Explanation
Vertical expansion occurs when multinational companies expand production processes to other countries. This strategy allows them to take advantage of factors such as the low costs of labor and raw materials, lower capital investment requirements and less stringent local laws and regulations. This means these companies can lower production costs and maximize profits. Some developing countries encourage multinational companies because of the innovative technology they bring to the host country and because they typically offer higher wages than the national average.
Multinational companies also might expand by setting up sales units in host countries instead of marketing their products through local agencies. This allows the companies to ensure that their products reach their buyers and that they are in control of prices. Multinationals also may enter foreign markets when other brands offering the same products set up operations there. Competition makes it necessary for these companies to follow suit with units of their own. Multinational companies can give their sales units a level of autonomy, which allows them to operate and adapt their sales efforts according to market conditions in the host country.
Often, multinational companies set up production units in other countries for the sole purpose of catering to the local market. They manufacture products in the host country for distribution in the same country. This helps companies save on transportation costs and shields their operations from uncertainties arising from fluctuations in currency values. They also use sequential marketing, a strategy that edges out the local competition by offering better and more state-of-the-art products. Another method they might use to eliminate competition is to merge with or acquire local companies.
When offering products in the host countries, multinational companies may present their goods and services just as they are offered in their home countries. Examples include branded and packaged food and beverages. They carry similar brand names and are similar in appearance. Companies also might set up showrooms and outlets to mimic international norms. Other companies adapt their products to suit local demand, tastes and customer requirements.
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