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The Historical Background of Multinationals and the Creation of Global Capitalism

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The role of multinationals in globalization cannot be fully understood without the sound understanding of multinationals and their historical background. The term multinational enterprise was used in the latter half of the twentieth century although firms had started to invest offshore in the nineteenth century. A multinational is an organization that has its control operations and income-generating assets in more than one country. The home country of multinationals is called home economy and the other countries where they invest are called host economies or host countries. Usually, no-host economies should exceed five or six and they should be of considerable size as well for an organization to be called multinational.

If a firm’ s international operations are very extensive then it is called a global organization. A multinational firm makes two types of investment in the host economy, portfolio investment and foreign direct investment (FDI). Portfolio investment is the acquisition of securities with no involvement in the management of the host economies. FDI involves control over the management as well. FDI gives ownership and control of assets to the multinational.

There are different types of options available for a multinational to invest in the home country depending on the degree of involvement and equity and non-equity arrangements such as joint venture, licensing, franchising, cartel, and strategic alliances. FDI is the most commonly used quantitative measure for multinationals. The basic reason for the existence of multinational firms is the maximization of profits by capitalist firms. However, some industries have more multinationals as compared to others and even some countries have more multinationals operating than others. According to Heckscher-Ohlin theory, a country’ s trade is determined through its comparative advantage which explains the above phenomenon (Jones, 2005) Globalization of Markets When the markets of the host economies became saturated it leads to the search for new markets.

But doing business in new countries and host economies with the same approach of customization was not profitable. Hence it led to the concept of standardization of products, that are advanced, functional, reliable and low priced. Multinationals companies that concentrated on consumer preferences failed and only global companies with their standardized value chain emerged as successful in the long run.

One of the major driving forces behind this globalization is technology.  

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