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

11 multinational corporation

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