Impact of Multinational Companies on Host Countries - McDonalds Company - Case Study Example

Impact of Multinational Companies on Host Countries Name Institution Course Date Introduction Law entails debating logic, analysing jurisdiction, protecting parties’ rights, resolving disputes, instituting proceedings etc. in relation to business, law is important when forming new businesses, interacting with private sector, government bodies and public institutions, and when partnering and forming coalitions (IBP, Inc., 2015). When businesses form a partnership, there are some factors to be taken into consideration such as profit and loss sharing, decision mechanism and ownership rights. Law is also important when companies decide to enter into international markets. There are different strategies that companies can use to enter new markets such as licencing and franchising agreement, merger and acquisitions, agency agreement and asset purchase agreement (Alexander, 2002). McDonalds Company makes use of licencing and franchising agreement when entering international markets (McDonald and Dunbar, 2013). This method has a number of advantages as well as disadvantages. The strategy has worked well for the company as it is a contributing factor to the success of the company. This paper will talk about McDonald’s, its activities, geographical presence and financial reports. The paper will also highlight the pros and cons of multinational companies and the legal structure to be considered when entering international markets. In addition, the paper will describe how multinational companies like McDonald’s tackle host government regulation and a lawsuit related to McDonalds in UAE. McDonald’s Company Description The mention of “fast-food restaurant” brings McDonald’s in many people’s mind as it is the largest food service company in the world. It has a very strong brand equity that enables it to have competitive advantage. The success of the company is attributed to the way they satisfy their customers. McDonald’s has over 30000 food outlets serving more than 47 million people every day in 100 countries (Mitchell, 2009). The company has incorporated high standards of quality, hygiene, service and value. It realises that its target markets have differing cultures and values founded on nationality and religion. To cater for all religions and values, the company offer products according to country’s preferences and taste (Herberberg and Rieple, 2008). In terms of market, McDonald’s targets the young families with children, business customers and teenagers (Pradhian, 2007). In terms of customer relation, McDonald’s has established good relationship with its customers. First, the company make sure that their products relate to its customer’s diet recommendation but at the same time ensure it maintains high quality, value and taste (Mitchell, 2009). McDonald’s utilizes franchising concept as more that 80% of its restaurants are owned by independent people. McDonald’s has four market segments; US market, Foundational Markets, huge growth market and international lead markets. McDonald’s operate in different countries such as Australia, Japan, New Zealand, United States, Africa and UAE to name a few (Merrill, 2009). McDonald’s restaurants are found in about 118 countries in total. McDonald’s Company has dramatically grown with growth in profits and revenues. McDonald’s have generated revenue in billions between 2005 and 2015. In 2009 along, the company generated approximately $22.75 billion of revenue. Over the last ten years, the company achieved peak revenue of about $28.11 billion in 2013 (Merrill, 2009). However, since 2013 peak growth, the revenue has decreased in the past last two years with $25.4 billion of revenue in 2015. The largest contribution of the company’s revenue comes from the United States restaurants. In 2015, in United States, McDonald’s generated a total of $8.56 billion. The second largest revenue contributors of the company are the international lead markets including France, Canada and Australia. They have a total of $7.62 billion worth of revenue (Merrill, 2009). From the revenue figure, it can be seen that McDonald’s is the most valuable fast food restaurant in the world. Advantages of Multinational Companies Multinational companies have some merits on the host companies. One of the merit multinational companies is research and development activities. Many countries especially those developing slowly lack extensive research and development areas (McDonald and Dumbar, 2013). Expenses incurred during research and development is very paramount for the enhancement of technology. Multinational companies are considered dynamic in terms of research and development compared to domestic companies (Schlosser, 2012). Multinational companies introduce extensive research and development to host countries and thereby promoting domestic growth in terms of technological advancement. In addition, multinational companies have profound positive effects on host countries in terms of economic, social and political growth. Multinational companies offer economic growth to host countries due to a number of reasons (Pradhan, 2007). First, they offer employment to local people and this raises disposable income of the country. In addition, the social significance of multinational companies to the host countries is reduced labour costs and operational costs. Also, their operation has the ability to change the social and political structure. For instance, multinational companies can assist in the exploitation of significant resources of a country for advancement purposes (Mitchell, 2009). Multinational companies come up with innovative products through their extensive research and development and resources availability. These companies manufacture diversified new products with huge production that serves the needs of the customers (McDonald and Dumbar, 2013). The customers also receive a wider choice of goods and services sometimes better than the substitutes. In addition, multinational companies offer marketing, technology and financial superiority. These companies generate financial resources in one country and utilize them in another (McDonald and Dumbar, 2013). Most at time, they have disposable capital compared to local companies that they can use to enhance and develop a host country and access external markets. Multinational companies also improve the balance of payment of the host country. The investment brought into the country is the direct flow of capital and leads to import substitution and enhancement of exports (McDonald and Dumbar, 2013). Enhancement of exports is due to the use of production facility for exporting. Host countries also benefit from tax revenues generated from multinational corporation’s operations. The profits generated by multinational corporations are subject to taxation which is a source of government revenue that enhances economic growth (Mitchell, 2009). The presence of multinational companies enhances the reputation of the host country and establishes it as a suitable location for additional foreign investments. Disadvantages of Multinational Companies There are a number of disadvantages that multinational corporation bring to the host countries. Multinational corporations have environmental impacts on the host countries (Pradhan, 2007). The companies produce cheap and efficient products with not always the best environmental practices. Most multinational companies have brought about negative environmental effects to different countries. They also bring about intense competition. Competition impacts can be severe since they affect the local upcoming companies. They offer quality products and services compared to most local companies and this often increases their customers (Pradhan, 2007). Multinational Corporations also causes political pressure and influence. Multinational companies often offer investment to countries that are beneficial and this often offers them a lot of influence over the government in the host country. As a result of their economic and social significance, governments often agree with the changes that at times are not beneficial to the welfare of the citizens (Schlosser, 2012). In addition, multinational Corporations may have negative cultural and social impacts. They have the ability to dilute the customs and cultures of the host countries. For instance, according to a research conducted in the developed countries, there has been an increased standardization and the shift away from traditional foods to unhealthy restaurants found in the fast-food restaurant (Schlosser, 2012). Multinational corporations also are accused of exporting profits from eh host countries. They sometimes repatriate profits to their home country and leave the host country with financial deficits. Multinational companies may bring about the loss of natural resources (Schlosser, 2012). They utilize these resources in the host countries for the purpose of making profit and this most at times lead to their depletion thereby resulting to the loss of natural resources for a country. Multinational companies may also be face with issues relating to the intellectual property that is not often pertinent in domestic companies (Schlosser, 2012). These companies have also been accused of cutting corners on safety as well as health issues in host countries especially where regulations are not as strict. Legal Structure when Entering International Markets The emerging market growth has been seen in the last decade. Emerging markets allow companies to expand and grow but there are a number of legal requirements that companies are expected to adhere to when accessing international new markets (Alexander, 2002). There are a number of considerations for multinational companies accessing new markets. First, there are registration, certification as well as licensing requirements. A company is expected to register its products in accordance to the human health and safety concepts. Products with hazardous effects on people are required to be certified and registered (Alexander, 2002). The products are expected to pass the food and safety law before it can be allowed to be sold in the host country. When entering new markets, there is need for a contract especially when there is an association of two or more companies. The parties who have entered into a contract agree on some factors of the agreement and in case of any dispute, the court make a ruling on the best way forward (IBP, Inc., 2015). The parties are bound by article specific to a country. In all contracts, the act of good will is applied. This means that it is an offense to use the terms of the contract to cause unjustified damage or act unreasonably or abuse the rights of the other party. In addition, multinational companies are bound by environmental laws and legislations (Alexander, 2002). They are expected to adhere to these laws and ensure that their operations do not cause any environmental challenges. When entering international markets, Multinational Companies are expected to comply with the labour laws of a particular country. Labour contract law protect the employees from the employers who may mistreat them in relation to income pay, safety, health or overwork (IBP, Inc., 2015). The law requires the employers to be in a written contract with the employees and failure to do so will lead to levy against the employer. For instance, McDonald’s is expected to adhere to the government requirements of the country it operates in. These measures assist in protecting the customers and local community at large. There are benefits that McDonald’s yield from implementing health and safety policies in its operations (IBP, Inc., 2015). To start with, these polices ensures that all employees and customers are protected from potential threats. Multinational companies are also expected to adhere to the foreign exchange regulations. In order for them to move money in and out of the host country, multinational corporations are expected to satisfy the settlement, registration and approval requirements (Alexander, 2002). For instance, a loan agreement between multinational company in the foreign country and a host’s bank must be approved by the state administration before it can be legal. In order for a multinational Corporation to operate in an international market, it should have intellectual property protection. Many host countries offer comprehensive protection of trademarks and copyrights (Alexander, 2002). Form of representation is also important for multinational companies particularly when importing products to the host country. Multinational Companies are also under the Foreign Corrupt Practice Act. According to the act, it is unlawful for a foreign company to offer or pay valuable things including money for the purpose of obtaining business (IBP, Inc., 2015). This act is different in different countries and thus foreign companies are expected to consult with an attorney when faced with such issues mentioned. How Multinational Corporation deal with Host Government Regulation Multinational organisations and host nations are considered to having a dynamic relationship. The host government pose a number of regulations that the foreign companies ought to adhere to (Merrill, 2009). There are a number of ways these companies can use to cope with the strict government regulations. One way that multinational companies deal with host government regulations is adapting or withdrawing. Strict government regulations may prompt foreign companies either to enter a foreign market or withdraw from it. Many organisations such as McDonald’s have accepted and adapted the infringement of these regulations in return for increase market presence (Merrill, 2009). Due to the vast nature of the UAE market, companies like McDonalds compromise their worldwide rationalization in the country. Between adapting and withdrawing from strict regulated markets lied what is called counteractive response that many organisations have adapted. Counteractive strategy involves the use of the competitive nature of multinational companies and bargaining power to beat other multinational corporations (McDonald and Dunbar, 2013). One source of competitive advantage Multinational Corporation can use to cope with host government regulations is technology. The ability to offer products and services that cannot be easily obtained by the competitors is considered a counteractive response to strict regulations. Other sources of competitive advantage and bargaining power include product differentiation, economies of scale and control of market access (McDonald and Dunbar, 2013). Another way multinational cope with strict regulation is to modify their business strategies for every country. Many companies adapt to the gap in the country’s market. Not every strategy work for every country (Haberberg and Rieple, 2008). Therefore, many foreign companies although retain their core business structure adapt new strategies suitable for the host country. For instance, in McDonald’s Company, due to the frequent changes of the customer’s preferences, product offering is expected to change as well in different countries (McDonald and Dunbar, 2013). To accommodate these changes, the company constantly introduce new products and phase out the old products in some countries and also offer different products in different countries depending on the customer’s preferences. Another way to cope with government regulation before entering foreign market is to research the riskiness of the country by acquiring reports from consultants or doing an independent research (Schlosser, 2012). This will enable the multinational companies make informed decision about operating in countries with major political risks. While this strategy is operational, sometimes the chance of entering a riskier nation in terms of regulation is attractive (Schlosser, 2012). In such cases, multinational companies can negotiate compensation terms with a host nation in order to have a legal basis for recourse. When the government regulations in the international market becomes too intense, multinational corporations may decide to segment their global operation in that it carries operations in countries with few legal restrictions and also operate in other countries with intense restrictions (Pradhan, 2007). For the first category of geographical segmentation, managers have the ability to diverse and implement their multinational strategies while in the second category of segmentation, due to the intense competition, companies may arrange to follow a different strategy. For instance, in the European nations, McDonald’s is able to maintain its strategic autonomy and is fully interpreted and centrally managed (McDonald and Dunbar, 2013). Latin America has strict government regulations which challenge autonomy of McDonald’s. Multinational companies also deal with strict regulations by grouping its operations on product line basis (Mitchell, 2009). From time to time, companies divide its operations according to competitive and governmental factors. Lawsuit related to Multinational Company Many companies in UAE are bound by strict laws and regulations. When organisations go against these laws, they may undergo lawsuits and legal proceedings. For instance, an international engineering company underwent a lawsuit as a result of a dispute connected to the construction of the sewage system in Abu Dhabi (Kudsi, 2015). After the completion of the sewage system project, there were some effects reported connected to the project. The Plaintiff clamed defects amounting to $100,000,000 for the losses sustained from the sewage system. The project took place in 1983 and in 1996; the defendants brought actions against the company claiming damages amounting to the stated amount. In order to get an insight in the case, the court appointed an engineering expert to provide expertise on the project (Kudsi, 2015). In 2011, the court decided that the defendants were liable for the losses sustained by the Plaintiff. The first defendant was the international engineering company and the second was an insurance company. After the dispute was brought to court, the two defendants brought a subsidiary claim against the main contractor of the project (Kudsi, 2015). Later onwards, they brought claims against additional contractors. In 2015, the court issued judgement in favour of the construction company and reject appeal from the Plaintiff. From this case, it is clear that it is for the court to evaluate the facts and evidence of the dispute and analyse the expert’s report (Kudsi, 2015). This court has the power to determine the components of the obligation and to ascertain whether compensation is due (Kudsi, 2015). In addition, the time-bar standard for construction disputes should be the leading defence when relevant. In relation to the construction-related disputes, a paramount time-bar rules are in the Articles 880 and 883 UAE Civil Code (Kudsi, 2015). The case involving the sewage system was delayed to years as a result of the defendants bringing actions against many parties. The parties involved in the dispute lawsuit were eight. Another reason for the delay was due to the delay of expert in finalizing report. Conclusion To sum up, business law entails analysing jurisdiction, instituting proceeding and resolving disputes etc. business law often applies when companies decide to access foreign markets. McDonalds Company effectively utilises the both licensing and franchising agreement when entering into an international market. The company is described as a largest food service company and through its strong brand equity, it has a competitive advantage. The company operates in countries such as Australia, New Zealand, UAE and the United States to name a few. McDonalds among other companies bring about advantages as well as disadvantages to the host countries. For instance, some advantages of multinational companies to host countries include: positive influence on the economic, social and political conditions enhancement of research and development; introduction of innovative products and creation of employment to name a few. On the other hand, the disadvantages include: money loss; negative effects to local companies; loss of natural resources and political risks and pressures. Multinational companies are subjected to legal frameworks in the international markets such as environmental laws and regulations, licensing and registration requirements and certified contracts. In order to survive strict regulations from host governments, multinational companies withdraw from host countries, modify business strategies and segment their global operations. References Alexander, N. (2002). Dubai: business law handbook. Washington, DC: International Business Publications. Haberberg, A. & Rieple, A. (2008). Strategic management : theory and application. Oxford New York: Oxford University Press. IBP, Inc. (2015). United Arab emirates insolvency (Bankruptcy) laws and regulations handbook: strategic information and basic laws. Intl Business Pubns Usa. Kudsi J. (2015). The Longest-Running Construction Case in UAE Legal History has Finally Ended. Retrieved 14th June 2016 from http://www.tamimi.com/en/magazine/law-update/section-14/march-9/the-longest-running-construction-case-in-uae-legal-history-has-finally-ended.html McDonald, M. & Dunbar, I. (2013). Market segmentation how to do it, how to profit from it. Chichester: John Wiley & Sons. Merrill, P. (2009). Do it right the second time: benchmarking best practices in the quality change process. Milwaukee, Wisconsin: ASQ Quality Press. Mitchell, C. (2009). A short course in international business culture building international business through cultural awareness. Petaluma, CA: World Trade Press. Pradhan, S. (2007). Retailing management: text and cases. New Delhi: Tata McGraw-Hill. Schlosser, E. (2012). Fast food nation: the dark side of the all-American meal. Boston: Mariner Books/Houghton Mifflin Harcourt. Read More