Multinational Corporations Fall Into One Of Four Categories Economics Essay
Multinational Corporation is an enterprise operating in several countries but managed from a home country. Generally any firm or group that derives a quarter of its revenue from operations outside of its home country is considered a multinational corporation (MNC), and may fall into one of the four categories:1)Multinational, decentralised firm with a strong home country presence, 2)global, centralised firm that acquires cost advantage through centralised production wherever cheaper are available, 3)international, firm that builds on the parent firm’s technology or R&D, or 4)transactional, firm that combines the previous three approaches.
The UN statistics confirms that around 35,000 firms have foreign direct investment in different countries, and the largest 100 of them control about 40%of the world trade.
So what motivates the companies to expand their operations internationally?
Extensive research on the motivations for the firms to internationalise was found to be more systematic than a thought specific to an individual, to become the CEO. It was found out that there three basic traditional motivations and the earliest motivation which led the companies to invest abroad was the need to secure key supplies.
Aluminium producers needed to ensure the supply of the raw material required in their production, Bauxite. Tyre companies started rubber plantations abroad. Oil companies wanted to open up new fields in Middle East. Companies like standard oil, Alcoa, Goodyear, Anaconda copper emerged as MNCs.
Market seeking behaviour also constituted the triggers for internationalisation. The strong motive of the triggers for internationalisation. The strong motive of the European multinationals was to gain the competitive advantage over their domestic rivals by exploiting economies of scale and scope through additional sales.
Companies like Nestle, Bayer and Ford which had some intrinsic advantage related to their technology or their brand recognition internationalised in search of new markets.
The desire to access low-cost factors of production also formed an important trigger to internationalisations. Labour cost was the significant element in the production of goods in many US and European countries which led to competitive disadvantage compared to imports.
This mainly occurred due to declination of tariff barriers. Due to this many of the clothing, electronics, household appliances industries started outsourcing for producing components or even complete production lines. It was also perceived that along with cheap labour availability of lower cost capital also evolved as a strong face for internalisation.
Professor Raymond Vernon presented the product life cycle theory which explains how the traditional factors motivated the companies to internationalise. Innovation that a company creates in its home country forms the basis of the theory and it divides the product life cycle in three meaningful phases.
The company starts manufacturing of the goods in its home market to target its main customers and also to maintain close linkages between research and production. The setting up of production plant forms the first phase ‘exploiting the development’ and the later the products enter the phase of the development cycle. In this early stage, the companies may also target the customers where the consumer needs and market developments are similar to home market, thus generating exports.
The company enters a new stage as the product matures and the production processes become standardised. By this time, the demand in the importing countries may also increase significantly and exports may form an important part of revenues. On seeing a potential market, the competitors may also try to capture the market and can set the production plant in the importing countries to meet the foreign demand more effectively.
Finally, an open market is formed with high standardisation of product. Due to increased competition the companies aim to cut down the production cost and hence move the production to the developing countries with low wages for labours. Thus finally in the last stage the developing countries end up being the net exporters of the product while developed countries become net importers.
Due to the increased complexity and sophistication in the international business environment, companies experienced a much richer rationale for their worldwide operations. Elements which can represent the firms like trademark, production techniques, entrepreneurial skills, return to scale constitutes the ownership advantages of the firm.
The location advantages of a firm consist of existence to raw material, low wages, special taxes or tariffs. Both the ownership and location advantages are also significant reasons for the internationalisation of the firms.
Thus, we get to know that the market seeking, resource seeking, efficiency seeking and strategy seeking are the main motivations which led the firms to internationalise globally.
There are different models which shows the steps or how to or how do the firms internationalise.1) The Uppsala model of internationalise.2)The Dunning’s eclectic theory. 3) The interactive network approach of the Internationalise marketing and purchasing (IMP) group. 4) The Business strategic approach.
Johanson and Vahlne, 1977 stated the key features of the Uppsala model as, the firms must develop their activities abroad overtime and in an incremental fashion, based on their knowledge; and the concept of psychic distance explains this development. It explains that the firms must first expand into the physically close market and later into the distant markets as the firms develop the knowledge about those markets.
It was shown by Buckley et al. in 1987 that firms can use "mixed" approaches to individual foreign markets, instead of export through independent intermediary, export through sales subsidiary and manufacture within the market. Also, Turnbull in 1987 claimed that a variety of export market approaches forms the basis for exports of large companies which have substantial international experience and commitment.
It was cleared that export through an independent middleman or production abroad may not be always be the step for entry in a market. In support of this Root in 1987 gave the example of the high technology firms considering licensing as the mode of first entry to international market. Johanson and Valhne in 1990, in favour of this theory suggested that when the firms large resources they are expected to go for internationalisation with larger steps.
They also stated that there are many other ways than experience to seek relevant market knowledge, when the market conditions are stable and homogeneous. Also that it may be possible for a firm to generalise its experience to some specific market, if the firm has considerable experience from markets with similar conditions.
The concentration of both the Uppsala model and the eclectic paradigm is mainly on the autonomy of the firm in developing its international marketing activity. Turnbell blames the uneven focus on the activities of the producers with the intermediary in the flow of goods and success to the customer.
As described by the IMP the network of firms involved in production, distribution and use of goods and services which helps in the establishment of a lasting business relationship. Thus, the four basic variables which evolved as an influential factors in the interaction process can be listed as; the elements and process of interaction, the characteristics of parties involved, atmosphere which surrounds the interaction and the environment in which interaction takes place.
The executives in the supplier company will evaluate this environment to reach a decision regarding the customers and countries and thus will drive the organisation structure for market entry.
Thus, it’s essential for the firms to evaluate and take into account the market environment along with its own position in relation to its customers.
Pragmatism forms the basis of the business strategy approach. Reid (1983) "results from a choice among competing expansion strategies that are guided by the nature of the market opportunity, firms resources and managerial philosophy". The factors of market attractiveness, psychic distance and accessibility and informed barriers are to be taken into consideration as per this theory.
The choice of organisational structure is equally important. Company specific factors like international trading history, size, export, orientation and commitment are the factors on which the firms depend for market entry. Also Porter states, the number of competitors in the market as a key factor for market entry.
Exporting, licensing, franchising, joint, ventures, turnkey operations, contract manufacturing, counter trading and finally foreign direct investment are the various modes of the internationalisation of the firms. Exporting is the selling of goods and services from one country to another. The utilisation or selling of the intellectual properties like technology, products, brand names, trademarks , designs or any combinations of these by one licensee, by the permission of the other business agent.
Franchising is a form of licensing in which in return for royalties or fees or initial payment, a franchisee is given a right to undertake business activity in a prescribed manner, for a certain period of time at a specified place. The correct and proper choice of any of the above modes plays an important role in success of a firm globally.