As a result of globalization and liberalization of the global trade, companies are expanding their operation in overseas countries (Rugman & Collinson 2009). The main reason as to why companies endeavor to penetrate into new markets in the overseas country is to increase their profitability by creating strong customer base in the global market. For multinational companies to be successful in many host countries, the management of such companies must first analyze the market situation in different host countries so as to determine if a company can thrive in the economic conditions in the host countries.
Additionally, they must determine if the company can adapt to the laws, rules and regulation that are set by the federal governments in various host countries (Moran & Braaten 1994). This is imperative because some government may enact laws that might not be favorable for the operation of multinational companies. For instance, taxes imposed on Multi-National companies by the government from the host country might not be attractive for Multi-National companies.
Additionally, federal governments from the host countries enact laws that require all multinational companies to employ a certain percentage of employees from the host country. Such laws might affect the operations of a multinational company since the company will be obliged to incur extra cost in training employees from the host country. This might have a negative impact on the profitability of a multinational company (Wild & Wild 2012). As a result, the management of a multinational company must be vigilant when planning to expand its operations to the overseas countries.
Despite many benefits that accrue on the side of multinational companies, there are also some risks facing such companies in the global market, and they can have adverse effects on the company if the management of a company is not vigilant. One of the greatest risks that multinational companies are likely to face is diseconomies of scale; these are limitations that may arise due to expansion. Multinational companies can be affected by diseconomies of scale like difficulties in harmonizing activities of its branches in several host countries (Daniels et al. 2011).
One of the main causes of diseconomies of scale is management problems due to the expansion in the global market. The tasks of management of a multinational company become more complex as the company expands its operations in various countries. This can be caused by information overload as well as communication barriers (Shenkar & Luo 2008). This is because such companies have extremely large workforce which might be hard to control. Additionally, a company has a wide range of operations which might be extremely difficult to control so as to ensure that all operations conform to the goals and objectives of the company.
Another cause of diseconomies of scale can be a delayed decision making. This implies that as a company expands its operations in the global market, decision making process is slow. This is because many stakeholders must be engaged in the decision making process so as to make their operations more efficient in the global market (Hill 2009). Therefore, it may take a long time before all stakeholders agree to the decisions made by the management. Moreover, multinational companies can face labor disputes, strikes or a situation where employees are not committed to work since they are far from the management.
Competition is another factor that may have negative effects on the operations of multinational companies. This is because a multinational company faces stiff competition from well established companies in the global market (Becker 2000). For a company to succeed in the global market, it must incorporate advanced technology in their operations, and adapt to changes. This is because all companies in the global market endeavor to gain a competitive advantage over competitors. Therefore, a company can be easily outdone if is not able to adapt to the changes in the market. As a result, a management of a multinational company must design effective mechanisms that can give their company a competitive edge in the market.
Ethical Difficulties Facing Multinational Corporations in Less Developed Countries
Multinational company faces various ethical issues in the developing countries. This is because developing countries have their own federal governments that are independent and enact and implement their own laws, as well as rules and regulations. Such laws are aimed at regulating and directing how businesses are operated in that country. This can be different from the laws set by the domestic countries on such multinational companies. Additionally, conflicts in ethics can emerge in the case where the cultural practices and norms in the host countries are different what is acceptable in the home country (Maidment 2007).
The main ethical issue that a multinational company is likely to face in the developing countries is the issue of fairness in offering remuneration packages for its employees both the expatriates and workers from the host country. Usually, as a multinational company expands its operations in other countries in the globe, differences in remuneration among its employees arise. This can be an extremely big challenge to the management of the company since it is hard to harmonize the salaries of all employees working for the company (Mendenhall & Oddou 2007). In most cases, difference in remuneration arises in the sense that multinational company pays expatriates based on the wage scale from their home country. Since the wage scale is high in the country where expatriates originate, expatriates are paid higher salaries than employees from the host countries. This is because employees from the host countries are paid on based on the wage scale in their country, which is usually low (Mead & Andrews 2009). This remuneration system is perceived as unfair in the host country due to the fact that both expatriates and employees perform the same quantity and quality of work.
Moreover, in developing countries, domestic companies operate in a market where there is just one set of legal requirements which companies must meet (Adekola & Sergi 2007). Conversely, multinational companies operate in many countries where every host country has its own laws and cultures as well as their own different ethical practices and social norms. As a result, multinational companies might find laws in the host country unattractive to conduct their business. Such companies are perplexed on whether to carry out their operations as they do in their home country or conform to conflicting and different ethical and cultural guidelines in the host countries. Ethical issues arise since what can be perceived as ethically right in the domestic country can be totally inappropriate in the host country and vice versa. It is vital for the management of a multinational corporation to consider the ethical issues that can arise as a result of differences in culture and enacted rules and regulation in the developing countries.
As a multinational company establishes its operations in developing countries, stakeholders of the company are also expanded so as to include other stakeholders from the host country. For instance, many governments from the host countries especially in developing countries require a multinational company to set a certain portion of its jobs to host country’s counterparts. A multinational company is also affected by considerations like environmental issues among others. Such factors increase the intricacy of the ethical issues that multinational companies face.
Another ethical issue facing multinational companies in developing countries can be as a result of conflicts between the requirement of the home country and the host country. In most cases, multinational corporations are accused or criticized of exploiting the host country where it carries out its business operations. For instance, many Americans argue that America multinational companies should maintain the same standards and norms in the host countries where they operate. However, if such companies apply standards and norms that are the same as those applied in the home country, they might not be legally and morally required or acceptable in the host country.
Other ethical issues that multinational companies face in the developing country can be due to cultural, linguistic and economic difference between a country where a multinational company originates and host country. When making decisions to expand business operations in overseas countries, the management of a multinational company must put into consideration such diversity. This is because the difference in cultural, linguistic and economic factors can result in ethical issues, which might have adverse effects on the operations of a multinational company operating in various countries in the globe.
Another ethical issue that may arise as a multinational company expands its operations in developing countries is the fact that some multinational companies try to influence the government of the host country in its favor. This is unethical since all businesses must respect the rule of law which demands fairness and transparency to all businesses regardless of their country of origin. Although this action is unethical some federal governments in the developing countries give preferential treatment to some multinational companies.