ACCESS TO RAW MATERIALS: First MNCs, most exposed to political risk.
The British East India Company, The "Seven Sisters".

ACCESS TO MORE MARKETS: Most prevalent reason since WWII.
Coca Cola, McDonald's, IBM, Sony, Volvo.

SEEKING LOWER (operating) COSTS: Lower Cost Labor or Tax Incentives. Output is usually exported.
Texas Instruments.

What about Honda and Mercedes?

The Modern Multinational Corp:
Involved in the production/selling of goods/services in more than one country.
Usually includes a "parent" company in the "home" country (which also serves as headquarters) and numerous "foreign" subsidiaries.

Company Home Country
Nestle Swiss
Heinz U.S.A.
Royal Dutch Shell Netherlands/U.K.
 

TYPICALLY (At Least At First)
THE PARENT PROVIDES: Technology, Capital (both Equity and Debt), Top Management (most Decision making).
THE SUBSIDIARY PROVIDES CASH FLOW: Return on capital (Dividends and Interest), Loan Repayments, Royalties for Technology, Management Fees and Corporate Overhead.
INTERMEDIATE and FINISHED GOODS Can be Produced by Either and Sold in any Market (or to each other).
Note: The Prices that Affiliates Charge One Another (Parent and Subsidiaries) are called TRANSFER PRICES. These are set by the Parent and can affect the MNC global tax rate.

Typical Evolution of a Market Seeker: From a "domestic" company to a Multinational Corp.
1) EXPORTING: rely on importers in foreign countries. Little or no investment overseas in plant, advertising, etc. For example, attend European trade fairs to attract importers there. (low risk)
However, importers, transportation costs, subcontracted warranty work, etc., eat into margins. (low return)
Provides time for overseas consumers to learn about product, whether it will be accepted.
Typical Evolution of a Market Seeker: From a "domestic" company to a Multinational Corp.
2) INTERMEDIATE: Adding sales reps, distribution centers, and service facilities adds to margins, but exposes more capital.
3) PRODUCTION: Closer to markets (more adaptable to local tastes - see the Coca Cola Museum) More flexible, fill orders faster
Customers feel more "secure"   Keep up better with local competition
Can begin with packaging, then assembling parts imported from home country, and finally full manufacture. More capital at risk, but more profit potential.

ADDITIONAL MNC ADVANTAGES
TAX ARBITRAGE: Funnel taxable earnings to Affiliates located in countries with low tax Rates;
This can be accomplished through the judicious setting of TRANSFER PRICES, ROYALTIES, FEES, OVERHEAD, INTEREST, etc.
CAPITAL MARKETS ARBITRAGE: Especially when there are government imposed restrictions on capital movements, loans, etc. Essentially, raise funds in the "cheapest" national market and transfer those funds to needy affiliates. Use above methods or inter-affiliate loans, or adjusting inter-affiliate trade credit (called LEADING and LAGGING.)
DIVERSIFIED MARKETS: While some markets may be in recession, other markets may be enjoying a boom.
DIVERSIFIED PRODUCTION: If there are Strikes, Unrest, or New Regulations in one country, the MNC can adjust production to favor other affiliates.

MNC DISADVANTAGES
TIME Spent Learning About Different Legal and Tax Systems; also learning about transportation systems and the local culture.
CURRENCY RISK: Future CASH FLOWS from affiliates usually in the "local" (affiliates) currency. What if that currency depreciates against the home currency?
POLITICAL RISK: Expropriation, civil unrest, dramatic changes in government policies (taxes, repatriation of cash flows, new business regulations, etc.)

Appendix Material
 
U.S. DIRECT INVESTMENT ABROAD (measured by Book Value of Equity and Parent Loans). Equity and Debt investments abroad - but only in firms in which Americans control.
Tends to understate earlier investments.
Mostly in Developed Countries 75% (Must be Market Driven).
Stable except for Canada.
Little in Japan (barriers to entry?)
Note the recent increase in developing Asia. (How will this change with the 1997 crisis?)

Mostly in Manufacturing and Other Industries in developed countries. (Only 9% in Petroleum)

More raw material seekers in developing countries. What about low-labor-cost seekers?

High Rates of Return on U.S. investments overseas may be overstated because of understated investment using historical costs.

Exhibit 1B.4. U.S. expenditures abroad slowed in the early to mid-eighties.
Related to world-wide recession. Europe was having a prolonged slump. Latin America still working off debt problems.
This was in spite of the fact that this period also was a time of the Strong $.  (Foreign investments should have been cheaper to make in dollar terms, but the fact that the European and Latin markets did not look that promising at the time dominated the investment decision.

FOREIGN DIRECT INVESTMENT IN THE U.S.

1996 ($ Billions)
United Kingdom: $132 24%
Japan: $109 19%
Netherlands: $ 68 12%
Germany: $ 48 9%
Canada: $ 46 8%
France: $ 38 7%
Switzerland: $ 33 6%
Netherlands $ 7 1%
Antilles:
Mostly in manufacturing (cheap labor?) And trade.

Net International Wealth of the U.S.

 Net Wealth = Cumulative U.S. Investment Abroad less Foreign Investment in the U.S.
We include Direct Investments, Loans, Bank Deposits, Purchases of stock on foreign exchanges.

1. The U.S. As LDC: Before WWI, foreigners (mostly British) invested more in the U.S. than we (in the U.S.) invested in other countries, thus the U.S. was a NET DEBTOR

2. The U.S. as Net Investor: The two World Wars destroyed much of Europe's Capital Stock. While rebuilding, there was little reason for Europeans (and Japan after WWII) to invest in other countries. U.S. Investments Overseas was the Dominating Capital Flow.  Thus we became a NET CREDITOR

3. By the 1970s, rebuilding was largely completed, and European/Japanese  firms began investing in the U.S., eventually in greater amounts than U.S. foreign investment. By the middle of the 1980s, we once again became a NET DEBTOR.

Currently: U.S. is the World's Largest Debtor and Japan is the World's Largest Creditor.   However, U.S. is prospering but Japan is not.   Consider historical costs again. The U.S. net debtor position is greatly exaggerated.