Why MNCs Pursue International Business – Part 1
Multinational businesses generally increase over time. Three commonly held theories to explain why MNCs are motivated to expand their business internationally are (1) comparative advantage theory, (2) imperfect market theory, and (3) product cycle theory. These theories overlap to some extent and can complement each other in developing the reasons for the evolution of international business.
Theory of Comparative Advantage
Specialization by the state can improve production efficiency. Some countries, such as Japan and the United States, have technological advantages, while other countries, such as China and Malaysia, have advantages in basic labor costs. Since these advantages cannot be easily transported, countries tend to use their advantages to specialize in the production of goods that can be produced with relative efficiency. This explains why countries such as Japan and the United States are large producers of electronic products, while countries such as Jamaica and Mexico are large producers of agricultural and handmade goods. Multinational companies such as Oracle, Intel, and IBM have grown rapidly abroad due to their technological advantages.
A country specializing in some products may not produce other products, so trade between countries is very important. This is an argument made by the classical theory of comparative profit.
Comparative advantages allow the company to penetrate foreign markets. Many of the Virgin Islands, for example, specialize in tourism and rely entirely on international trade for most products. Although these islands can produce some goods, it is more efficient for them to specialize in tourism. That is, the islands are better off using part of the revenue earned from tourism to import products than to try to produce all the products they need.
Imperfect Market Theory
If the market of each country is closed to all other countries, then there will be no international business. On the other hand, if the market is perfect, so that factors of production (such as labor) are easily displaced, then labor and other resources will flow wherever they are demanded. Such unlimited mobility of factors will create equality in costs and returns, thereby eliminating the advantage of comparative costs, which is the reason for international trade and investment. However, the real world suffers from imperfect market conditions in which factors of production are rather immobile. Costs and often other restrictions affect the transfer of labor and other resources used for production.
In addition, restrictions can be placed on the transfer of funds and other resources between countries. Since the market for the various resources used in production is “imperfect”, MNCs such as Gap and Nike often utilize foreign countries’ specific resources by having many of their products manufactured in countries where labor costs are low. An imperfect market provides an incentive for companies to look for foreign opportunities.
- Madura, J. (2020). International financial management. Cengage Learning.
- Madura, J., & McCarty, D. E. (1989). Research trends and gaps in international financial management: a note. Management International Review, 75-79.
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