The paper "Transaction-Cost Based View of Multinational Companies" is a great example of management coursework. The aim of this essay is to establish how changes in social development variables affect the ownership structure, location and internationalization dimensions of Dunning’ s OLI model of a firm. As behavior of consumers changes among the population, it potentially influences internalization dimension of an international company. As well, companies are likely to reduce search and information costs where information is available online to millions of customers who are educated. While those firms engaging foreign operational structures desire lower transactional costs, sustainability issues affect transaction cost of a global strategy adopted by firms expanding their operations abroad.
Most Multinational Companies (MNCs) have adopted Foreign Direct Investment (FDI) strategies to overcome export difficulties, get a high rate of return and access cheaper capital when transaction costs are kept to the minimum. Although MNCs are there to maximize profits, changes in consumer behavior, government policies, education of employees and consumers and sustainability issues influence mode of entry firms operate in the host country. As a result, corporate managers will be interested in the level of transaction costs that determine the optimal mode of entry strategy.
Consequently, as the firm expands to the foreign market, the transaction costs will depend on the response of the country host social development variables. 1.1 Eclectic theory of Multinational Companies: The OLI model 1.1.1 Ownership Changes in social development, specifically government policies on taxation and tariffs, have increased specific advantages for FDIs from developed countries to invest in emerging economies. Multinational companies invest overseas by using firm-specific advantages to acquire higher profits. When referring to Dunning’ s OLI model, shows that ownership, location and internalization impact on corporate strategies of firms to invest abroad.
Firms have ownership advantages if they have differentiated products or services, technology intensity, international experience and adaptability of service or product. For example, Chinese government policies on liberalization have changed leading to reduced regulations on foreign companies. Although the country relaxed its position on privatization and liberalization, tax structure and intellectual property protection have worsened hence affecting the ownership of the FDIs. Conversely, an increase in corporate taxation and tariffs makes MNCs firms to reconsider their ownership structures.
Previously, firms needed to possess superior skills and assets to compete against high taxation and tariffs that host country firms enjoy. With increased funding from governments, the differentiated products or multinational experience and size of firm changes. For example, the decision by the government of South Korea to finance Samsung Semiconductors increased the equity of the government in the company. Similarly, transaction costs in the firm have been reduced as they achieve more on economies of scale, and enforcement of contracts and patents. Firm size influences the absorption of these costs and positively affects Foreign Direct Investment.
Nonetheless, the concern on the choice of a joint venture among larger firms is reduced as the possibility of exploitation by host country partner is diminished. On the same note, firms with multinational experience prefer investment modes of entry while those with less experience choose non-investment modes. Changes in tariffs and increased regional integration and cooperation in similar markets have increased levels of trade and understanding. For example, Mazda Motors of Japan did not have to create an FDI in Malaysia but opted for a joint venture with Bermaz Motors of Malaysia in 2012 because the government has more respect for partnerships.
However, management of foreign operations in some firms may attract high transaction costs if a multinational lacks foreign market experience. This shows that increased integration in the regional market affects ownership structure and in turn, determines the level of transaction costs involved.
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