How Firms Become Multinational Enterprises

How Firms Become Multinational Enterprises A multinational enterprise according to Brooke and Remmers is a company that is present in more than one country, the home country and the host country and provides valuable activities in a service or manufacturing area (Dunning, 1993, p.3). Though Maurice Bye 1958 began to see and recognize multinational enterprises by the definition Multi-territorial firm indicating that a MNE was purely given the name by the amount of countries a company occupied(Maurice Bye 1958). Academics see the multinationals in great depth and definitions are slightly different, J.Dunning defines a Multinational enterprise as an enterprise that engages in foreign direct investment (FDI) and owns or controls value adding activities in more than one country (J.Dunning 1992). MNEs therefore, control a package of resources, which they move across national borders, and continue to control over those borders. This transfer is often conceived solely in financial terms, but in practical terms the role of MNEs in tra nsferring capital between countries is one of their less important functions. The critical resources, which multinationals transfer across borders, are the areas of technology and organisation, entrepreneurship and culture. MNEs are imperative because they have the capacity to move technologies and ideas around the world. This gives the firms the potential to serve as engines of growth. This essay will explain why and how firms become multinational enterprise. The subsistence of MNEs might seem apparent, in the sense that firms in the capitalist system exist to make profits, and investing in foreign countries could be seen as a coherent way of making more wealth than staying in one country. In spite of that not all firms in the world are multinational. In addition to this, according to Jack Behrman there are four main types of Multinational corporations motives (Jack Behrman 1972). The first motive, the resource seekers the enterprises, to obtain particular and specific resources at lower real cost that cannot be obtained in their home country aim to invest abroad. One kind of these is the physical resources like, raw materials, minerals, agricultural product and location advantage, which generally involves substantial capital expenditure. Another kind of resources is semi-skilled and unskilled labour that is available at lower costs, in countries developing in advanced industrialization like, Mexico, Taiwan, China and like Primark outsour cing from India. One more motive why firms seeking FDI in resources is to obtain technological skill, management and organizational skills already accessed there. The second motive the market seekers enterprises, aim to prolong or protect existing market or to promote in new markets. Thereby, there are four main reasons firstly, to cope-up with the suppliers and customers who have set up foreign producing facilities. Secondly, to hunt the market, the product needs to be modifying according to the local customers preferences. Thirdly, sometimes it is a lot cheaper to produce in the host country than to export from home country. This is becoming more necessary if there are trade barriers and restrictive government laws. Furthermore, the last reason for market seeking investment is that enterprise wants to have physical presence in the foremost markets served by its competitors. Therefore, companies like Nestle, Bayer and Ford expanded internationally in search of new markets. The third motive the efficiency seekers enterprises want to obtain from the common governance of geographically scattered activities and to have benefit of economies of s cale and of risk diversification. Therefore, enterprises wants to compete on the basis of the product it offers and its ability to diversify its assets and capabilities by exploiting the benefits of producing in several countries. The fourth motive the strategic asset seeker enterprises to sustain their international competitiveness acquire the assets of foreign corporations. Like one company might acquire a business so as to thwart competitor from doing so or another might merge with its foreign rivals or one might acquire suppliers to corner the market for raw materials. Enterprises seeking strategic FDI are trying to protect or advance their long-term competitive position. Apart from these four motives other motives like escape investments, support investments, passive investments also play a big role why firms want to go international (Dunning 1992). Therefore, these motives were and will be the main driving force behind the expansion of MNCs. The ways in which these motives have mainly pushed firms from United States to become MNCs are based on product cycle theory developed by Professor Raymond Vernon. This theory suggests that the starting point for the internationalization process is typically an innovation that a company creates in its home country (Raymond Vernon 1966, p.190-207). Then after the product is launched it is gaining success in its domestic market and finally the product becomes highly standardized and company has gained recognition thereby, the competitors enter the same business. Market now focuses on price so the company has to move its production to low-wage developing countries so as to be above the competition and later has to develop market share in other countries, which they have lost in home country. For example Nokia started as domestic company in Finland but its success at home country led its produc tion and sale to foreign markets. This way firms should analyse their role of management, motives of the organisation and their success at home country and should think of entering foreign market but question here arises how will firms do that. This can be explained on the basis of theories of Internationalisation. The Eclectic paradigm sets out to explain the extent, form and pattern of international production and is founded on the juxtaposition of the ownership- specific advantages of firms contemplating foreign production, the propensity to internalize the cross-border markets for these, and the attractions of a foreign market for the production (Dunning, 1988). The eclectic paradigm, with its emphasis on TCA, i.e. Transaction cost analysis tells how firms and especially MNCs evaluate whether or not to establish a manufacturing subsidiary in a market abroad (Erramilli and Rao, 1993). This information is cost-based, requiring the costs of running a system to be calculated so that the firms can make any evaluation. Thereafter, industrial network approach (Johanson and Mattsson, 1986) and the business strategy approach (Welford and Prescott, 1994) present detailed models incorporating a number of factors which impact upon market entry and the selection of a market entry method. By doing so, it seems clear that information on these factors is a pre-requisite of a firms decision. However the Uppsala model is unique in seeing information about a market, specifically that based on experiential knowledge, as the crucial indicator of market entry and, particularly, market entry mode selection. (Jan Johanson et al. 1977) So, the firms should make an initial commitment of resources to the foreign market, and through this investment it gains local market knowledge. On the basis of this, the company will be able to evaluate its current activities and opportunities for additional investment. Thereby, companies should accumulate their time of entry on the basis of its level of commitment in the foreign market and level of control over foreign activities. This all depends on the nature, form of the firm whether the firm is going to only sell its product or the firm is producing and selling goods and services. At the first stage this can be done by the indirect exporting, licensing/ franchising and then at second stage by direct exporting, direct sales operations in host country, joint ventures and FDI. Firms can potentially enter into international business at any of these stages and decide to prolong at that stage but can go to other stage and choose another option in starting or later period of business. Like, some companies internationalize gradually by moving up the scale from exporting through joint venturing to direct foreign investment. With exceeding industrial period of globalisation firms have shown mounting interest in going abroad because of the increasing need to go international, pressure to procure cheapest inputs, efficiency seeking, the opening up of new markets, considerable changes in location costs and benefits and a strive to strike a balance between globalisation and localisation. Therefore, firms should choose appropriate business options to enter and service the host market on the basis of above discussed Multinational corporations motives and then decide which stages firm will go ahead so that firms corporate objectives are achieved efficiently and effectively. Then domestic firms can face challenge as cross border mergers and acquisitions, MNCs have been constantly increasing and MNCs account for over 40 percent of the worlds manufacturing output and almost a quarter of world trade. So firms should analyse their business prospective on the basis of above discussed Uppsala model, eclectic theory an d other theories and then go ahead. However, international business has taken a quantum leap and is now considered strategically important both by firms and governments. How Firms Become Multinational Enterprises How Firms Become Multinational Enterprises INTERNATIONAL BUSINESS ASSIGNMENT II Introduction A significant shift is taking place in the world economy today; previously each nation had different and relatively isolated economies from each other by different barriers to cross border trade. But now we are drastically moving towards an independent global economic system in which different national economies are blending together which is referred as globalization. Independent global economic system has brought effective involvement of numerous firms from various countries in the international market; the shift towards globalization has been accelerating currently, and it looks set to carry forward. Multinational Enterprise An enterprise that operates and has its assets and facilities in more than one country excluding its home country is called as multinational enterprise, such firms has have offices, factories, outlets and etc., in different countries and usually have centralised head office where they co-ordinate global management. The swiftly developing global economy creates many factors and opportunities for business worldwide. It creates opportunities for business to expand their resources, profit and market, this make many firms to become globalized for example Wal-mart , Coca-Cola, Exxon Mobil, Levi Strauss, and Royal Dutch Shell are some of the most successful multinational enterprise in the world. But still many significant differences exist between national markets along many relevant factors which need to be overcome to be successful globally. Why Firms become Multinational Enterprise? As an enterprise operating in an International Business environment provides many new openings to a firm than operating in a domestic environment. A worldwide operation provides an enterprise access to new markets, resources and many other benefits, mainly it also widens the options of strategic moves of the firm against its rivals. Lets discuss the reasons for the firms becoming a Multinational corporation elaborately. The Eclectic Paradigm An effective approach to the study of the internationalization of business was offered by John H. Dunning. The Eclectic paradigm was a dominant framework for explaining the reason for the existence of Multinational enterprises and the determinants of foreign direct investment. Dunning stated three factors to the eclectic paradigm: i. Ownership-specific advantages The enterprise which invests in a foreign country has a competitive advantage and out-competes the firms that operate in the country where the investment is done. The multinational enterprise has advantages of Intangible assets like trade name, brand, and patents. The firm has benefits of reputation, technology and skills of management. ii. Location-specific advantages This advantage is based on the geographical position of the firm; according to this many positive factors like resources, cheap labour, host countrys regulations and political stability are available for the multinational enterprises. iii. Internationalization-specific advantages When a firm enlarge its operations in another country, by acquiring the property of the assets that are abroad its get this internationalization benefit. The firm gets a new market, reduces the production cost and can keep its skills and capabilities internal to the firm. The Product life cycle theory The product life cycle theory was framed by Raymond Vernon, this illustrate that in the beginning stage of the product life cycle the production and the rest of the operations of the product takes place in the home country. First the product will be serving the local market and then world market, when the product gains reputation the production gets relocated abroad to gain from lower labour cost and the other benefits available in host nation. At a point of time the country which invented the product becomes an importer of that product. The best example for this is the invention and production of personal computers by IBM. This is also an essential cause for firms to become a multinational enterprise. The Internationalization theory The market imperfections approach to Foergin direct Investment is typically referred to as internalization theory. The Internationalization theory was developed by Buckley and Casson. This theory states the main reasons for which the firms become a multinational enterprise due to market imperfection. Due to market imperfections, the monopolistic advantage of the firm can be used to widen worldwide to again competitive advantage. A firm overcomes market imperfections by creating its own market by the means of internalisation through this the firms become a multinational enterprises. Resource seeking The firms develop into a multinational enterprise to seek and secure natural resources like raw materials, minerals and human resource. This helps the firms to reduce the labor cost and production cost. Market seeking The multinational enterprises emerge to identify and exploit new markets for their products. This approach is followed by the firms to overcome trade barrier and to reduce high transport cost. Efficiency seeking The firms try to enlarge globally to obtain the efficiency benefits they obtain from the host country like cheap labour force, for example multinational enterprise obtain low cost but labour intensive manufacturing in many Asian countries. Capabilities seeking The firms follow strategic operations by buying existing firms or assets abroad, this is an approach by the firm to seek adequacy in order to sustain and advance its competitive position globally.These are the major reasons for a firm to become a multinational enterprise. How firms become multinational enterprise? Once a firm take on Foregin Direct Investment(FDI) it become a multinational enterprise, a multinational enterprises have substantial direct investment in foreign countries. FDI (Foreign Direct Investment) refers to the long term participation like management, partnership, technology transfer and etc., between a foreign country and a host country. FDI has become a vital accept of global economy, many nations liberalized the regulations for FDI and numerous host economies has have reduced trade barriers for foreign nations to do business in their nation. When a firm decides to enter foreign market and expand to become a multinational enterprise then mainly there are six different modes to enter. Joint venture Establishing a joint venture with a foreign firm has been a feasible mode of enter to the world market. Setting up a firm that is jointly owned and operated by two or more firms is called as joint venture. A firm can gain advantage from a local partners knowledge of the host countrys competitive conditions, culture and political system. Through this joint venture a firm can gain by sharing development cost and high risk of entering a foreign market with the local partner. Wholly Owned Subsidiaries When firm owns 100 percent of the stock then it is termed as wholly owned subsidiary. If a firm wants to compete based on its technology then this will be the most preferred entry mode. Many high-tech firms prefer this mode of entry for overseas expansion. Establishing a wholly owned subsidiary in a foreign market can be done by setting up a new operation in that country or by acquiring an established firm and using that firm to operate. Licensing Licensing is very attractive approach for the firms which lack capital to develop overseas operation. Licensing is an arrangement by a firm to grant the rights to intangible property to another entity for a period of time and in return a fee is charged by the licensor. The advantage of licensing is that the firm does not need to bear the set up cost and risk involved in opening a foreign market. Franchising Franchising is basically a specialized form of licensing in which franchiser sells the intangible property and provide business assistance to the franchisee. The best example for a firm using franchising strategy is McDonalds.   By using this a firm can build up a global operation quickly at a low cost and risk.  Ã‚   Exporting Most of the firms begin their internationalization as an exporter. Exporting reduces the costs of establishing manufacturing operation in the host country. By manufacturing the product in a centralised location and exporting it to world market; the firm may get the picture of substantial scale economies from its global sales volume. Turnkey Projects This is a means of exporting process technology to foreign countries. Under turnkey project, for a foreign client the contractor designs, construct the whole manufacturing unit and also train the operating personnel. After completing the contract, the contractor hands over the key to a plant that is ready for full operation hence this approach is called turnkey. Turnkey projects are common in chemical, petroleum refining and metal refining industries, all of which require costly, complex production techniques. Conclusion Abstaining national trade barriers and advancement in communication, information, and transportation technologies are the main factors which influence the trend towards internationalization. These changes have enabled firms to operate worldwide and emerged different nations market into a single global market. The advantages of the growing global economy should be utilised for the welfare of the people all over the world. BIBLIOGRAPHY Buckley, P.J. and Ghauri, P. 1993. A Theory of International operations: The Internationalization of the firm-A Reader, pp 45-50. Elkahal, S. 1994. The Internationalization of trade: Introduction to International Business, pp. 65-70. Hill, C.W.L. 2000. Entry strategy and strategic alliance: International business-competing in the Global Marketplace, pp. 426-448.