Reasons for Multinational Corporations
According to the Bureau of Economic Analysis, U.S. multinational corporations accounted for $9,843 billion in revenues in 2010. Small businesses can also be multinationals if they have facilities and other assets in their home country and at least one other country and manage them in an integrated way. The company's long-term commitment to operating internationally offers many advantages, including economies of scale, reduced costs and market growth.
Converting a small manufacturer to a multinational may give the business an opportunity to achieve increased production efficiency as the quantity produced rises. Because each manufactured unit shares fixed costs that are unrelated to the quantity of goods produced, the average cost per unit goes down as the number of units manufactured increases. For example, the cost to produce 50 gadgets might be $1,500, or $30 per unit, whereas the manufacturing cost of 300 gadgets might be $2,000, or $6.66 per unit.
Becoming a multinational helps a small business expand its reach, which enables the company to exploit new growth markets, such as the Mexican economy. This opportunity is especially beneficial if the domestic demand for the company's products or services has plateaued. In the article “Dealing With the New World of Multinational Competition” on the PricewaterhouseCoopers website, Harry G. Broadman and Sunita Saligram write that multinationals seek opportunities in emerging markets in particular because the average growth rate of gross domestic product in these markets is twice that in developed countries, such as the United States.
Operating as a multinational provides a small business the option of conducting some of the company's offshore sourcing through subsidiaries, rather than independent contractors. This flexibility in selecting the origin of its supplies provides the business a better opportunity to control the quality of its products or its product's components. Relying on its own subsidiaries as a source of supply also provides a business the opportunity to better ensure promised delivery dates of critical product components.
National regulators sometimes discriminate against foreign subsidiaries unless the subsidiary is established enough locally to be perceived as a domestic firm. Establishing foreign subsidiaries, therefore, may protect the small business from certain governmental investigations, audits and prosecutions. The multinational subsidiary may also be a way for a business to expand into foreign countries and bypass the protective controls of the importing country. For example, a U.S. company might circumvent Mexican external tariffs by setting up a subsidiary in Juárez.
High transportation costs can significantly raise the prices of products offered by a small business. Functioning as a multinational can reduce such costs by acquiring production supplies from a manufacturer that is close to the company's plants and the product market. As a result, a small business may benefit by investing in production plants in foreign countries and selling the manufactured products directly to consumers in those countries, rather than exporting the goods from the United States.
The production costs of a small business differ from one country to the next. For this reason, a small business might choose to operate as a multinational and establish a production facility in a foreign country to benefit from the cheap labor, land or production resources. However, these and other cost advantages of operating in a foreign country must be weighed against the cost-based advantages of operating a production facility in the U.S. For example, a U.S. worker may produce a greater number of error-free units in a particular period than a foreign worker can produce, and the U.S. plant may be more energy efficient than the foreign plant. Such U.S. cost-based advantages may narrow the gap between the cost of operating a foreign facility and a domestic one.