Free Accounting Dissertations - Introduction In Order To Understand The Reasons Why A Multi-national
INTRODUCTION
In order to understand the reasons why a multi-national corporation would engage in foreign direct investment, one will need to first of all understand the meaning attached to both concepts. A multi-national corporation is a company that is headquartered in one country but has operations in one or more other countries. Sometimes it is difficult to know if a firm is a multi-national corporation because multinationals often downplay the fact that they are foreign-held. For example, many people are unaware that Nestle, the chocolate manufacturer, is a Swiss company; Northern Telecom is Canadian; and Ford Motor now owns Jaguar, the British based auto maker. Similarly, approximately 25 per cent of banks in London are foreign-owned, but this is not evident by their names. In addition, foreign direct investment (FDI) is the ownership and control of foreign assets. In practice, FDI usually involves the ownership, whole or partial control of a company in a foreign country. This is called a foreign subsidiary, Rugman (1982). It is also worth noting that most foreign direct investment is conducted by companies within the ‘triad’ nations. The triad is a group of three major trading and investment blocs in the international arena. The nations are US, European Union, and Japan. With this in mind we can now move on to talk about all the aspects that relate to the push by multinational corporations to engage in foreign direct investment.
Now, foreign direct investment or rather this equity investment carried out by multinational corporations can take a variety of forms. One is through the purchase of an ongoing company. For example, Santander Central Hispano (SCH), the Spanish lender, which is Spain’s biggest bank, bought Abbey National of the United Kingdom, in order to ring up 150 million euros of cost savings in the first year after the merger, rising to 300 million euros in the second and 450 million euros in the third, BBC (2004). Rather than building this business from scratch, Banco Santander bought its way into the financial sector of the United Kingdom through FDI. Another form of FDI is to set up a new overseas operation as either a joint venture or a totally owned enterprise. For example, Matsushita, the Japanese company is now positioning itself to become a major competitor in the European digital industry and has recently entered into a joint venture with British Telecommunications plc for the purpose of developing multimedia wireless services and products, Pringle (2000). In general, the objective of FDI is to provide the investing company with the opportunity to actively manage and control a foreign firm’s activities. There are a number of advantages that multi-national corporations (MNC) face or rather factors that encourage MNC to take ownership position or gain control of foreign assets. The following examines these advantages.
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