What is a multinational corporation? Why do firms expand into other countries?

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What is a multinational corporation? Why do firms expand into other countries?

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With the growth in demand for exotic foods, Possum Inc.’s CEO Michael Munger is considering expanding the geographic footprint of its line of dried and smoked low-fat opossum, ostrich, and venison jerky snack packs. Historically, jerky products have performed well in the southern United States, but there are indications of a growing demand for these unusual delicacies in Europe. Munger recognizes that the expansion carries some
risk. Europeans may not be as accepting of opossum jerky as initial research suggests, so the expansion will proceed in steps. The first step will be to set up sales subsidiaries in France and Sweden (the two countries with the highest indicated demand), and the second is to set up a production plant in France with the ultimate goal of product distribution throughout Europe.
 
Possum Inc.’s CFO, Kevin Uram, although enthusiastic about the plan, is nonetheless concerned about how an international expansion and the additional risk that entails will affect the firm’s financial management process. He has asked you, the firm’s most recently hired financial analyst, to develop a 1-hour tutorial package that explains the basics of multinational financial management. The tutorial will be presented at the next board of directors meeting. To get you started, Uram has supplied you with the following list of questions:
a. What is a multinational corporation? Why do firms expand into other countries?

Explanation & AnswerSolution by a verified expert

Explanation

A multinational corporation conducts its business in multiple countries to explore the foreign markets. A multinational corporation is not only involved in selling the goods in foreign markets, but it also conducts business in a fully integrated manner which involves procurement of raw material, converting that material into finished goods and finally distributing them to customers. The foreign branches of a multinational corporation are its subsidiaries and they all report to the holding company in their home country.
 
"Going global" generally refers to expanding the business operations in the foreign countries. There are various reasons for companies to go global.
 
The primary reason is the desire to broaden the market horizon. It helps to reach more customers and clients. Secondly, going global helps to reap the benefits of comparatively cheaper abundant resources, which are available in the form of raw materials in foreign countries. Similarly, technological advancement of the host country can be used to increase the efficiency of production.
 
Corporations also decide to go global in order to avoid the political irregularities and regulatory hurdles prevailing in the domestic economy. Moreover, globalising the business enables them to diversify.It helps to maintain optimum balance between the economic ups and downs of the domestic and the foreign country.

Verified Answer

Multinational corporations are firms which operate in an integrated fashion in two or more countries. Companies go global to diversify their business operations, to seek new raw materials along with new technology, to avoid political irregularities, to achieve production efficiency and to broaden their market share.

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