Today we are living in the world that is integrated at a global level. It is this integration that is acting as a platform to success for these individual linkages. Any entity that is not a part of this integration cannot succeed. This is the exact concept that implies to organizations prevailing in current globally integrated world. Organizations can be segmented into national firms and multinational firms (MNE's).
This essay puts light on the motivations behind firms to become an MNE's. Also the essay discusses how the firms wanting to attain the status of an MNE are actually able to do so. It shows different pathways that can be followed by firms to achieve the global reach.
A national firm is usually referred to as an organization the operating span of which is subjected to the national boundaries of a country and has no investment of any kind beyond the national border. A multinational enterprise (MNE) on the other hand is defined by Dunning (1992) as “an enterprise that engages in foreign direct investment (FDI) and owns or control value-adding activities in more than one country”.
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A MNE is an enterprise that has task not only to operate successfully in varying business environment prevalent in different countries but also to coordinate the native conditions in different economies to lucratively deploy the resources at the company's disposal. The effect of MNE's can be seen on a global level. The activities of an MNE are visible clearly on both the home country and the host country.
Home country is the one from which the MNE originates, host country is the economy in which an MNE enters to operate. An MNE has a bearing on both the home and the host economies. An MNE is noted to eradicate any local dominance in the host country and thereby forcing the local enterprises to be more efficient if they want to be competitive. MNE's also has a massive influence on job prospects in both the home and the host economies.
An MNE can significantly increase the job prospects in the host country and also develop the labor skills in the economy. On the contrary MNE's can adversely affect the labor situation in the home country as its international exposure leads to loss of jobs in the home economy. The above trend can be seen in Indian and Chinese economies. In the year 1990 a total of 200 million people were lifted out of poverty in India and china alone. The Indian and he Chinese markets are the fastest growing economies in the world even surpassing the US, European and the Japanese economies. India and China are the go-to options for the MNE's when they intend to amplify their profits and scale. (http://hk.video.yahoo.com/video/video.html?id=377384&p=??) (Forbes' Robyn Meredith: Hong Kong central in the new supply).
The importance, reach and scope of an MNE can be understood by a simple example of an Indian family driving a Range Rover that run on fuel from Shell going to enjoy a Big Mac from McDonalds. The above line clearly states the extent to which MNE have influences on lives of each individual across the globe. We as consumers, consume goods and services that are manufactured and provided by MNE's without even being aware of this fact.
Every organization is not capable of converting itself to an MNE. The working and scope of every MNE differs from each other. Hence there are different motivations for every organization to go global. Firms go global primarily to make safe the supply of key materials. This ensures long term security of the firms operation as the key ingredient in the production of the product is secured. Also MNE's go abroad when they intend to boost their sales and expand their market catering. This is what multiplies the profit many folds and provides a competitive edge over the competition due to a large market presence. The most common reason for a firm to go global is to reduce the cost of production. This requirement pulls the firms to developing economies where the factors of production (land, labor, capital) are relatively less expensive.
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Also MNE's have had a history to travel abroad in respect to utilize the grants that are provided by the host country governments. Host country government provided with grants to MNE's as they are employment generators and are often seen utilizing low rated land very efficiently. Also the presence of MNE's in an economy says lengths about the prospect prevailing in the area. This induces other big players to invest in the economy that in turn raises the standard of living in the host country. Hence the host government encourages the arrival of these global giants.
An MNE needs to be futuristic in its approach if it wants to stay and be a competition to others. This requires the multinational corporation to be aware of its surrounding and adapt to the changes that are present. To successfully meet the above requirements multinationals travel to various economies to scan what is new that is happening and then it tries to adapt it in its work culture to be ahead of the competition. MNE also have a hunger learn whatever new they can. This is another very imperative motivation for the organizations to travel across national boundaries.
An organization never directly enters a market as multinational. There are a series of procedural step that are followed with a vague variation by different organizations to enter a market as a MNE. To be a MNE an organization has to have direct investment in a foreign country and this is involves a huge cost. Hence this is the last step organizations take in order to go international.
Organizations initially start the process of being global by the method of exports. The company stays in its original country and tries to meet the demand arising in other parts of the world by the exporting the goods. This enables the organizations to have a global reach and that too at a very low level of risk. Exporting has a benefit that a company can cater an international market by not having to take the risk of traveling abroad.
Another way that any corporation uses to go global is by the way of licensing and franchising. Under licensing an organization (licensor) allows another organization (licensee) sell its goods in return of a monetary sum. Under franchising the franchisor giver the right to the franchisee to use the name, technology and expertise that have been developed by the franchiser company for a specified fee. These methods involve significantly low cost attached with a huge risk. The USP (unique selling proposition) of the franchiser can be lost, as the control of the USP has to be distributed among all the subsidiaries.
Some companies also prefer to use a simple pathway of distribution of products via distributors in the home country. This is another convenient method that is very popular in order to go global. Distributors have no say in the working of the company whatsoever; they work for what is called commission pay. Commission pay can be referred to as an income to the distributor for his efforts in distribution of the products.
One of the most widely used practices to appear on the global stage is joint venture. Joint venture is defined as ‘a commercial collaboration between two or more unrelated parties whereby they pool, exchange, or integrate certain of their resources.'(D.Laughton, 1995). In simple terms a joint venture is an agreement between two or more companies on a profit sharing basis that enables all the companies in a joint venture to use each other's assets, names, technology to be successful as well as achieve the purpose of being global.
After going through all the above steps in becoming global if the company survives, it finally invests abroad to establish a fully owned ancillary. This is the last and the most crucial step for an organization in becoming an MNE, as the cost involved is huge is irreversible without a significant loss. Hence it is evident from the above that different organizations have different motivations and so they have to travel on different paths to realize the status of an MNE.