Goldcrust looks across the border: Goldcrust plc runs 400 bakeries, one in nearly every town in the country. Its sales have not grown for two years.
Across the border
- 20 million people buy bread every day.
- No chain bakes it for them.
- Goldcrust's board decides to open 30 bakeries there.
The day the first of those bakeries opens, Goldcrust changes what kind of company it is. A company that runs part of its business, a shop, a factory or an office, in at least one country other than its own is a multinational company (MNC).
The country where it is based and registered, where its head office is, is its home country. Each other country it operates in is a host country. For Goldcrust the home country is its own; the country across the border becomes its first host country.
Lena's Bakery Ltd
- Three shops, all in one town
- Bakes and sells its $3 loaves at home
- Operates in one country: not an MNC
Lena sends sourdough abroad
- A café across the border orders 200 loaves a week
- Lena bakes them at home and ships them over (exporting)
- Sells in two countries but operates in one: still not an MNC
Goldcrust opens bakeries abroad
- Its head office stays at home
- It runs 30 bakeries in the country across the border
- Operates in two countries: a multinational company
Selling abroad is not enough: Lena's sourdough is eaten in two countries, but every loaf is baked in one. Selling to customers in another country from home is exporting. It does not make a business multinational.
The test: where it operates: The test is where the business operates: where it has its own shops, factories or offices. Size is not the test either. A bakery with one shop at home and one across the border is an MNC; a chain of 400 bakeries in one country is not.
What Goldcrust looks like as an MNC
A head office in the home country
The board and the head office stay where they were. The big decisions for all 430 bakeries, such as where to open next and what to spend, are still made there.
Operations in a host country
Goldcrust owns and runs the 30 new bakeries itself. It rents the shops, employs the bakers and sells to customers inside the host country.
One company, two sets of rules
It is one company, but it now works under two countries' laws and taxes and is paid in two currencies.
Usually large, with a known name
Most MNCs are big businesses with well-known brands and plenty of money to spend, like Goldcrust. That is common, not the definition: what makes a company multinational is operating in more than one country.
A company can also count as multinational by being legally registered in more than one country. Either way the idea is the same: the business is present in two or more countries, not just selling into them.
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Why not just open more at home?: Goldcrust could squeeze a 401st bakery into its home country. It would mostly take customers from the Goldcrust down the road.
The growth is abroad: Across the border every customer is a new one. Most of the reasons a business becomes multinational start there: the growth it wants is no longer at home.
Businesses rarely go multinational for one reason. For Goldcrust, five reasons point the same way, and each can be said in one sentence and shown with one fact from its case.
Five reasons to operate in another country
New customers, more sales
The home market is full: a bakery in nearly every town. A new country is a bigger market (market growth), with 20 million people who have never bought a Goldcrust loaf.
Lower costs
Rent and wages across the border are lower. And buying flour for 430 bakeries instead of 400 brings the price per bag down further (the economies of scale from 1.5).
Getting past trade barriers
The country across the border charges a 20% tax on baked goods brought in from abroad (a tariff). Bread baked inside the country pays none.
Spreading risk
If the home country goes into a slump and people cut back, the bakeries across the border keep selling. Two markets are safer than one.
Resources and fewer restrictions
A host country may have what the business needs: cheaper wheat, skilled workers, or rules that let it do what it cannot do at home, such as open on Sundays.
Why bread has to be baked where it is eaten: A loaf is stale by the next morning. Goldcrust cannot bake in its home country and ship bread across the border every day, the way a car maker can ship cars.
So for Goldcrust, selling in the other country means operating there. The only way to reach those 20 million customers with fresh bread is to become a multinational company.
Look back at 1.5: these are reasons to grow. Going multinational is growth across a border. The reasons that make a business want more customers and lower costs at home are the same ones that take it abroad, once the home market has run out of room.
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Goldcrust is the new business now: At home, everyone knows the name. Across the border, nobody has heard of it.
Look back at Lena's first year in 1.1.6
- No known name.
- Customers who already buy their bread elsewhere.
- Rules to learn from scratch.
In the new country, the chain of 400 bakeries faces all of that, from a head office in another country.
What operating in two countries costs
Different laws and taxes
Food labelling, hygiene rules, employment law and tax are all different across the border. Goldcrust has to learn and follow a second set of each, and pay for the advice.
Different tastes and language
Customers there eat a different kind of bread for breakfast, and the staff speak another language. What sells at home may not sell there.
Distance and control
Managers at head office cannot visit 30 bakeries in another country every week. Problems take longer to see and longer to fix.
Political change
A new government can raise taxes, change the rules on foreign companies or put the tariff on flour instead. Goldcrust has no vote there.
One cost has no equivalent at home. The bakeries across the border are paid in the host country's money, the crown, but Goldcrust counts its profit in dollars. How many crowns buy one dollar (the exchange rate) changes every day, and with it the value of that profit.
| Year 1 | Year 2 | |
|---|---|---|
| Profit across the border, in crowns | 2,000,000 crowns | 2,000,000 crowns |
| Exchange rate | 10 crowns = $1 | 12.5 crowns = $1 |
| The same profit, in dollars | 2,000,000 ÷ 10 = $200,000 | 2,000,000 ÷ 12.5 = $160,000 |
Reasons against costs: The bakeries sold exactly as much bread in year 2, yet the profit is worth $40,000 less at home. Nothing Goldcrust did caused it; the crown simply fell against the dollar.
Every reason to go multinational comes with a cost like this. A good answer names one of each and ties both to the business in the case.
How this comes up: A case study names a company as a multinational company, and a short question asks you to define the term, for two marks.
What to know
- A full meaning earns both marks; no example is needed.
- The same cases then ask about the company's plans to grow abroad.
- That is where the reasons in the second section, and the costs in the third, do the work.
The two-mark definition
- What it is. A company.
- Where it operates. In its home country and in at least one other country: two or more countries.
- Or how it is registered. Legally registered in more than one country also counts.
- Then stop. One sentence. No example, and no name from the case.
Trap one: selling is not operating: 'A company that sells its products in many countries' describes an exporter. It shows some understanding, so it is one mark at most; the second needs the company to operate in another country.
Trap two: big is not the meaning: 'A very large global company' describes most MNCs, but it is not what makes them multinational. Say where it operates, not how big it is.
Define the term multinational company (MNC).
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Reasons for going multinational
- Access larger markets -- selling to customers in multiple countries dramatically increases potential revenue
- Lower production costs -- some countries offer cheaper labour, materials or energy
- Avoid trade barriers -- producing locally in a market avoids import tariffs and quotas
- Spread risk -- operating in multiple economies means a downturn in one country does not destroy the whole business
- Access resources and talent -- some countries have unique raw materials, skilled labour or research capabilities
- Tax advantages -- some countries offer lower corporation tax rates to attract investment
- Follow competitors -- if rivals go global, staying domestic may mean losing market share
Difficulties MNCs face
- Different laws and regulations -- employment law, environmental regulations and consumer protection vary by country
- Cultural and language barriers -- marketing messages, management styles and product preferences differ across cultures
- Managing across time zones -- coordinating teams in different parts of the world is logistically challenging
- Exchange rate fluctuations -- changes in currency values can make profits worth more or less when converted back to the home currency
- Political instability -- some host countries may face political unrest, policy changes or corruption
- Ethical concerns -- criticism for exploiting cheaper labour or environmental standards in developing countries
- Reputational risk -- a scandal in one country can damage the brand globally
When discussing MNCs in exams, always consider BOTH the benefits and challenges. Show awareness that going global is not automatically positive.