Free Accounting Dissertations - In Recent Years Many Firms Have Used All Four Of These Reasons To Justify
In recent years many firms have used all four of these reasons to justify moving assembly operations to other countries.
Gain a foothold in economic blocs
As mentioned there are three major international economic blocs (triad). MNC’s that acquire a company in one of these blocs or that enter into an alliance to do business in one of these economic strongholds can obtain a number of benefits including the right to sell their output without having to be burdened by import duties or other restrictions. In the case of the EU, over the last decade the membership of this bloc has increased to 15 with the admission of Austria, Finland, and Sweden. Currently, Bulgaria, Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, the Slovak Republic and Slovenia are being considered for membership. International MNC’s wanting to do business in the EU are finding it important to gain a foothold in this region through FDI. This also relates to the Asian bloc, which comprises of Australia, China, India, Indonesia, Malaysia, the Philippines, South Korea, Taiwan, and Thailand. In addition the NAFTA, which comprises of the US, Canada, Mexico, and possibly Chile in the future will become a fourth member; in which the final result will be three extended triads and any company wishing to do business worldwide will have to have a presence in all three blocs.
Protect domestic markets
Another reason for FDI is to protect one’s domestic market. Many MNC’s are now entering an international market in order to attack potential competitors and thus prevent them from expanding their operations overseas. Most multinationals reason that a competitor is less likely to enter a foreign market when it is busy defending its home market position. Similarly, sometimes an MNC will enter a foreign market in order to bring pressure on a company that has already challenged its own home market. For example, 10 days after Fuji began building its first manufacturing facility in the US, Kodak announced its decision to open a manufacturing plant in Japan, Rugman (2003).
Protect foreign markets
Sometimes MNC’s will use FDI in order to protect their foreign markets. In the US, for example, from 1981 to 1991 the total number of service stations had declined by over 50 percent. British Petroleum (BP), which had a substantial investment in this market, realized that in order to protect its investment it would be necessary to make a substantial investment in order to upgrade its stations and increase its market share, Rugman (2003). The company refines and markets petroleum products and realized that if it could attract a growing number of customers to its service stations, it could profit handsomely by moving its products directly downstream to the final consumer.
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