Globalization is relatively new idea in the world. From a social base it can be seen as making the world a global market where people relate and integrate freely without any barriers. An economical view of globalization is concerned with the removal of trade barrier between nations and allows free trade between people from different countries. Multinational companies are companies that have their presence in more that one country even though it is registered in a certain country. Multinational companies have contributed a lot in integration of global market. By so doing multinational companies have encouraged globalization. Today, there is increase in the presence of multinational companies in the world. Many corporate registered in a certain have opened offices, manufacturing plants and branches in various other countries. The reasons why companies decide to become multinational are several and varied.

Factor that encourage multinationals

The primary reason that motivates companies to become multinational is growth. A company registered in a certain country may grow to an extent that there is no more room for growth in that country’s market. In order to grow the company has to expand its market. Since the local market is exhausted, the company will opt to seek more market outside the country borders (Kleinert, 2004). To enter to another market in another country, the company has the options of both forming and registering new companies in that country, forming subsidiaries companies in that county or going into the market as a multinational. The process of growth by seeking to expand the company’s market to other countries is faced with some challenges (Kleinert, 2004). To be able to counter the challenges faced, the company may opt to become a multinational. The other motivations are technology, labor, price control and competition.

Coordination of separated foreign investments made through creation of local companies and agents in other countries is difficult than coordination in a multinational company. Multinational


company provides a centralized institutional control and coordination (Articlesbase, 2009). Separated investment will be expensive and there would be poor management and monitoring of investment that can lead to loss of investment capital. On the other hand multinational company allows centralized management of the investment. A multinational company usually has a well defined and recognized vision and mission and their objectives well defined. The management structure is well defined so as to allow better control and coordination. The books of account are centrally managed and this allows the management to easily manage its profitability. The finance of a multinational is managed and controlled from a central place and this allow the multination to ensure free flow of finance where its needed more.

Market imperfection motivates companies to opt to become multinationals. Existence of monopolies in the market will motivate competition. With increased competition the prices of the goods manufactured or traded by these companies will fall. Fall in prices would lead to lowering of profit for the competing companies. One of the ways that multinational companies are formed is through merger of two or more companies across countries border to form one company. By so doing the companies would remove competition among them selves and increase their profitability (Articlesbase, 2009). Thus one of the motivations of companies to form multinational is to increase its profitability by reducing competition.

The multinational companies have the advantage of being able to use price discrimination in their investment. Price discrimination is achieved by consolidating foreign investment through acquisition and merger. It is also done by vertical integration of potential licensee. Price discrimination reduced external competition and lead to high profitability of the multinational companies.

Modern interments have called for specialization. Many of the companies specialized in either manufacturing of certain product, mining of a certain mineral or provision of a certain service. Specialization calls for heavy investment in on area in terms of machinery, technology, skills and capital. The exploitation of an individual market as compared to the investment in the company may not be profitable (Siegel, 2005). The use of the investments such machinery, and technology and technical skills across the countries through local investments and agent would be faced with challenges. To fully and efficiently use the investment made, a company may decide to become a multinational. By so doing the company will reduce the cost of doing business and will be able to effectively utilize technical and machinery investment. The overall


result increased profitability and growth of the companies.

Management of a market involves good control and management of distribution system. Long distribution system result in increase in the prices of goods and services and would as a result reduce consumption or purchases of the good. A foreign company can distribute its goods in the foreign market by use of agents (Siegel, 2005). The agents may be other registered companies in that country and have a different structure and internal; management. Since a company may not have control over the agents and distribution of its products, then it may opt to become a multinationals company. Being a multinational the company will be able to control the distribution system of it product and directly influence the flow of its products or services in the market.

Resources needed by a company may influence a company to become a multinational company. Various resources exist in various countries in varied amounts and varied cost. A company can be able to take advantage of the various resources from different countries by taking a multinational structure. Resources such as land, minerals, and labor could be considered. Labor is a very important factor for the success of any company. The availability, cost and technical skill of labor is a factor considered by multinational companies (Tayeb, 2005). Being a multinational company, a company would be able to take advantage availability of cheap labor from another country and thus enhance its efficiency and profitability.

Effects of multinationals companies

Multinational companies have both positive and negative effects to a country. The multinational makes variety of products and services to be available (Siegel, 2005). The citizen of the host country would get job opportunity. The multinational companies have very high investment base and thus they provide capital for exploitation of a country’s resources. In addition they provide revenue to the government of the country. How ever the negative effect would vary fro effects on environment, exploitation a country’s resources to influence in government policy (Kleinert, 2004).



Although the growth of a company is determined by many factors, availability of sufficient market is a major factor. Market imperfection resulting from the existence of economical borders motivate companies to form multinational so as to over come such factors as prices, competition, distribution and control of proprietary technology. Many countries encourage multinational so as to gain from the revenue obtained from the multinational countries. In addition the existence of the multinational is encouraging globalization.


Articlesbase (2009) Organizational structure of the multinational companies; Retrieved from htt p:// ompanies-1277760.html on 10th October 2009

Siegel (2005) The future of investors; Why the tried and true triumph over the bold and new:-Crown Business;

Kleinert (2004) The role of multinational enterprises in globalization;-Springer;

Tayeb (2005) International human resource management: a multinational company perspective;- Oxford University Press;