International Transfer in Multinational Corporations (MNCs)

Introduction

Multinational corporations (MNCs) operate in multiple countries and often engage in international transfers of funds, goods, and services (Buckley, 2018). These transfers can take various forms, including foreign direct investment, cross-border mergers and acquisitions, and international trade transactions. International transfers facilitated by financial institutions such as banks and money transfer companies provide services such as foreign currency exchange and wire transfers. In order to minimize the risks associated with currency fluctuations and to ensure the smooth and efficient transfer of funds, many MNCs use a variety of financial instruments, such as currency hedging and forward contracts. However, international transfers can also be subject to regulatory constraints and government policies, such as foreign exchange controls, taxes, and tariffs (Mayrhofer and Prange, 2015). MNCs must navigate these regulations and consider the potential implications of their international transfers on their operations and financial performance. In essence, international transfers are a vital component of the operations of MNCs and require careful planning, risk management, and attention to regulatory requirements.

Question 1: What are the main motives for MNCs to use international transfers?

• Cost Advantage

Multinational corporations like Amazon use the concept of purchasing power parity (PPP) to their advantage by taking advantage of differences in the cost of labor, goods, and services across countries. The Purchasing Power Parity theory states that exchange rates should adjust to equalize the purchasing power of different currencies in different countries (Vo and Vo, 2022). In practice, the cost of goods and services can vary significantly from country to country. Amazon can reduce its costs and increase its competitiveness in the global market by establishing operations in countries where labor, goods, and services are cheaper. That allows the company to sell its products at lower prices, increasing its market share and profitability. For instance, Amazon may manufacture its products in countries where labor is less expensive and then sell them in countries where the cost of living is high. By taking advantage of the differences in labor costs across countries, Amazon can reduce its overall costs and offer its products at more competitive prices.

In addition, Amazon can also take advantage of differences in the cost of goods and services across countries by sourcing materials and supplies from countries where they are affordable. It helps the company reduce costs and increase its competitiveness in the global market. Therefore, by utilizing the PPP theory and taking advantage of differences in the cost of labor, goods, and services across countries, Amazon can maintain its competitive advantage and continue to grow its business.

• Tax Optimization

Multinational corporations (MNCs) use tax optimization in their international transfers to reduce the amount of taxes they pay in different countries. The Efficient Market Hypothesis (EMH) theory suggests that financial markets are highly efficient, which means that prices reflect all available information and new information is quickly absorbed into the market (Financial Analysts Journal, 2020). In the context of MNCs, this theory can be applied to their tax strategies, as they aim to optimize their tax payments by taking advantage of tax regulations in different countries. For instance, as a multinational corporation, Apple has been known to use tax optimization in its international transfers. The company has fallen prey to shifting profits to subsidiaries in countries with lower tax rates, such as Ireland, through a practice known as transfer pricing.

The practice involves charging high prices for goods and services provided by the parent company to its subsidiaries, which reduces the taxable profits in the parent company’s country and increases the taxable profits in the subsidiary’s country. Therefore, Apple can minimize its tax payments in high-tax countries and maximize its tax savings in low-tax countries. MNCs use tax optimization in their international transfers to reduce their tax liabilities while still complying with the regulations of different countries. By applying the EMH theory, they aim to maximize their tax savings by taking advantage of the differences in tax regulations across countries. As one of the largest MNCs, Apple is a prime example of how MNCs use tax optimization to minimize their tax payments while still maintaining their profits.

• Diversification

Multinational corporations (MNCs) use diversification in their international transfers to minimize risks and maximize profits. The Optimal Currency Area (OCA) theory provides a framework for MNCs to understand different countries’ economic and monetary conditions and make informed decisions about currency selection. According to the OCA theory, an optimal currency area is a geographical region in which a single currency is optimal due to its ability to promote economic and monetary stability (Bolton and Huang, 2018). In order to utilize diversification in international transfers, MNCs must consider the degree of trade and financial integration between countries, as well as the degree of labor mobility, production specialization, and monetary policy coordination.

Toyota is a multinational corporation that has successfully utilized diversification in its international transfers. Toyota operates in numerous countries, including the United States, Japan, Europe, and Australia (Ohno and Bodek, 2019). To minimize risks and maximize profits, Toyota has chosen to use different currencies for its international transfers, depending on each country’s economic and monetary conditions. In Japan, Toyota uses the Japanese yen, the national currency, while the United States uses the US dollar. This allows Toyota to take advantage of each country’s favorable exchange rates and monetary conditions while minimizing its exposure to currency fluctuations and economic instability. MNCs use diversification in their international transfers to minimize risks and maximize profits, and the OCA theory provides a framework for making informed decisions about currency selection. By considering different countries’ economic and monetary conditions, MNCs can optimize their international transfers and achieve tremendous success in their global operations.

• New Markets Access

MNCs often utilize access to new markets as a driving factor in their international transfers. It can involve expanding into untapped regions to increase revenue and market share. By entering new markets, MNCs can diversify their customer base, reducing their dependence on any single market and mitigating the impact of economic or political changes in any location. One example of an MNC that has utilized this strategy is PepsiCo. PepsiCo is an American multinational food and beverage corporation with operations in over 200 countries. In order to gain access to new markets and increase its global reach, PepsiCo has made strategic investments and acquisitions in regions such as India, Africa, and the Middle East. For instance, in 2012, PepsiCo acquired a 66% stake in Wimm-Bill-Dann, Russia’s largest producer of dairy products, juices, and snacks (Purkayastha and Rao, 2017). This acquisition gave PepsiCo a strong foothold in the Russian market, a relatively untapped market for the company at the time.

In addition to gaining access to new markets, PepsiCo has utilized this strategy to tap into new consumer demographics. PepsiCo has launched products specifically designed for the Indian market, such as Lays Magic Masala and Kurkure Masala Munch, to cater to local consumers’ tastes and preferences. Therefore, MNCs like PepsiCo utilize access to new markets as a key driver in their international transfers. That allows them to increase revenue, diversify their customer base, and tap into new consumer demographics. By making strategic investments and acquisitions in new markets, MNCs can expand their global reach and solidify their position as leading players in the global marketplace.

• Availability of raw materials

Like many other multinational corporations (MNCs), Mitsubishi Corporation faces challenges in accessing raw materials in its international transfers. To overcome these challenges, MNCs like Mitsubishi employs a variety of strategies. One such strategy is based on the International Fisher Effect (IFE) theory. IFE theory states that changes in a country’s nominal exchange rate will affect its real exchange rate in proportion to the difference between its domestic and foreign inflation rates (Curran and Velic, 2019). MNCs like Mitsubishi use this theory to assess the relative inflation rates of different countries and make informed decisions about where to access raw materials. For instance, if a country has a higher inflation rate than another, its nominal exchange rate will increase, leading to a higher real exchange rate. In this scenario, Mitsubishi might choose to source raw materials from a country with a lower inflation rate, as this would reduce the cost of the raw materials in terms of the company’s home currency.

In addition, MNCs like Mitsubishi can use financial instruments, such as currency derivatives, to hedge against currency risk and protect themselves against fluctuations in exchange rates. For example, the company might enter into a currency forward contract to lock in an exchange rate for a future transaction. Furthermore, MNCs can also use their bargaining power to negotiate favorable terms with suppliers in countries with lower inflation rates. It can include securing long-term contracts that fix prices and ensure a reliable supply of raw materials. MNCs like Mitsubishi Corporation use IFE theory, financial instruments, and bargaining power to access raw materials in their international transfers. By leveraging these strategies, the company can ensure a steady supply of raw materials and mitigate the risks associated with currency fluctuations and inflation.

Question 2: Why are MNCs increasingly looking for alternative forms of international assignments, and what are the benefits and drawbacks of using short-term international assignments?

Multinational corporations (MNCs) are increasingly looking for alternative forms of international assignments to improve their competitiveness, expand their global reach, and respond to changing economic, cultural, and technological trends (Luo and Shenkar, 2017). Companies such as Toyota, Amazon, and PepsiCo are prime examples of MNCs exploring alternative forms of international assignments. The following analysis examines the factors driving this shift and discusses the benefits and challenges of these alternative forms of international assignments.

One of the main drivers of the shift towards alternative forms of international assignments is the changing economic landscape. In the past, MNCs typically sent employees abroad for long-term assignments to manage their foreign operations. However, in today’s rapidly changing global marketplace, MNCs seek more flexible and cost-effective ways to do business overseas. For instance, Toyota has been experimenting with short-term assignments. Employees are sent abroad for a few months to gain new knowledge and skills and then return to their home country to share that knowledge with their colleagues.

Another important factor driving the shift towards alternative forms of international assignments is the rise of technology. The widespread availability of digital communication tools and cloud-based technologies has made it easier for MNCs to collaborate and communicate with their global operations. Amazon has expanded its business globally without relying on long-term assignments by leveraging technology to support remote work and virtual collaboration (Yarberry, 2021). Nevertheless, the changing cultural landscape is another factor driving the shift towards alternative forms of international assignments. In the past, MNCs would typically send employees to work in foreign countries for long periods, which often resulted in culture shock and other forms of personal and professional stress. To mitigate these challenges, MNCs are now exploring alternative forms of international assignments, such as rotational assignments, where employees spend a limited period working in different countries and then return home. This approach allows employees to gain exposure to multiple cultures and work environments while reducing the risk of culture shock and other forms of stress.

In addition, the changing political and legal landscape also plays a role in the shift towards alternative forms of international assignments. With increasing globalization, MNCs face a more complex and rapidly changing regulatory environment, making it more difficult to manage long-term assignments. For example, PepsiCo has been exploring alternative forms of international assignments, such as short-term projects and cross-border collaborations, to respond to the changing regulatory environment and maintain its competitive position in the global marketplace (Janes and Sutton, 2017). Despite the many benefits of alternative forms of international assignments, there are also several challenges associated with these approaches.

Companies must ensure that employees have access to the resources and support they need to succeed in their assignments. Additionally, companies must be mindful of the potential risks associated with cross-border collaboration, such as cultural misunderstandings, data privacy issues, and language barriers. Cost is also among the challenges associated with alternative forms of international assignments. While alternative forms of international assignments may be more cost-effective than traditional long-term assignments, they still require significant investment in time, resources, and expertise. Companies need to be prepared to invest in the training and support that employees need to be successful in their assignments, and they need to be mindful of the risks and challenges associated with these assignments. In conclusion, MNCs are increasingly looking for alternative forms of international assignments to improve their competitiveness, expand their global reach, and respond to changing economic, cultural, and technological trends. Companies such as Toyota, Amazon, and PepsiCo are prime examples of MNCs exploring alternative forms of international assignments and reaping the benefits of increased flexibility.

What are the benefits and drawbacks of using short-term international assignments?

Short-term international assignments refer to a temporary assignment of an employee to a foreign location, typically lasting between a few months and two years. This type of assignment has become increasingly popular in recent years as multinational corporations look to expand their global footprint and develop their employees’ cross-cultural competencies. Companies such as Apple, Amazon, and Mitsubishi have used short-term international assignments to transfer knowledge, build relationships, and enhance their employees’ skill sets. However, like any other work arrangement, short-term international assignments also have various benefits and drawbacks.

Benefits of Short-Term International Assignments

• Cross-Cultural Exposure and Development:

One of the most significant benefits of short-term international assignments is the opportunity for employees to gain exposure to different cultures, languages, and work styles. This exposure can help employees develop their cross-cultural competencies, which are increasingly important in today’s globalized business environment. Companies like Amazon have recognized the importance of cross-cultural competencies and have implemented programs encouraging employees to take short-term international assignments.

• Skill Development

Short-term international assignments can provide employees with opportunities to develop new skills and broaden their expertise in their field. For example, an employee working on an international assignment in a new market may learn about new technologies, products, and services that can be applied to their work back home. This learning experience can be invaluable for employees’ career development and enhance their overall value to the organization.

• Improved Business Performance

Companies such as Apple and Mitsubishi have used short-term international assignments to transfer knowledge and best practices between different parts of the organization (Inomata and Taglioni, 2019). This knowledge transfer can help improve business performance, as employees can bring new ideas and approaches to their home location. Additionally, short-term international assignments can help build relationships between employees from different parts of the world, leading to improved collaboration and communication.

• Cost Savings

Compared to a full-scale transfer or relocation, short-term international assignments are often a more cost-effective way for companies to achieve their global goals. The shorter duration of the assignment means fewer costs associated with relocation, such as housing, school fees for children, and language training. Additionally, short-term international assignments can allow companies to test the waters in a new market before committing to a full-scale transfer or relocation.

• Improved Global Competitiveness

Companies can improve their global competitiveness by sending employees on short-term international assignments. This is because employees who have worked abroad are often better equipped to understand and work with customers, clients, and suppliers from different countries, which can result in increased business success.

Drawbacks of Short-Term International Assignments

• Adjustment Challenges

While short-term international assignments can provide employees with valuable exposure to different cultures and work styles, they can also be challenging to adjust to. Employees may experience culture shock, language barriers, and difficulty adapting to a new work environment. This can lead to stress and decreased job satisfaction, which can impact their overall performance on the assignment. Companies must carefully consider the potential adjustment challenges when deciding whether to send employees on a short-term international assignment and should provide adequate support to help employees overcome these challenges.

• Disruption to Personal Life

Short-term international assignments can be disruptive to employees’ personal lives, as they may have to leave behind family and friends for an extended period (Liisa Mäkelä, Saarenpää and McNulty, 2017). That can be incredibly challenging for employees with young children, who may need to be enrolled in a new school and adjust to a new social environment. Companies should be mindful of the impact of short-term international assignments on employees’ personal lives and should provide support to help employees manage the transition.

• High Cost

One of the most significant drawbacks of short-term international assignments is the high cost involved. These assignments often require significant financial investments from companies, including travel, relocation, and housing expenses for the employee and their family.

• Increased Stress and Isolation

While short-term international assignments offer many benefits, they can also be stressful and isolating for employees and their families. This is because employees must adapt to a new country, culture, and work environment, often without the support of their usual network of friends and family.

• Potential Loss of Productivity

Short-term international assignments can also result in a temporary loss of productivity. This is because employees may need time to adjust to their new environment and get up to speed with their new roles and responsibilities.

Conclusion

The international transfer of goods and services is a critical component of the operations of multinational corporations (MNCs). MNCs engage in international trade to access new markets, increase their customer base, and reduce their dependency on a single market. MNCs face complex challenges when transferring goods and services across borders. However, by employing effective strategies, such as logistics management, compliance with regulations, supply chain management, global sourcing, and pricing strategies, MNCs can ensure the successful international transfer of goods and services while minimizing risks and maximizing profits.

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