LITERATURE REVIEW OF DISCUSSIONS OF MULTINATIONAL CORPORATIONS
In this chapter previous Literature will be reviewed from various books, articles/journals and online publications. This chapter will systemically discuss different radicals in different sub-sections and critically analyse their definitions and the theories related to them which one should understand in order to understand the reverse flow of MNCs
2.2 Multi-National Companies
2.2.1 Emergence of MNCs:
Few Centuries ago there was no notion of Multinational companies, as most of trades were limited in their own small region (Dunning and lundan, 2008) But with the evolution of Industrial revolution in eighteen Century, Small and medium sizes business begun to produce in bulk and they started expanding their area of business to faraway places. (Huang and Sternquist, 2007) In the process they crossed international Boundaries and were transformed to Multinational enterprises (Hennart, 2009). A considerable amount of literature has been published on reasons why companies wanted to expand overseas.
2.2.2Motivations for going abroad:
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According to (Bartlett, Ghoshal & Beamish, 2007) the traditional reasons for going overseas were (1) securing some of important supply chains for example many oil companies went abroad for capturing the oil fields. (2) Some of the enterprises planned to cash their brand image formed in one country by expanding in other countries. (3) Business in developed countries of western world strategized to lower their costs by utilising the low labour cost in other countries. Some of the authors have given current reasons which motivate the MNCs for going global. (Hill, 2009) says that main motive of enterprises is profit and profit growth can be raised either by selling more products/services in existing market or by going overseas and entering new markets. Whereas (dunning and lundan, 2008) identifies main reason of international expansion as seizing of local markets, which means when there is no further scope of growth in local market then companies tend to go overseas. On deep analysis it can be concluded that both the above mentioned reasons are overlapping with each other.
2.2.3Definition of MNC:
There are many definitions available for MNCs but most acceptable definition was given by United Nations. UN defined MNC in 1984 as " enterprises (a)comprising entities in two or more countries, regardless of the legal form and fields of activity of those entities; (b)which operates under a system of decision making permitting coherent policies and a common strategy through one or more decision-making centres; and (c) in which entities are so linked, by ownership or otherwise, that one or more of them may be able to exercise a significant influence over the activities of the others, in particular to share knowledge, resources, and responsibilities." (Bartlett, Ghoshal & Beamish, 2007, p 2)
The above definition clearly explains about the MNCs that they are firms which operate in more than one country, having common head quarter which makes the policies. (Mmieh, 2010) also says that MNC is an organisation which have main branch in one country known as headquarter and have more branches in other countries where some kind of operation is done either at managerial level or as production house. Similar kind of definitions was there in other literatures.
2.2.4 Expansion Strategy for MNCs:
To give overview of the factors affecting decisions for going overseas, mainly there are three broad categories (1) company's core business policies and their own culture (2)host nation background and current circumstances (3) International trade environment (Dereskey, 2008)
Source: Deresky, 2008, p.16
All Companies have their own core policies according to which they decide whether to go overseas or not (Prater, Swafford and Yellepeddi, 2009). Global environment for expansion is same at all places, although the decision for going in a particular country is combination of global factors and host country's conditions. But (Doukas, Pantzalis,and Kim, 1999) argues that companies with technical knowledge as their core competencies have to follow geographical diversification during the expansion process which reflect that in some particular cases organisation compromise on host country conditions.
However study of previous literature given by (Huang, Sternquist, Hennart, John, Christos, Sungsoo, Hill, Keegan, Deresky, Daniels, Radebaugh, Sullivan, Dunning , lundan and most of authors writing on international expansion ) generalised concept of globalisation as flow of companies from Northern America and Europe to other parts of world. Previous literature says that main reasons for expanding are saturation level reached in home country for market seeking opportunities and exploiting low wages regimes for production establishment opportunities. It also emphasize that Core policies and global environment is same everywhere, so special consideration is given to analyse host country Conditions by MNCs while going overseas. Particularly companies look for political, economical, social technological and legal conditions in the host country. On the other hand Researcher thinks that reasons for going overseas for companies from developing countries to the developed countries are somewhat different than freeze in their own country, and they don't need to analyse all of the factors known as "PESTL" although they need to analyse some of them. These will be discussed in findings of the dissertation. Let us now explore the road for Indian MNCs
2.3 Road for Indian MNCs
2.4 Eclectic / OLI Paradigm
According to (Dunning and Lundan , 2008) until the mid 1970s there was no single theory which could explain the MNCs activities but internalisation theory tried to explain the MNCs activities. This theory says that MNCs expand with in a hierarchical model. (cole, lee and Mccullough, 2007) elaborates that considering ownership, Location and internalisation in isolation cannot lead to full understanding of MNCs operations.(Narula, 2006) also agrees with him by saying that OLI theory is ultimate explanation of MNCs activities replacing the internalisation theory. (Mudabami, 2004) explains that OLI theory says that MNCs expansion process is driven by three set of advantages Ownership (O), Location (L) and Internalisation (I) specific advantages. This is the combination of these three advantages which motivates or discourages a company in going abroad (cole, lee and Mccullough, 2007). Different advantages which come under above mentioned parameters are:
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Ownership advantages are registered trademark, production methods, entrepreneurial capabilities, work force and Institutional assets.
Location advantages are availability of raw materials, low input costs like less international transport costs, low wages regime etc., special taxes or tariffs regions.
Internalisation advantages are advantages by producing means of partnership with others such as exporting through agents, Joint ventures, exploration of other market.
Source: derived from (dunning and lundan, 2008)
The above table shows the type of favourable entries in different configurations of OLI advantages. If Company has only ownership advantage than it will prefer licensing mode to enter that market, if a company has both Ownership and internalisation advantages then export is a good option. On the other hand if a company has advantage in all three OLI paradigms then it will prefer FDI. Foreign direct investment will be discussed in detail in next sub-section of the literature review.
(Tolentino, 2001, pg. 191) says that "TheÂ eclecticÂ paradigmÂ has derived its strength from being a general framework of analysis that explains the level and pattern of foreign value-added activities of firms, and/or of countries, and allows for the co-existence of complementary and alternative theories in the discipline of international economics in a logically consistent manner without being inextricably wedded to any one particular approach". Moreover extra paradigm are being added to OLI paradigm time to time like institutional norms is the recent addition to the OLI paradigm (Dunning and Lundan , 2008) Time to time various authors have tried to condemned the eclectic theory as the godfather theory for MNCs activities but they all have failed(Narula 2006)
2.5 Foreign Direct Investment theories
Foreign Direct Invest (FDI) means investing the money in a foreign land which will ultimate in the interest of the investing organisation (Dunning and Lundan , 2008). It may be in the form of establishing a production plant, service outlet, research centre or buying property in foreign land (keegan, 2008). When invest comes in a country from other country's MNCs it is known as Inward FDI, contrary when it goes outside the country via domestic multinational it is known as Outward FDI (Daniels, Radebaugh and Sullivan, 2010) Over the past few decades there have been a numerous theories which try to explain reasons for FDI, but here three relevant theories have been explained: Knickerbockers' theory, Vernon's theory -Product Life Cycle and market imperfection approach.
2.5.1 Knickerbockers' theory:
According to me the (Knickerbocker, 1973) FDI are the result on the nature and behaviour of the firms in an oligopolistic market (The market in which a small number of business controls the whole market) As per Knickerbockers'; the firms study the practices of the competitive firms a lot. Each and every move of the other firms in the market is very well noticed. The company tries to understand the competitors' strategies and try to imitate them (Dunning and Lundan , 2008) The companies imitate the strategies of the other firms in undertaking FDIs. For example when one firm reduces prices, expands capacity or opens a new market, the other players have to respond in kind or risk losing market share. If we see this in Indian context large banks follow each other in developed countries markets, so that their competitor does not have a edge. This theory lacks the explanation on organisations preferring FDI's over export and license. It does not explain the importance of undertaking foreign direct investments. Knickerbockers' theory does not explain the merits of exports and license (Daniels, Radebaugh and Sullivan, 2010).
2.5.2 Vernon's theory -Product Life Cycle:
Source: Derived From (keegan, 2008)
Second comes the (Vernon, 1979) argues that the foreign direct investments depends on the development of the product. It is the situation when in one country the demand of a particular product becomes significant, that product is particularly in very much high de mand in that particular region (Hill, 2009). Then the firms start looking for setting up production facility in the other areas of the country demanding that product or nearby areas which are relatively cheaper in labour costs as compared to that of home country. According to this theory foreign direct investments occur when a foreign market have the potential or is big enough to compliment the local production. (keegan, 2008) As the above self explainer graph shows that a product may be at introduction stage in low developed economy, growth stage in Emerging economies and at different stages in different stages as shown in graph. The figure also gives practical example of type of country in each stage.
2.5.3 Market imperfection approach:
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This concept was first introduced by Coase in the 1930s.However, it was Buckley and Casson 1985 who made it popular and also introduced the ISAs into the main analysis of FDI in the 1970s (Daniels, Radebaugh and Sullivan, 2010).The market imperfections approach to FDI is typically referred to as internalization theory. (Donald, 1984) It deals with the factors obstructing the smooth flow of the perfect market. It involves tariffs and other rules and regulation of the government (Leitch andÂ Barrett, 1982) Internalization theory explains the existence of the multinational firm in terms transaction cost -based market failure in international (cross-border) intermediate markets and particularly in the market for knowledge. (Leitch andÂ Barrett, 1982) The market imperfections approach more directly explains these issues, and explains why FDI may be preferable to other alternatives for expanding business activities. It identifies the importance and difficulty of transferring know-how (Mmieh, 2010)
2.6 Entry Modes
While entering in a new Country obviously the first question is where to enter (Hill, 2009), But this as soon as answer to this question is there, there is another question to be answered which is how to enter the market (Keegan, 2008). In this section First of all various modes of entering will be briefly explained, followed a small literature review on what factors affect the choice of entry mode. Most common modes of entering a foreign market are:
2.6.1Type of Entry Modes:
Exporting is referred to as sale of goods/services produced in one country to residents of other country (Keegan, 2008). Although Companies following this mode are not known as MNCs but this is first step of transformation from small/medium enterprise to a MNC (Mmieh, 2010).
Turnkey Project is a contractual agreement by a company with local company where local enterprise initiates the operations and after reaching a particular threshold point local company handovers the project to MNC (Hill, 2009). It is most commonly used by companies which require a manufacturing plant.
Licensing is an arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified time period, and in return, the licensor receives a royalty fee from the licensee. Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks (Dunning and lundan, 2008)
Franchising is basically a specialized form of licensing; franchisor not only sells intangible property to franchisee, but also insists that franchisee agree to abide by strict rules as to how it does business.(Daniels, Radebaugh and Sullivan, 2010) Franchising is used primarily by service firms
Joint Ventures are the establishment of a firm that is jointly owned by two or more otherwise independent firms.(Keegan, 2008) Many joint ventures are 50:50 partnerships
Wholly Owned Subsidiary is type of entry where the firm owns 100 percent of the stock.(Dunning and Lundan, 2008) Firms can establish a wholly owned subsidiary in a foreign market either setting up a new operation in the host country or by acquiring an established firm in the host country(Hill, 2009)
Strategic Alliances refer to cooperative agreements between potential or actual competitors.(Mmieh, 2010) Strategic alliances range from formal joint ventures to short-term contractual agreements(keegan, 2008)
2.6.2Dilemma in selecting the entry mode:
As Mentioned above there are a lot of entry modes, but the dilemma lies in choosing the entry mode. (pan and tse, 2000) says that first criteria for filtering the entry modes is whether Company wants a equity based entry or non-equity based entry. Furthermore Equity based entries are own subsidiaries, joint ventures etc. Whereas non-equity based entries are contractual agreement, licensing etc. The former requires more active participation than the later one (keegan, 2008). According to (Xin, Musteen and data, 2009) Prospectors prefer equity based entries, on the other hand defenders favours the non-equity based entries.
An interesting fact put on light by (Eicher and Jong, 2005) is that big counties most often attracts companies to enter through equity modes whereas small companies although having lower tariffs are unable to attract equity based entries. They only get Foreign Direct Investments or No entry. On the other hand (Lehner, 2009) found out that small countries attracts equity based entries and large countries attracts non-equity entries.
Source: Derived from Roots model mentioned by Keegan
As we can see in previous paragraph choice of entry mode is very complex decision, different authors found out different results in similar host country environment. Rightly so pointed out by (Benito, Peterson and Welch, 2009) there are no particular laws defined for entry mode, same theories cannot be applied in similar scenarios. They defined new terms for entry modes like discrete entry modes, within-mode adjustments. They conclude every single entry has to be analysed with the telescope of theoretical, practical and host country business environment rather than size. (Keegan, 2008) said that entry mode is a decision taken by balancing risk and control, more is the risk and more is the control over the operations in the foreign land. So if a company wants more control over decisions they will have to invest more. A self explanatory graph on the top of this page shows that control and investments are directly proportional which is derived from roots model. Different entry modes are marked on the proportionality line.
Chapter 3: METHODOLOGY
This chapter puts light on the methodological approach of the dissertation. The methodological approach plays a very crucial role in the quality of every research assignment (Bryman & Bell, 2007). Hence, considerable time was given in order to finalise the methodology. The research was designed to investigate the perception of managers who at some point of their life worked/working in Indian MNCs overseas office. Their views on why their organisation decided to come overseas, and what were the difficulties faced by them during the process. Their views were asked through a designed questionnaire, which appears in the appendix. As Neuman (2003) states that reality is socially constructed when individuals attach meaning to their experiences and social world is what the individuals perceive it to be. So later it was decided to take interviews of some of the participants through personal meetings, telephones and Skype video Conversations. The structure of interview was to discuss questions in the questionnaire and discuss the results of survey with them and their views on them, why they are so. This chapter contains the research strategies, research design, questionnaire design data collection methods, (primary, and secondary data), Context of study, participants of study (sample) selection, Interviews, data analysis and limitations.
3.2 Research Design
Research means to collect, store and analyse data (Zikmund, 2003). There are two bases of research: objective and subjective. The previous is in the consideration of physical characteristics and external world On the other hand later is in the observation and explanation for individuals and groups social lives. This study is matching with the objective style in examination of the external world and physical characteristics particularly comparing the reasons of expansion and difficulties faced by developing countries MNCs and Western countries MNCs. India is the country chosen to represent developing country because it is researcher's home country, so it is convenient to get data.
Research design acts as a research frameworks that are applicable to collect and analyze data (Bryman and Bell, 2007). Moreover structure for the collection and analysis of data is guided by the research design. This research is a combination of both primary and secondary methods for research process. There are five main methods of research designs: longitudinal design, experimental design, case study design, cross-sectional design and comparative design (Bryman & Bell, 2003). This research adopted the cross-sectional design to examine particular issues or theories through managers working /worked in Indian MNCs overseas offices with the aim of studying their perception. Cross-sectional design as per (Bryman & Bell, 2003) "entails the collection of data on more than one case (usually a lot more than one) and at a single point in time".
3.3 Research Strategies
Research strategy means a path in which the research is conducted (Bryman and Bell, 2003).There is two broad research strategies: Qualitative and quantitative research. This study adopted both of them because responses are analysed quantitatively whereas qualitative research is done via interview because it is a means to explore and understand the meaning an individual or group attach to the social world. This process usually involves asking questions and enquiring procedures usually in the participants' settings (Creswell, 2007). Qualitative allows the researcher the flexibility to pursue any topic of interest that comes up during the research (Ritchie& Lewis, 2003). This type of approach is also used when either the topic is new or the topic has not been tested with certain sample of settings (Morse, 1991). This is true in this research because no previous work has been done to distinguish reasons for going abroad for western countries and developing countries MNCs
3.4 Questionnaire Design
Deductive method means to explore the relationship between theory and research whereas inductive method tends to develop a theory from data analysis (Saunders et al., 2000). In this research, the inductive approach is applied in designing the questionnaire. 1. Theory
3. Data collection
5. Hypotheses confirmed or rejected
6. Revision of theory
Source: Bryman & Bell, 2007, pp.11
The questionnaire designing is very important part of whole research. The designing of the questionnaire helps to achieve aims and efficiently follow the objectives of the research. So it becomes extremely important to draft the questionnaire relevant to aims and objective of the questionnaire. Due to the busy schedule of participants, it was designed short and consisted three sections. Following were the key components of questionnaire.
Questionnaire Aim: To understand what Factors are Responsible for Encouraging Indian Companies to go overseas and Difficulties by them during the Expansion process.
To develop an understanding on what are the difference between reasons for which western companies and companies from developing countries go overseas.
To collect the information from Managers who have worked/working in Indian MNCs overseas offices in different countries of world
To correlate the previous literature to actual ground reality.
Questionnaire drafting Methodology
Following a review of the literature as well as well as own critical thinking questionnaire was composed in three sections, Section 1 was personal information consisting of 5 questions. Whereas Section 2 and 3 were on reasons for going overseas and difficulties faced in the process respectively. Section 3 was further divided into pre and post entry difficulties. The questionnaire comprised of closed statements in order to extract manager's opinions. It was designed to take a few minutes to complete to maximise accuracy/minimise inconvenience with each question being measured with a Likert scale to enhance validity and allow comparison between results (Saunders 2000). The survey was aimed at the people who have/had been working in Indian MNCs overseas offices. This non probabilistic, convenience sampling frame was most appropriate by virtue of accessibility, lack of time and funding (Bryman 2007). Similar issues affected the choice of sampling size.
3.5 Data Collection Methods
3.5.1 Primary Data:
Primary data is "data observed, experienced or recorded closest to the event" it is also considered significant because data "are the nearest, one, can get to the truth, although distortions inevitably occur as the proximity of the event decreases (Walliman 2005, pg 197).
Data collection can be a qualitative or quantitative approach, depending upon there is face to face interaction with individuals on a one to one basis or analysis of answers by several numbers of respondents. Data collection in this type of approach is time consuming hence the sample are normally smaller. Interviews are associated with qualitative approach and are a method of collecting data where the participants are asked questions to find what they feel, think or do (Rubin et al., 1995). Strength of qualitative interviewing is that it gives researcher an opportunity to collect and thoroughly study participant's visual of social world (Silverman, 2004).
The primary data for quantitative approach in this study was collected through formal request of filling a questionnaire, through emails and researcher's personal contacts. E-mail address was also found out through web browsing and researcher's personal contacts. An email header/research consent form (see appendix) was sent with questionnaire as attachment. In the end there was collection of 47 filled questionnaires. The primary data for qualitative approach was collected through semi-structured interviews either face to face, telephonic or through Skype video conversation.
Semi Structured Interviews
Interviews are the most commonly used methods in qualitative research (Bryman and Bell, 2007). In this study one of the sources of the primary data was semi structured interviews. Questions in the Interviews was same as the questionnaire, asking about to elaborate reason of their selection of likert scale in questionnaire and discuss the founded trend in survey. The participants were encouraged to give open ended answers as (Patton, 2002) says that "open-ended responses let the researcher understand the world as seen by the person being interviewed". The Interviews are the only way to collect data when it is crucial to hear the view of people based on their personal experiences and the semi structured interview gave this comfort to the researcher. It also allowed the researcher to manage over the wide area of questioning, as the researcher had vast topics that covered the aim of the study.
3.5.2 Secondary Data:
The study used the past research done on this subject in the literature review, other secondary data has also been utilised to check the hypotheses. Major secondary data sources were the FICCI reports on Indian investments in USA and Europe. These techniques are used to gain extra reliability and validity as per method of triangulation (Bryman & Bell 2007).
Secondary data is the art of analysing data that others have collected through either qualitative or quantitative methods (Bryman & Bell 2007). In this study, secondary data collection involved collecting relevant data from textbooks academic journals, professional reports by individuals and organisations. Journals are a reliable and valid source for information on Management issues (Bryman & Bell 2007). Some secondary data was also collected through articles, magazines and internet.
3.6 Participants of the Study (Sample)
As mentioned earlier in the research approach, the methodology used is Survey and semi structured interviews. This involved identifying a suitable study sample size. As (Lewis, 2007) mentioned that the most vital criteria while selecting the study population is their proximity to the research topic. So managers working/worked in Indian MNCs overseas offices was finalised as study population. In order to collect more Intensive data the interview was conducted with participants through different means of communications. There were a total of 47 filled questionnaires by the participants. Moreover 12 participants were interviewed out of which 5 were females and most of them were from banking sectors.
3.7 The Interviews
Before each interview, the research question was explained and MNCs activities were told in detail. Interview schedule was made based on theories and issues identified in previous research. The order of the question was based on the semi-structured format and on patern of questions in the questionnaire. The interview schedule was either emailed to the participants or conveyed through a telephonic conversation well before interview time slot, so that the participants can familiarise themselves with the research topics and question. There is a term known as critical incident technique which is defined as "The critical incident technique is a qualitative interview procedure which facilitates the investigation of significant occurrences (events, incidents, processes, or issues) identified by the respondents...The objective is to gain an understanding of the incident from the perspective of the individual" (Flanagan (1954) cited in Gremler (2004) p. 66). This technique was applied during the interviews to collect more information about the participant's personal experiences
3.8 Method of Data Analysis
The quantitative data is shaped into pie charts so that it can give us a picture of generous view of participants. The qualitative data was analysed using thematic analysis. According to (Bryman and Bell, 2007) "one of the commonest approaches to qualitative data analysis is undertaking a research for themes in transcripts or field notes". Thematic analysis helped the researcher in finding whether the data confirmed, extended or did not confirm the participant's perception about the concerned topic or question.
Even though primary and secondary data are the best possible techniques to gather data however, there were some limitations related to data collection for this study:
Collecting primary research is costly and time consuming; on the other hand some of the secondary data are not very reliable and valid.
It was also a very difficult task to conduct telephonic/Skype video interviews due to the time difference (participants were from US, UK and India so Time zones differed from UK) The task of keeping a track of the various participant's available timings and the time difference between places was a daunting task, Some participants were keen to talk Whereas other wanted to keep it a fast conversation
There are also some other limitations to this method of data collection like the information is filtered through the many views of interviewees. The presence of researcher may prevent them to give bias responses. Sometime the interviewees may misunderstood the question and may not be able to handle the questions and answer them as not as expected.
In many companies senior managers were not too keen to attend the interview and give out in-depth information. Hence the researcher had to convince them to give their precious time.
Recall or memory bias: This can happen particularly when the participants are asked questions about past events (Saunders et al., 2000). For e.g. the participants can't memorise a particular incident based on reasons for expansion and end up unintentionally answering wrong.
Social Approval Bias: the participants may answer some questions wrong deliberately to impress the researcher (Eysenck and Flanagan, 2001).
Demand Characteristics: This may occur when the participants may previously know about the research aim and answer accordingly instead of personal experiences. (Eysenck and Flanagan, 2001)
This chapter discussed in detail the methodologies used by the researcher for this dissertation. A detail explanation of what is research has been given. This chapter gives a justification of the methodology applied in this research. Different types of data collections are elaborated upon. Moreover it explains questionnaire designing process. In the next chapter findings of this research are discussed and analysed and lastly the result is concluded.
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