There are a number of factors that influence the decision by MNCs to establish businesses in foreign countries. These may either be a pull factor originating from a particular opportunity that is presented by the foreign location or a pull factor that emanates from an internal strategic growth policy of MNCs.
One of the factors that make MNCs to establish in foreign countries, especially the developing countries is existence of cheaper sources of labour. Most developing countries operate under a wage regime that prescribes generally low wages as compared to those payable in the developed countries. Even tough most of the developing countries have minimum wage laws, the said laws stipulate relatively low statutory minimum wages and other terms and conditions of employment. This is mainly attributed to the fact that majority of the developing countries are labour surplus economies characterized by high levels of unemployment and rampant poverty. Consequently, the country legislates minimum wage laws that are relatively low in order to attract investments and encourage investors to adopt capital –saving-labour-intensive techniques of production to promote employment creation. Given that labour cost is a major component of the cost of production and determinant of industrial competitiveness, MNCs are normally attracted to establish the countries with low labour costs.
Flexibility in regulations is also another important factor that influences MNCs to establish businesses in foreign countries. MNCs mostly look for the indices measuring important market fundamentals such as the labour market rigidity, extent of flexibility of trade regulations, taxation laws, exchange rate regulations and the rigidity or flexibility of other legal and regulatory framework that supports business operations . MNCs would therefore be attracted to establish businesses in foreign countries where the regulations are more flexible and easy to comply with than in countries where it is difficult to comply with the regulations. This is an important consideration since the more stringent the regulations in the country are, the more costly it is to operate in the country.
Kenya has consistently been ranked as one of the countries where the regulation for firing workers is highly stringent. This is because the country’s labour laws provide for the minimum statutory notice period for one month to be accorded to the employee before he/she is discharged from employment and a severance pay of about a month for every completed year of service. This means that the cost of hiring may at times be higher than the cost of retaining employees. Most companies MNCs included, however, want more flexibility and autonomy in the management of employee-employer relations. Consequently, they may not be readily attracted to establish businesses in the countries with such kind of rigidities.
A number of MNCs are also attracted to establish businesses in the countries that offer business incentives. For example, in the case of Kenya, a number of MNCs especially in the textile sector were attracted by incentives regimes that came under the Export Processing Zones (EPZs). The EPZ incentive regime provides exporting firms with a 10-year tax holiday, unrestricted foreign ownership and employment, and freedom to repatriate unlimited amount of earnings. The firms are also exempted from observing some core labour laws and regulations. For example until 2003, trade unions could not organize workers in the EPZ firms. In addition, the now repealed factories Act (Chapter 514)was not being enforced in the zones. The EPZ have also enjoyed from enormous market prospects presented by the tariff and quota advantages granted under the US-led African Growth Opportunity Act (AGOA) and the African. Caribbean and pacific European Union (ACP-EU) Cotonou agreement. These incentive schemes and flexible regulations have attracted a number of MNCs in the country.
Along the same lines, growth and development of the MNCs have increased considerably particularly in the developing countries as these countries adopted more open outward oriented approaches to economic growth and the development. For instance in Kenya a considerable number of MNCs have come up since abolition of the inward oriented import substitution strategy in the 1990s. by the beginning of 1990s, the importance of the inward looking development strategy had started waning. A review of the strategy showed that the inward looking strategy discouraged export promotion and resulted in the consistent shortage of foreign exchange. In addition, the world had started moving towards opening up of trade. Kenya had to embark on economic reforms as a pre-condition for receiving aid. Arising from these developments the government embarked on a reform program to promote trade, among other national growth and development areas. Some of the incentives provided by the government to promote these are; manufacturing under bond scheme, removal of export licensing and price controls, pursuance of flexible exchange rate systems, trade licensing reforms and rationalization and removal of duties. These reform initiatives attracted MNCs to establish operations in Kenya.
It is also noted that as local markets throughout the world are being deregulated and liberalized foreign firms are looking to locate part of the production process in other countries where there are costs advantages. Although developing countries may present high levels of risks, they also present the potential for higher levels of profits due to their relatively low production cost structures.
The quest for profit maximization is also another factor that influences the decision of MNCs to establish businesses in foreign countries. MNCs will go to foreign countries if they find that the countries present better profit maximization opportunities than in the domestic countries. Also related to this is the desire by the MNCs to find new markets for their products, and bring awareness of the products to different people, territories and countries. Thus the MNCs will decide to establish in foreign countries in pursuit of maximization of sales, profits and growth. It is for this reason that many developing countries present destinations of most MNCs since most of the developing countries have growing economies and increasing incomes, which provide future growth markets for the MNCs.
MNCs also influence in the foreign countries because of the availability and proximity to raw materials. For example, Unilever’s section dealing with tea is located in countries that produce tea. This is necessitated by the fact that green leaf tea is highly perishable and requires processing within 24 hours for quality tea. It is for this reason that the MNC is located in Kericho (Kenya) with another unit in Uganda to process the tea produced in the two countries.
Other factor that determine why MNCs establish in foreign countries and in which particular ones are political stability, state of infrastructure, stock of skills available in the economy, among others. A country may possess very good business opportunities for MNCs but if it is politically unstable, then no MNC or any other company will establish there. This is because a country that is politically volatile presents enormous risks. Infrastructure is an important factor that influences business decisions and this also enter into the decision functions of MNCs. Since the goal of the most MNCs is to maximize sales, profits and growth, infrastructure is the most variable that will influence their decision to establish in a given country. The same goes with the stock of skills that are available in a given country as this will lower the cost of recruitment.
Kavungya answered the question on May 2, 2019 at 12:39