How Multinational Companies Exploit Cultural and Regulatory Differences

Running head: ECONOMICS
Economics
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How do multinational companies (MNCs) seek to exploit national and regional differences
in culture and regulation? How should states respond to this?
Introduction
The multinational companies are the central factors in the international economy.
They are also termed as the emerging global class of organizations with the potential to form
their own intra organization field. MNCs also gains from their global presence in large
number of ways. The multinational corporation can also use their global presence for taking
advantage of the underpriced labour services which are available in some of the developing
countries and also gain access to the special R &D capabilities residing in the advanced
foreign countries. The MNCs seek markets in worldwide and rational production layout for
achieving maximum profit.
The MNCS is also termed as the world wide enterprise which controls production of
services or goods in at least one country other than its home country. They are the large
corporation which are incorporated in one country which is known to produce or sell goods
and services in various countries. The two main characteristics are the MNCS are usually of
large size and their worldwide activities are centrally controlled by the parent companies.
MNCs also gain from their global presence in a variety of ways (Almond, Lavelle & Murray,
2017). The multinational corporations can also benefit from the economy of scale by
increasing the expenditures of R & D and also by advertising the cost over their global sales.
One of the main objective of the multinational companies are that due to strong growth and
technical strength and a huge potential of funding for rapid cross borders transfers, the
multination corporations have a huge potential in the world.
The inward investment involves an external or foreign entity either investing it or purchasing
the goods off the local economy. It have been found out that multinational companies engage

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in foreign direct investment when the three sets of determining factors exists which are the
ownership specific competitive advantages, location advantages in the host countries. The
multinational enterprises which is operating a plant in a foreign country is known to face with
additional cost compared to those of the local competitors. The foreign firm will be
successful in another country when it will be having advantage which overcomes the
operating cost in the foreign market (Meyer & Peng, 2016). The multinational corporations
are seen to relocate portions of their global supply chain mostly to the developing countries
like those of China and India for generating efficiencies and also remain competitive in the
marketplace. The consumer base of the developing countries and the lowering trade barriers
have allowed the multinational corporations for selling their products in these countries.
Host countries proving location advantage
The location advantage of the various countries helps in determining which will
become the perfect host countries for the multinational enterprises. The country specific
advantage which influences where a multinational enterprise will invest depends on
economic, political and social factors. The economic advantages include the qualities and
quantities of the production factors, cost of transport and telecommunication and scope of the
market. However, the multinational enterprises also provide huge benefits to the host
countries like it provides the provision of significant employment and training to the labour
force. Various studies have shown that the foreign direct investment is generally attracted
towards countries which invest in infrastructure facilities (Jackson & Rathert, 2016). One of
the examples of the location specific advantage is that a lumber company in Oregon have a
location specific advantage to a limber company in Arizona since there are more trees in
Oregon. Over the few years, the effects globalization known to have escalated the growth in
strength and visibility of MNCs. Numerous companies in the emerging markets are known to
contribute to the regional and global business in a dynamic way.

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The host countries specific advantages which are known to be economic advantages
comprises of quality factors of production, size and scope of the markets, social cultural
advantages which include distance between country of origin and host country. The political
stability is also known to affect the inward flows of foreign direct investment. The
environment of the host market is also more challenging in nature than for the multinational
enterprises than for the firms operating in the local market. The foreign market penetration
will be attracting additional costs for venturing for enhancing recognition and cultural
adaptation (Jackson & Rathert, 2016). The main strategy of the multinational enterprises is
using their home advantages and markers which they already occupy and minimize costs of
operations by adopting various practices. The various advantage of outsourcing to the host
countries are that outsourcing allows for accessing the world class capabilities, help in
sharing risks with various people, provides free resources for non core activities and also
reduces the cost by the economies of scale.
The location advantage refers to location factors in the host country. The unprecedented
growth of international productions and the flows of the foreign direct investment over the
last two decades have led to improvement of the countries. India also scores over other places
in terms of being an ideal destination of investment mainly due to the vibrant setup of
democracy which is known to be underpinned by a broad legal framework along with
independent judicial system. There are various location advantages in the less developed
countries which includes infrastructure facilities like ports, road transport, cheap availability
of electricity (Yuan, Pangarkar & Wu, 2016). The legal as well as e various infrastructure
facilities are known to reduce the cost of the transaction. The presence of controls on the
investments along with regulation on imports of goods are some of the factors affecting the
location advantage. The regulation on import of goods includes components and capital
goods and the foreign exchange restrictions are also considered as some of the important