Multinational Corporations Flashcards
Characteristics of Multinationals
HQ and operations in one country and operations in one or more other country.
Foreign Direct Investment (FDI) implying ownership and overseas operations
Management presence overseas
Large pool of resources
Operations linked by centrally coordinated global strategy
Diffusion of ideas, technology, policies and practices
Characteristics of multinationals (2)
The United Nations Conference one Trade and Development (UNCTAD) has devised the ‘Transnationality Index’, an unweighted average of three factors.
% of foreign to total assets
% of foreign to total sales
% of foreign to total employment
From Multinational to Transnational: International mentality
Focuses on the export of products manufactured at home. Some of the marketing is local.
Not strictly MNC’s e.g. Tunnocks
Multidomestic mentality
Sets up operations in one, but usually more, overseas countries and produces and markets local products for local markets. Considerable product variation.
Local responsiveness can be costly- duplication of R&D, marketing and other functions.
Several decentralised companies operating independently can create problems of coordination and control.
Global mentality
Typified by increased competition and expansion of operations.
Local focus on cost reduction, achieved through switching operations to low cost countries.
Cost reduction also achieved by product rationalisation leading to economies of scale.
Transnational mentality
Attempts to address the pressures of operating in a global economy.
Defined by Bartlett and Ghoshal (1995) as the need to be locally responsive; the need to be cost efficient and the demand for innovation to responsiveness to changing markets and increased competition. (standardization and flexible response)
Achieves both local responsiveness of the multi domestic operation with economies of scale and cost reduction of the global operation.
-growth of cross-border operations and alliances
-variety of strategies
-diffusion of technology and R&D
-corporate rather than national culture
Why did multinationals develop?
Protection against downturn in national economies
Access supply of raw materials
Access new markets
Protection against competition
Growth by acquisition or joint venture
Exploit economies of scale
Reduce costs
Overcome import controls
The process has been assisted by:
The creation of new structures – multidivisional companies.
Developments in transport and information and communications technology.
As with globalisation itself reasons are both proactive and reactive.
Theory of multinational
A simple explanation is based on economies of scale and economies of scope.
Economies of scale
Concept of economies of scale suggests that increased size in operation brings with it a reduction in unit costs. In other words, the larger the firm becomes, the cheaper it is to produce goods and services.
This is due to benefits from increased specialisation, the experience of staff and the ability of larger firms to borrow more money at favourable rates.
Economies of scope
Economies of scope refers to reduced costs associated with a range of products.
Benefits include; centralisation and sharing of functions such as marketing, distribution and accounts.
The Uppsala School
Based on an analysis of Swedish firms by members of Uppsala University in the 1970s.
Going international was an incremental process from exporting moving to wholly owned subsidiaries.
The most favourable locations initially are those with greatest similarity of language, culture and business practices.
The similarities and differences of language, culture and business practices are measured as ‘psychic distance’.
However not all firms follow this incremental route. ‘Born globals’ are firms with rapid overseas expansion to a number of different countries at the same time e.g. Amazon
John Dunning (1993) Eclectic Paradigm OWNERSHIP FACTORS
To be successful in an overseas market; have superior technology, superior brands, greater access to finance, superior forms of distribution and superior organisation and management.
Dunning LOCATION FACTORS
Operating in a country to avoid import tariffs or to take advantage of cheap labour or low rates of taxation or the availability of specific resources.
Dunning INTERNATIONALISATION
Based on notion of costs.
Firm may wish to do business a foreign market to seek a partner either as a manufacturer or distributor or both.
The partner in that host country will require some form of payment and their activities will need to be monitored and controlled.
Additional costs incurred drawing up contracts and other legal fees.
Firm wishing to expand may base decisions on host country firms with limited information.
Risks involved that the host country partner may acquire the intellectual property of the expanding firm and emerge as a competitor.
These are reasons a firm that wishes to expand in a foreign market may wish to apply greater controls and reduce risk by keeping all activities in house.
The reduction of transaction costs by doing it yourself rather than going to the market. Multinationals control both wholly owned subsidiaries and contract manufacturers in the supply chain.
Modes of entry into an International market
To do business in another country, organisations have a choice of:
Exporting – e.g. Tunnock’s -> Japan
Licensing -> Disney (primark sell products with Disney brand name)
Franchising – paying to operate under brand name
Offshore outsourcing e.g. call centres abroad
Establishing a wholly owned subsidiary
Joint venture
