laws passed by parliaments of different countries can either favor the growth of multinational companies or prevent their growth. For example, multinational companies operating in the Middle East countries are prone to experiencing difficulties in operations because of political instabilities. Economic factors like interest rates, inflation and exchange rates affect performances of multinational companies because of risks of reduced profitability. Therefore, from the essay, it is evident that cultural, legal, political and economic differences affect multinational business operations. Bibliography Acheampong, G and Kumah, B 2012, ‘Impact of firm-level factors and market entry mode on performance: A study of service MNCs in an emerging economy’. Management Science Letters, Vol. 2, no. 2, pp. 631–646. Boyle, B and McDonnell, A 2013, ‘Exploring the impact of institutional and organizational factors on the reaction of MNCs to the global financial crisis’, Asia Pacific Business Review, Vol. 19, no. 2, pp. 247–265. 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