A multinational corporation (MNC) is an enterprise incorporated in one country (the home or source country) and owns income generating assets and has productive activities in some other country or countries (host countries).
In 1973 United Nations defined an MNC as one "which controls assets, factories, mines, sales offices, and the like in two or more countries." By 1984, it had changed the definition to an enterprise (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, (c) in which the 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, and, in particular, to share knowledge, resources, and responsibilities with others (Bartlett et. al, 2006).
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The multinational firm and its most important medium, foreign direct investment are key elements in economic globalization. MNCs own a significant equity share, usually 50% or more of another company operating in a foreign country. They include modern corporations like IBM, General Motors, Intel, Microsoft, Coca Cola, Nestle, Nike, Unilever, Hitachi and many more. MNCs are comparatively large; they have competitive supremacy in the market and bargaining power in the policy-making field, particularly in smaller developing countries.
It is the ownership or control of productive assets in other countries which makes an MNC distinctive from an enterprise that does business overseas by simply exporting goods or services. A true MNC is that which has substantial direct investment in a foreign country and which actively manages its offshore assets regarding these operations as integral parts of the company both strategically and organizationally.
Before identifying the different reasons for operating internationally, it is important to know the different categories of multinationals. A vertically integrated multinational undertakes the various stages of production for a given product in different countries (Oil companies like Shell and Exxon are good examples). A horizontally integrated multinational produces the same product in many countries. A conglomerate multinational produces different products in different countries (Unilever is a good example). The latter two categories of MNCs utilise their multinational base mainly to achieve growth by expanding into new markets and the former primarily focuses on reducing costs.
Some strong triggers and motivations that drove companies to invest abroad are: the need to secure key supplies, a market seeking behaviour, desire to access low-cost factors of production such as the relative aspect of cheap cost of labour (both skilled and unskilled), low taxation, low transportation costs, lower input costs and desire to extend the sources of capital. Development of the product or service by creating market presence, market access, and brand acquisition as well as the saturation of existing markets crafted the importance for firms to internationalise.
Sales growth in overseas markets may also be cheaper (Begg and Ward, 2007). Wal-Mart, which already dominates the US retail market, also operates internationally, as it does in the UK through the Asda chain. Firms may operate internationally as they might have better cost advantages and can also compete more effectively in foreign markets. Cost differences between countries are ruthlessly exploited by Nike, the American sportswear manufacturer. Nike has organised itself globally such that it can respond rapidly to changing cost conditions in its international subsidiaries (Sloman and Sutcliffe, 2004).
The advantages sought by firms to invest abroad are also described in the Eclectic paradigm proposed by John. H. Dunning. The paradigm states that not only are the structure of organizations imperative but also three conditions must be met for the survival of an MNC. The OLI-factorsÂ are three categories of advantages, namely theÂ ownership advantages,Â locational advantagesÂ andÂ internalisation advantages. The company must have some strategic competencies or ownership-specific advantages to counteract the disadvantages of its relative unfamiliarity with foreign markets. Some foreign countries must offer certain location-specific advantages so as to provide requisite motivation for the company to invest there. Also, it must possess some organizational capabilities so as to get better returns from leveraging its strategic strengths internally rather than through external market mechanisms such as contracts or licenses (Bartlett at. al, 2006). Understanding these conditions is vital as they give us a clear picture of why MNCs exist and also help us evaluate organizational competitiveness and define strategic options to compete and operate globally.
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The ways in which these motives cooperate to push companies into expanding their operations globally is finely congregated in the well-known product life cycle theory developed by Professor Raymond Vernon in the 1960's. This theory gives an accurate explanation of international trade patterns. The country that has the comparative advantage in the production of the product, changes from the innovating (developed) country to the developing countries. This can be explained with the help of an example.
The photocopier industry started in the USA with its pioneer being Xerox. Originally, the company exported to other countries in Europe. But as demand increased, Xerox entered into joint ventures to set up production in Great Britain and Japan. Once Xerox's patents on the photocopier expired, other foreign competitors like Cannon and Olivetti entered the market. As a result Xerox began to switch production to developing countries such as Singapore and Thailand to avail advantages over its competitors. Initially, USA and now several other advanced countries (e.g., Japan and Great Britain) have switched from being exporters of photocopiers to being importers. This evolution in the pattern of international trade in photocopiers is consistent with the predictions of the product life-cycle theory (Hill, 2005).
"It is the market impurity which leads the possessor of the advantage to choose to supersede the market for his advantage" (Laughton, 1995). The road to become an MNC is an explorative learning process and the MNC's exploit the market by taking advantage of the market imperfections (Nike is a great example).
In exploiting its competitive advantages on an international scale, a firm has a broad number of options including exporting, licensing, franchising, establishing joint ventures, setting up wholly owned subsidiaries (FDI), contract manufacturing, turnkey operations, countertrade and strategic alliances. MNCs will weigh the different factors such as transportation costs, trade barriers, political risks and economic risks.
The process of developing strategies and organisational attributes is at the heart of the internationalisation process through which a company builds its position in world markets (Bartlett et. al, 2006). Firms mainly use four basic strategies to enter and compete in foreign markets: an international strategy, a multi-domestic strategy, a global strategy and a transnational strategy. These strategies are restructured according to the firm's requirements.
Firms structure their strategies according to their organisational attributes, competencies and capabilities and make initial commitment of resources to the foreign market. Through these investments it gains local market knowledge. Gradually, through several cycles of investment, the company develops the necessary levels of local capability and market knowledge to become an effective competitor in the foreign country (Bartlett et. al, 2006).
Let us consider MTV networks. The company began its global expansion in 1987 and its strategy was to transfer its programming and content wholesale from the successful U.S. network. This strategy was a failure and so the strategy was shifted from one that emphasized global standardisation to one that emphasized local responsiveness. At MTV, localisation meant local programming and local video content hosted by local vee-jay's and aimed at local markets. This strategy has enabled the company to capture more viewers and to grow its advertising revenues at a double-digit rate (Hill, 2005). This company is a great example of the well known model for internationalisation known as the Uppsala model which described the process of internationalisation as a learning process. MNC's like Wal-Mart have succeeded in foreign market entry without focusing on this model by buying supermarket chain Asda in the UK rather than developing its own stores (Bartlett et. al, 2006).
Therefore, finding a correct and an appropriate balance between global standardisation and localisation forms a major strategic challenge for many MNCs. The internationalisation decision is usually a complex and a gradual process, due to high risks it represents to the firm. Often a firm will go through a number of intermediate stages before engaging in a total commitment to foreign markets. This approach allows deepening investment as success occurs and the learning process takes place while reducing the risks of failure (Bartels and Pass, 2000).
The success of an MNC and its optimal entry mode varies by circumstances and situations, depending on factors other than purely achieving global operations and growth, as many companies go global by gradually moving up the scale, from exporting through joint ventures to direct foreign investments (Bartlett et. al, 2006).
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To conclude, an MNC typically builds on a combination of opportunism, rational analysis and pure luck, but these firms have to consistently evaluate and build commitment to the overall strategic intentions and motivations.
In the essence, MNCs have to handle internationalisation with a delicate hand as aptly suggested by this quote:
"Managing is like holding a dove in your hand. Squeeze too hard and you kill it, not hard enough and it flies away". (Tommy Lasorda)
References: Journals and Texts
Barlett, C.A. et al. 2006. Expanding Abroad. Transnational Management: Text, Cases and Readings in Cross-Border Management. New York: McGrawHill. pp. 1-13.
A. C. Inkpen, Strategic Alliances, in A. Rugman and T.Brewer, The Oxford Handbook Of International Business, Oxford University Press,2003, Chapter 15.pp.402-423.
D. Laughton, How Firms Internationalise their Operations in B. Dawes, International Business: A European Perspective, Stanley Thornes, Cheltenham, 1995.pp.2-27.
J. H. Dunning and C. N. Pitelis, Stephen Hymer's Contribution to International Business Scholarship: An Assessment and Extension, Journal of International Business Studies, Vol 39, No 1, 2008.pp.167-176.
John Sloman and Mark Sutcliffe, Economics for Business, 3rd edition (Pearson Education Limited, 2004).
David Begg and Damian Ward, Economics for Business, 2nd edition (Published by McGraw-Hill Education, 2007).
Frank L. Bartells and Christopher L. Pass, International Business: A Competitiveness Approach, (Published by Prentice Hall, 2000).
Charles W. L. Hill, International Business: Competing in the Global Marketplace, International edition, 5th edition (Published by McGraw-Hill/Irwin, 2005).