A MULTINATIONAL ENTERPRISE-
Why & How
The world trade has grown at a tremendous rate since 1980s. There have been huge discrepancies between taxation, working standards and pay in the Less Economically Developed Countries (LEDCs)and More Economically Developed Countries (MEDCs)which has resulted in trade opportunities for companies all over the world allowing them to have low cost and high profit- Schifferes (2007). According to Dunning (1995) the employment structure of MEDCs, for instance US & UK has changed dramatically. In Britain, manufacturing and production has declined, whereas the tertiary sector had an increase to 72%. There were several factors behind this: such as the dramatic rise in the cost of labour in Britain; thus it is now expensive to produce goods in the UK than importing from outside world. Due to technological advancement, fewer factories are needed as machines are replacing human labor. Export taxation has also increased. All these factors have added to the existence and growth of the Multi-National Companies (MNCs).
This essay will explore into how and why a domestic firm becomes a multinational and will provide a critical view to the topic, supported by a case study of the multinational company-Fiat.
Until 1973, the MNC was described as an enterprise which controls factories, mines, sales offices, and assets in two or more countries (Bartlett et al, 2003). What constitutes the term ‘Multinational Corporation’ has now changed and requires two essential qualifications. Firstly, an MNC is required to have a substantial direct investment in foreign counties and not just have an export business. Secondly, a true MNC is a company which actively engages in the management of their offshore assets rather than simply hold them in a passive financial portfolio. Veneeva (2006) According to Dunning, (2009), a multinational or transnational enterprise is an enterprise that engages in foreign direct investment and owns or controls value-adding activities in more than one country.
Fiat is a good example of what a multinational firm can be understood as. Based in Italy, it has a wide range of industrial ventures like – chemicals, bioengineering, insurance and primarily cars. It is the second-largest automobile manufacturer in Europe (after Volkswagen).
The company has its plants in places including Australia, China, USA, South America and Africa. As mentioned in BBC news (2005) in order to understand how the MNCs work, the best way is to consider Fiat’s move into Brazil (LEDC) and later in the rest of South America. The few reasons that forced Fiat to Brazil are: the strong military government during the start up of the company helped in reducing the strikes. Pool of cheap human resources, earning just $7 per hour in comparison to $20 per hour in the UK. The company also received grants and aid of $135million form the state of Minas Gerais. The Brazilian government, in order to provide long-term employment agreed to the growth in the car industry in 1990s. this led to an increase in production from 130,000 cars in 1976 by the company to 2.2 million in 2003.
In order to understand why a firm goes abroad, we need to consider the factors that push the organisation towards internalisation. These factors can be divided into two categories- organisation & employees and the environment as described by Tayeb (2000). Initially, most of the companies lack enough experience or do not have enough money, but in order to go global all they need is the strong push from any of the factors.
In terms of organisational factors, the reason for companies to go multinational can depend on the need of the company for instance, if the company needs better national resources or a wider market for its products. The four needs of the company can be classified as: Natural resource seeking, where companies seek availability of certain resources or input in certain markets is sought by the organisation. For instance- most oil companies have investments in oil refineries in Middle East. In a similar way, most of the textiles producers and fashion house have opened production units in the two major cotton producing countries in the world, India and Pakistan. Efficiency seeking, in which, companies move to new markets, seeking efficiency in their distribution or production, for instance- Philips moved consumer electronics and semi-conductors to Singapore and Malaysia. Similarly, due to the availability of an efficient port, a skilled and English speaking labour force and the closeness to the EU market, Netherlands is a popular distribution and logistics centre for a number of Scandinavian and American companies. The third one is Market seeking, the companies go international just to capturing a greater market for their products and services is another motive for companies to go international. This is done for many reasons – overcoming trade barriers; tax benefits, access to new markets; profit advantages, exclusive market information. Major part of the revenues of companies like McDonald, Nestle and Unilever comes from the market in India, China and Brazil. Veneeva (2006)
Increased need for rapid and coordinated innovation and learning is also vitally important for survival for any company. With great advancements in technology the word impossible looks very small. It is now a must for companies to gain knowledge about their global competitors whom they face competition from. In today’s world, a company based even in Japan or China can dominate the market to some extent by selling their products for half the price on websites such as Ebay and Amazon. Thus to gain a competitive edge over its global rivals, companies need to outsource as well. Schifferes (2007)
In terms of the environmental factors, Dunning (1995) explains, the most common of all is the Bandwagon effect; most of the industries today have become oligopolistic in nature. No matter what a firm does, it is immediately followed by its competitors and thus an internalisation decision by one company is followed by similar moves by other leading firms in that industry. Companies go abroad not only following their competitors but also their customers, as a result of which, a number of markets have become central for certain industries for instance- Taiwan, Singapore and Malaysia for consumer electronics and semi-conductors and India and Pakistan for the textiles and garments. Another environmental factor that influence the decision to go abroad is presence of the foreign companies specially competitors. Many firms also become multinational in order to gain an edge over their competitors on the following basis- Exploiting national differences in factor costs; Scale Economies; Scope Economies. Every nation has different factors endowments. A firm can also gain cost advantages by configuring its value chain so that each activity is located in the country which has the least cost for the factor that the activity uses most intensively. E.g. Land in Honduras, cheap labour force in China, cheap but skilled engineers in India.
The domestic companies become multinational by the pull and push factors discussed above, but the manner how things are done after the company feels the need comes under the internationalisation process. As mentioned by Christopher (2006), the most well-known traditional model for internalisation is the Uppsala model or the Learning process of 1970s, which includes a series of decision and commitments that defines the internationalisation process. The process starts by an initial commitment of resources to the foreign market. Through its investments, it gains local market knowledge about their customers, competitors and regulatory conditions. On the basis on the market knowledge, the domestic company is then able to evaluate its current activities and hence makes a subsequent resource commitment which may be buying its local distributors or even buying its manufacturing etc. depending upon the need of the firm. Gradually the domestic company acquires the label of a Multinational enterprise and becomes an effective competitor in the foreign market. But according to Dunning (1995), not all companies follow the traditional process, companies invest or acquire in the foreign markets in many different ways as there is no single approach to the decision but they do need to be consistent in their strategic intentions and the motivations. For instance- Wal Mart entered UK by buying the supermarket chain ASDA rather then building its own stores. These companies make the modes of entry to foreign countries diverse and complex.
The various modes of entry to the foreign markets are: Licensing & franchising, Exports, Joint ventures, foreign direct investment etc. The two important things the any domestic company keeps in mind while deciding how to go abroad are: level of market commitment and the level of control. Following this, some companies internationalize by moving up in the ladder, from exporting through joint ventures to direct foreign investment. Wal-Mart decided to enter with high commitment and control whereas on the other hand, Amazon.com works by sub-contracting method, it adapted the low control and low commitment method, being a Canadian company, it controls its website from US and has many reliable local partners for order fulfilment.
Thus it is clear that why and how a domestic firm becomes a multinational enterprise. These motivations and the pull and push factors plays a crucial part in shaping company’s strategic and organisational capabilities.
References-
Christopher, B. et. al. 2006. Expanding Abroad- Text, Cases & Reading in Cross Border Management, New York, McGrawHill.
Dunning, J. 1995. Multinational Enterprises and the Global Economy. Great Britain, Wesley Publishing company Inc.
John, M. 2006. Dragon Multinationals: New players in 21st Century Globalisation. United Kingdom, Asia Pacific Journal of Management, 23.
Tayeb, M. 2000. International Business- theory, policies & practices. Essex, England, Pearson Education Limited.
BBC news, January, 2005. Multinational Corporations [Online] Available at: http://www.bbc.co.uk/dna/h2g2/A3407474 [Accessed 20th March, 2010]
Schifferes, S. January, 2007. Globalisation shakes the world [Online] Available at: http://news.bbc.co.uk/1/hi/business/6279679.stm [Accessed 21st March, 2010]
Veneeva, V. June, 2006. Role of Multinational Corporations in the modern world [Online] Available at: http://ezinearticles.com/?Role-of-Multinational-Corporations-in-the-Modern-World&id=232597 [Accessed 23rd March, 2010]
Palaniyandy, T. January, 2010. Multinational Companies: A curse to Developing countries [Online] Available at:
http://www.youthkiawaaz.com/2010/01/multinational-companies-a-curse-to-developing-countries/ [Accessed 23rd March, 2010]