A Company Is A Statutory Organisation
A company is a statutory organisation that operates business to gain profit. In modern time a company not only operates in a local area or inside a state but also a famous multinational company conducts its operation worldwide. Initially, a business organisation starts its business in a small field. Gradually, it expands business in different areas. To do worldwide business a company follows certain rules and regulations that are helpful for the development of their business.
When a company becomes successful in their country of origin they try to make a world market. A multinational company put forward their ideas in accordance with international trade. When the company is in operation outside the domicile state they are bound to follow the rules and regulations of international business. To develop business different companies use different policies and/or strategies. In modern globalise economy a company compete with similar other companies. As an international business organisation the activities of the company crosses the national boundaries. To do business a company moves its capital, services, employees, goods and technology from one business area/zone to others. Now-a-days the business activities are moving away from internationalisation to one of globalisation with the help of technology i.e www.
In the given scenario we are going to examine the internationalisation of a business organisation in relation to the theories of international trade. For the assignment we are going to choose ‘Nissan Motor Company' and its international business policy. In this regard it is to be mentioned here that Nissan Motor Company is the second largest carmaker in Japan. The company has been doing business in Japan and it was their long-term intention to start business somewhere in the European Union. On the basis of the theory of international trade the company began their investment in the United Kingdom in 1984. The main purpose of the business was to supply the cars to the European countries from United Kingdom instead of the cars manufactured in Japan with the aim of capturing European market.
It was thought that it would be difficult for the company to supply the vehicles from Japan to the European market and bearing that in mind the company reviewed different areas of the Europe and finally decided to start business in Sunderland. As the company was given support from the British government they choose United Kingdom instead of other countries like Belgium and Spain. To set up business in the international field different company follows different trade theory. While discussing about the Nissan Motor Company it is relevant as well as important to know the different international trade theory in details.
It is the old theory that a country should encourage exports and discourage imports. Although it is old it is not out of date yet because some countries still follow the policy in their international trade. It is the theory of absolute advantage of Adam Smith, which explained first that the unrestricted free trade is beneficial to a country. If a government does not influence through quotas or duties on goods which the people of that country buy from another country and sell to other countries can be said as free trade. If we look at the theories of Smith, Ricardo and Heckscher-Ohlin, they tell us that a country's economy may gain even if the citizen of that country buy some products from other country which can be produced in their own country. There is no doubt that the policy adopted by Nissan was part of free trade based on the above theory of absolute advantage. The new trade theory of Paul Krugman suggests that in some cases countries specialise in the production and export of particular products not because of underlying differences in factor endowments but because in certain industries the world market can support only a limited number of firms. Comparing this theory to Nissan it can be argued that as the company is well renowned for their car making they started the business in the United Kingdom and became successful in their field. That Nissan Motor Company is famous for their vehicles and it was quite easier for them to open a new plant in Europe.
Porter's the country factors such as domestic rivalry and domestic demand in explaining a nation's dominance in the production and export of some specific product are very important. It is to be mentioned that together with these theories the policy of the government is also vital for the generation of a company's business. On the other hand Smith stated that countries should specialise in the production of goods for which they have absolute advantage and then trade these goods for goods produced by other countries. It can be said that as Japan is specialised in manufacturing cars they can trade those cars to other countries. On the basis of that theory the Nissan Motors set up their business in Sunderland, UK.
At the time of deciding to build a production plant Nissan Motor Company took into consideration the high employee productivity of United Kingdom as well as political stability. As Britain was generous in permitting Nissan to set up their business it was largely criticised by some European leaders. It is mentionable here that the French President called Britain as ‘Japanese aircraft carrier sitting off the coast of Europe'. The policy taken by the governments varies from state to state and sometimes favours the domestic products or discriminates against foreign products. At the national level a multinational company is faced with the domestic competition which favours the domestic products. However, the policy taken by the British government towards the Nissan Motor seems to be liberal and not restrictive which helped them to capture the car market here in Europe. It was told that the plant might be only assembling cars by the parts imported from Japan. But the fact proved that the critics were untrue. It was announced while the plant was opened that the company would be using 60 percent of local contents or materials. The president of Nissan announced in Sunderland in 1986 that an acceleration of its UK manufacturing programme with local content rising to 60 percent by 1988. The company achieved its goal and it had been using 80 percent of the local content for their European car plant at present.
The company is now expending about 1,300 million dollars in the Sunderland. Two-thirds of the suppliers of the plant are located in the United Kingdom and most of the component suppliers are based in France, Spain and Germany. It is to be mentioned that there are thirty suppliers surrounding the car plant in Sunderland. In the modern open market economy free trade might increase a country's stock of resources as increased supplies of labour and capital from abroad and it becomes available for use within the country where the business is in progress. If we look at the Eastern European economy it is clear that most of the Western European countries are investing more capitals in those less developed countries because of the availability of chief labour.
It may be said that Nissan was interested to invest money in the United Kingdom because of easy and experienced labour, stable socio-cultural environment etc. Free trade increases the efficiency with which a country can utilize its other resources. If we look at the theory of Eli Heckscher and Bertil Ohlin, it explains differently the comparative advantage theory. According to them comparative advantage arises from differences in national endowments. Although most of the economists prefer the Heckscher-Ohlin theory to Ricardo's theory it is not out of criticism. The Nobel Prize winner economist Wassily Leontief questioned about the validity of their theory. If we look at the project of the Nissan in the United Kingdom, it seems that it does not follow a single theory- it is a combination of some theories that made the plant one of the successful car companies in the world. Behind the success were the location, communications infrastructure, skilled labour, available research facilities and modern technologies. There is a big market of Japanese cars in the Europe, which made the plant very effective one. United Kingdom is the main beneficiary of the Nissan plant because the country is exporting the cars to most of the European countries. The plant created a big number of jobs for the British people, which have a direct effect on the British economy. If we look at the new trade theory it seems that Nissan was following most of them. According this theory if in some industries the world market supports only a few firms, the countries may predominate in the export of those products because they had that firm which is fast mover in that field. On the basis of the theory Nissan was planning to build a big plant in the Europe. The company was aware that it would be expensive for them to supply cars to European countries from Japan and was also aware of the European Union's business policy.
In 1994 the company was producing more than 250,000 cars in Sunderland and most of them were sold to the European countries. About 80 percent of the vehicles were exported to Europe and some other countries including Japan. It is to be mentioned that the plant is now the largest car exporter in Britain. To do worldwide business the other important factor is the political relationship of the countries. It is well known that United States and Japan are one of the largest bilateral trade partners. It became possible because of the political relationship between the states. Nissan was trying to establish a firm in the Europe and they got better opportunities from United Kingdom and finally started their business. It was only possible because of the political relationship between Japanese and British government.
In international trade we can find mainly six instruments and they are: tariffs, subsidies, import quotas, voluntary export restraints, local content requirements and administrative policies. Apply these policies to our selected company. When Nissan Motor Company was trying to start a plant in Europe, they were looking for a better place. The company could not get better opportunities in France, Germany, Spain and Holland. Finally they approached to British authority and was given quite reasonable terms and conditions for their business. The tariffs were not big enough that could be unreasonable. The condition for export was flexible and was acceptable to Nissan. The local requirements were quite good for the company and the administrative policy was very friendly from the British authority, which made the plant one of the successful multinational companies in the world. Nissan was not intervened to carry on their business by Japanese or British authorities what turned the plant as the biggest car-exporting agency in the United Kingdom within few years of its operation in the Europe. If we look at some political or business organisations it can be found that some of them are against free trade. Some of them are made for free trade and they are GATT, WTO and EU etc. However, the Nissan plant was never been approached by any organisations to continue their business. Although the British government was criticised by some European leaders the company did not face any big difficulties ever.
Foreign direct investment is very important and relevant to know in this regard. When Nissan started its European plant in UK they employed 470 people but in 1994 it has risen to 4,250. Other jobs were created by investing more money in the supporting industries. In the Sunderland area some subsidiary supplying company have been established for the Nissan Motors. Nissan estimates the total permanent employment generated in the northeast part of the United Kingdom from its Sunderland plant was 8,029 in 1994. Since Second World War United States is the biggest source country for foreign direct investment. In 1970 United Kingdom was in second position. Japan is one of the beneficiaries of the foreign direct investment. Taiwan and Vietnam developed their country when United States invested a lot of money there. Although Nissan Motors had a big project in Japan they made direct investment in the United Kingdom because it was very expensive to export cars from Japan to European countries. We are well aware that a government can encourage or restrict the foreign direct investment. The host country has a big authority in this regard. From the very beginning the British government encouraged Nissan because the government was concerned about the employment of the skilled people of the United Kingdom. It is worth to mention that for the foreign direct investment the political ideology of the government plays a vital role. The radical view that a multinational enterprise exploits host country, so no country should permit foreign direct investment. This view is now old dated and very few countries follow this view now, neither United Kingdom nor Japan followed the view.
In the time of globalise economy according to free market policy, multinational enterprise is an instrument which increases the efficiency of resource utilization in the world. It is clear from our case that both Japan and Britain took the free market policy when they entered into the agreement. The British economy benefited from Nissan by the way of employment and balance of payments effects. United Kingdom also gained benefits from resource transfer from Japan to United Kingdom. Therefore, it can be said that Nissan gained profit by investing money to the United Kingdom and exporting the vehicles to other countries and the British authority benefited from the employment and some other charges on import and exports.
International trade theories are very important for the firms that intend to set up businesses internationally. A firm needs to influence the government or the international business organisations to set up business in different countries. The firm also has to have a good lobby with some political organisations. It is to be in mind that foreign direct investment is also an important factor for the international business. The policy of the Nissan Motor Company was one of free market policy and both British government and Japanese were benefited by establishing the plant in Sunderland. Classical trade theories of Smith, Ricardo and Heckscher-Ohlin showed us that in a world without trade barriers are beneficial to current world economy.
Print based materials:
Hill, C.W.L (2005) ‘International Business: Competing in the Global Marketplace'
Bennett R (1996) International Business
Harris N (1996) European Business
Porter M (1990) Competitive Advantage of Nations
Root FR (1994) International Trade and Investment
The Economist, Financial Times & World Economy.
www.un.org, www.wto,org, www.ft.com
www.economist.com, http://europa.eu.int, www.tranparency.org.
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