11 multinational corporation
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Chapter 11
Multinational Corporation
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Multinational Corporation
Multinational corporation is a company which has a
direct investment base in several countries, generally
derives from 20% to 50% or more of its net profits from
foreign operations and its management makes policy
decisions based on the alternatives available anywhere
in the world. MNC as a company meets five criteria.
1. Operate in many countries at different levels ofeconomic development.
2. Local subsidiaries are managed by nationals
3. Maintains complete industrial organizations,including R & D and manufacturing facilities, inseveral countries
4. It has multinational central management
5. It has multinational stock ownership.
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Characteristics of Multinational Enterprise
1. MNEs affiliates must be responsive to a number ofimportant environmental forces, including competitors,
customers, suppliers, financial institutions, and
government. The same forces are at work in both
the home and host country environments.
Example: Many of General Motors competitors inthe US market are the same as those in Europe:
BMW, Ford, DaimlerChrysler, Honda, and
Volkswagen, among others. Similarly , MNEs often
use the same suppliers overseas that they employdomestically and it is common to find home
country-based suppliers following their MNE
customer to other geographic locales in order to
provide the same types of services worldwide.
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2. MNE draws on a common pool of resources,including assets, patents, trademarks, information,
and human resources. Since the affiliates are allpart of the same company, they have access toassets that are often not available to outsiders.Example: both Ford and General Motors competevigorously in Europe and many of the design andstyling changes developed for their European cars
have now been introduced in US models. The flowof information and technology between Europeanand US affiliates has led to success in theworldwide market for many MNEs. Also if anaffiliate needs expansion funds, and MNE will oftenhelp out by working with the affiliate to raise themoney. If a loan is needed, the affiliate is likely tofind many financial institutions that are willing toprovide the money since the MNE will back theloan.
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3. MNE links together with the affiliates and business partners
with a common strategic vision.All of the firms with whom
the MNE works fit into the companys overall plan of what it
wants to do and how it intends to go about implementing
this strategy. Example : General Motors (GM), the auto giant
has announced that it is now going to rely heavily on
partnerships to help it grow. GM realizes that no auto maker
has all of the resources for achieving leadership in everyregion of the world or in every product segment. As a
result, the company has formed a manufacturing
partnership with Toyota to conduct research and
development on fuel cell and gas-electric hybrid vehicles.
GM also has created and alliance with Fuji Heavy Industriesand its Subaru brand that allows GM to benefit from Fujis
strengths in small sport utility vehicles, continuously
variable transmissions, and all-wheel-drive systems and , in
turn, gives Fuji access to GMs vehicle platforms and other
important manufacturing technologies.
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The internationalization process
The process by which a company enters a foreignmarket at a slow and cautious pace, often using the
services of specialists in international trade outside
the firm. The major types of foreign types of foreign
entry for a firm are as follows
1. The firm sees potential extra sales by exporting and
uses a local agent or distributor to enter a particular
market. It have no long run commitment to the
international market. If it does well abroad, it may
then set up its own local sales representative ormarketing subsidiary, in the hope of securing a
more stable stream of export sales.
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2. As exports come to represent a large share ofsales, the firm may increase its capacity to servethe export market. It will set an office for its
sales representative in a major market, or set upa sales subsidiary. At his stage the firm willoften set up a separate export department tomanage foreign sales and production for suchmarkets and product design and the production
process itself may be modified to tailor productsfor export markets.
3.. Now the firm begin to move on the foreignproduction side. Initially it may start to use hostcountry workers to engage in local assemblyand packaging of its product line. It must dealwith such environment variables as wage rates,cultural attitudes and worker expectations in itsnew labor force.
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4. The final stage of foreign involvement comes when thefirm has generated sufficient knowledge about the hostcountry to overcome its perception of risk. Because it
is more familiar with the host country environment, itmay now consider a foreign direct investment activity.In this it produces the entire product line in the hostnation and sells its output there, or it may even be ableto re export back to the home country. These decision
depend on the relative country specific costs. Example if labor is inexpensive in the host nation, mostexporting takes place than if it is expensive.
Reason for Becoming MNE
1. Diversification : Companies diversify themselvesagainst the risks and uncertainties of the domesticbusiness cycle. By setting up operations in anothercountry, multinationals can often diminish the negative
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3. Increased competition : Companies in response to foreigncompetition and a desire to protect their home marketshare go for foreign investment. Using a follow the
competitor strategy, a growing number of MNEs nowset up operations in the home countries of their majorcompetitors. This approach serves a dual purpose i) ittakes away business from their competitors by offeringcustomers other choices ii) it lets competitors know , ifthey attack the MNEs home market, they will face a
similar response. This strategy of staking out globalmarket shares is particularly important when MNEs wantto communicate the conditions under which they willretaliate.
4. Reduce cost : By setting up operations close to the
foreign customer, these firms can eliminatetransportation expense, avoid the overhead associatedwith having middlemen handle the product, respondmore accurately and rapidly to customer needs and takeadvantage of local resources. This process known asinternalization of control within the MNE, can hepl to
reduce overall costs.
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5. Protective device: Sometimes companies go for foreign market
to overcome protective devices such as tariff and non tariff
barriers within. The EU provides an excellent example. Firms out
side the EU are subject to tariffs on goods exported to EUcountries. Firms producing the goods within the EU, can
transport them to any other country in the bloc without paying
tariffs. The same is now occurring in North America, thanks to
the North American Free trade Agreement (NAFTA), which has
eliminated tariffs between Canada, the US and Mexico.6. Technological Advantage : MNE is to take advantage of
technological expertise by manufacturing goods directly rather
than allowing others to do it under a license. Although the
benefits of a licensing agreement are obvious, in recent years
some MNEs have concluded that it is unwise to give anotherfirm access to proprietary information such as patents,
trademarks or technological expertise, and they have allowed
current licensing agreements to lapse. This has allowed them to
reclaim their exclusive rights and then to manufacture and
directly sell the products in overseas markets.
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Merits of MNCs
1. MNCs help increase the investment level and
thereby the income and employment in that hostcountry.
2. The transnational corporation have becomevehicles for the transfer technology, especially tothe developing countries.
3. They also kindly a managerial revolution in thehost countries through professional managementand the employment of highly sophisticatedmanagement techniques.
4. The MNCs enable the host countries to increasetheir exports and decrease their import
requirements.5. They work to equalize the cost of factors of
production around the world.
6. MNCs provide an efficient means of integratingnational economies
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7. The enormous resources of the multinationalenterprises enable them to have very efficientresearch and development systems.
8. MNCs also stimulate enterprise because to supporttheir own operations, the MNCs may encourageand assist domestic suppliers.
9. MNCs help increase competition and breakdomestic monopolies.
Demerits of MNCs
1. The MNCs technology is designed for world wide
profit maximization, not the development needs ofpoor countries, in particular employment needsand relative factor scarcities in these countries.
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2. Through their power and flexibility, MNCs can evade orundermine national economic autonomy and control, andtheir activities may be inimical to the national interests of
particular countries.3. MNCs can have unfavorable effect on the Balance of
payments of a country. Example : the Coca-Cola, until1978, had remitted abroad nearly 6 crores on an initialinvestment of 6.6 lakhs in India.
4. MNCs may destroy competition and acquire monopolypowers.
5. The tremendous power of the global corporations posesthe risk that they may threaten the sovereignty of thenations in which they do business
6. MNCs retard growth of employment in the home country7.The transactional corporations cause fast depletion of some
of the non renewable natural resources in the host country.
8. The transfer pricing enables MNCs to avoid taxes bymanipulating prices on intra-company transactions.
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The strategic philosophy of multinational enterprises
Multinational enterprise are different from companies that
confine their activities to the domestic market in that MNEsmake decisions based on what is best for the overall company,
even if this means transferring jobs to other countries and
cutting back the local workforce. Example: in the last decade
IBM, A
BB, and Sony have spent considerable sums of moneyto train and develop local managers to handle overseas
operations because the companies are finding that these
managers are often much more effective than those sent form
the home country.
There is a great deal of economic interaction in the
international arena, giving business firms headquartered in
one country a significant impact on the economies of other
countries. Example : with the recent slowdown of the world
economy more and more MNEs are now trimming their
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workforces. Alcatel, the giant French telecom
medications equipment maker, has announced plansto cut 29 per cent of its workforce and to reduce its
factories down to a dozen, using outsourcing to
handle all other production needs.
The overall operation can be seen in the way MNEsteam up to get things done.Example: Mazdas sports
car, the MX-5 Miata, which was designed in California,
had its prototype created in England, was assembled
in Michigan and Mexico using advanced electronic
components invented in New Jersey and fabricated in
Japan, and was financed from Tokyo and New York.
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Steps in strategic management process
Strategic planning typically begins with a review of the
companys basic mission, which is determined by
answering the questions : What is the firms business?
What is its reasons for existence? By answering these
questions, the company clearly determines the
direction in which it want to go. Example :Shell Oil, BP,
Amoco, and Texaco, see themselves as being in theenergy business, not in the oil business, and this focus
helps to direct their long-range thinking.
An MNE will evaluate the external and internal
environment. The goal of external environment analysis isto identify opportunities and threats that will need to be
addressed. Based on opportunity analysis, BMW has
invested in East Germany in small startup companies to
produce components and tolls for its auto manufacturing
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business and McDonalds has been opening fast-food
restaurants in the region. These companies all see the
region as having tremendous financial potential.
These expansion decisions were made only after the
companies had analyzed the potential pitfalls. Their
external environment analysis showed that it would be
necessary to increase worker productivity, improve the
local infrastructure, and bring in qualified managers torun the operations until a local cadre could be developed.
The Purpose of internal environment analysis is to
evaluate the companys financial and personnel
strengths and weakness. Examining its financial picturewill help the MNE decide what it can afford to do in terms
of expansion and capital investment. Examining its
financial picture will also help it to identify areas where
cost-cutting or divestment is in order.
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Internal and external analyses will also help the MNE
to identify both long-range goals (typically tow to
five years) and short-range goals (less than tow
years).
The plan is then broken down into major parts, and
each affiliate and department will be assigned goals
and responsibilities. This begins the implementation
process.
Process is then periodically evaluated and changes
are made in the plan. Example: an MNE might realize
that it must stop offering a particular good or service
because the market is no longer profitable or it mightcreate a new product in order to take advantage of
an emerging demand