The Terms Of Multi National Companies Business Essay


The terms multinational company (MNC), multinational enterprise (MNE), and transnational corporation (TNC) are widely and interchangeably used by international business commentators, practitioners and scholars. Firms are specialized social communities which help in transfer of knowledge and power both within and across national borders. Multinational corporations arise not due to the failure of markets in order to buy or sell knowledge but because of their superior efficiency as dominant vehicles of internationalization which provide company with the access to new markets and specialized resources by sharing the cognizance they possess (Kogut and Zander, 1993). It also broadens the strategy of the firm in competing with its national and international rivals by allowing access to new markets and new sources of information.

Business enterprises evolved from mid-nineteenth-century from independent units of production and units of distribution into large, integrated, and diversified, multinational corporations in the early twentieth century. Multinational corporations are defined as "A Company that operates internationally, usually with subsidiaries, offices or production facilities in more than one country" (Chandler, 1986).

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The national firms after the World war II underwent transition into a Multinational firm as explained by Stopford and Wells' (1972) which clearly shows the importance of strategic and organizational integration with management operations located in different parts of the globe as a key differentiating characteristics of an MNC (Artisien and Murphy, 2010). Further explained are the push and pull factors which are key motivations for internationalization, which give a greater insight as to what motivates companies to expand their operations internationally?

Push factors include limited opportunities in the home market through saturation, regulation or adverse trading conditions, while pull factors relate to seeking opportunities in markets conducive to (Moore, Fernie and Burt, 2000). The motive factors broadly classified as Traditional drivers and Emerging drivers. These include triggering factors for expansion by acquiring New Resources, diversification, minimizing competitive risks within national boarders, gaining economics of scale, cushioning the economic cycle, regulatory differences, for cutting down tax pays, economic and political instability (Daniels, Ogram and Radenbaugh, ).

The earliest one that drove the companies to be multinational is the inboard need for secure key supplies. For instance, if you consider retail organizations, one of the motivational factor through which internationalisation can take place is the recognition of market opportunities at various stages of a company's development referring to luxury goods retailers (Dunhill and Liberty are the examples) with regard to reaching domestic market saturation at an early stage (Alexander, 1995b). Prior research has also showed that the combination of institutional factors like regulations, industry factors like competitive forces and organizational factors fuel international expansion of firms (Brush and vanderwerf, 1992).

Market seeking behaviour of a company also elicits for it to go multinational usually due to some intrinsic advantage like innovative products manufactured related to use of technology or brand recognition. Firm level empirical analysis test results confirm that innovation in a company is directly proportional to the increase in performance. However, to be an effective company it must meet some threshold international activity (Kafouros and Buckleya, 2008). Due to these eventually, additional sales allowed the firms to exploit the economies of scale and scope, thus providing a very tough competition for their rivals (most of the European companies like ford nestle etc…).

Responses to increased Economic Liberalization and the associated entry by foreign firms could range from cost oriented commodity approaches based on low-cost labour and other resources to component or private-label manufacturing for established multinationals (Craig and Douglas, 1997). Consider the example of Nike Company which offshores all it manufacturing process to countries like Bangladesh and India where the cost of labour is very cheap. Firms also go international to take advantage of differences in the availability and costs of traditional factor endowments in different countries or to take advantage of the economies of scale and scope and differences in consumer tastes and supply capabilities (Dunning, 1981).

The Product cycle theory suggests that the starting point for internationalization process is typically an innovation that the company creates in its home country (Veron, 1966). Companies based their expansions on strategic and organizational appendages originally but, managers began to take these as secondary measures due to new set of emerging motivations that underlay their global strategies. First set were the economics of scale as mentioned earlier along with enhancement of R&D investments and shorter life cycle products (Ghoshal and Bartlett, 1990). Differences in productivity in carrying out economic activities make it desirable for firms and nations to trade products and services that reflect their superior quality (Kogut and Zander, 1993). Learning capability and global scanning with offshoring of its activities helped the company to gain greater knowledge for innovation of products and broader market opportunities killing the chances of strong firm competitions (Lecraw, 1993). In the major home countries, the debate on Foreign Direct Investment (FDI) has ranged from worries that outward FDI may substitute for domestic investment and erode technology leadership to the argument that firms must invest abroad in order to stay competitive in an increasingly international environment (Blomstrom and Kokko, 1998).

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Understanding why companies go global now leads us to learn the process and methods adopted by the firms in order to set themselves at the pace for the international level and competition. New firms competing in international markets, for instance draw from multiple knowledge bases in their research and development, manufacturing and market operations to learn new skills that augment current capabilities. Internationalization stage theories (Johanson and Vahlne, 1977; Stopford and wells, 1972) suggest an evolutionary pattern in a firm's international expansion. Usually depicted along a continuum, the choices include exporting, licencing, alliances and start-ups (Andersen, 1993).

The Uppsala internationalization model proposed by Johanson and Vahlne and The Innovative- Related Internationalization model, both explain the forces as a slow gradual learning and adoption of various ways of doing the business (Madsen and servais, 1997). Explanation is given in five steps as follows:

The knowledge that is most important to a firm going global is to be Market-Specific, i.e. the knowledge is about how to do business in the targeted foreign country.

Crucial one is Experience-Based; it originates from the current foreign business activities and also due to learning-to-do process.

Depending on the knowledge embedded within an individual, acquired through personal experience and is the one representing the firm.

The logical extension of individually embedded knowledge being passes on from organization to organization or from employee to employee is only fraught with difficulties.

The international involvement including commitment of resources to foreign markets, increases with knowledge acquisition.

(Peterson, Pederson and sharma, 2003).

The OLI framework proposed by Dunnings which states that Multinational enterprise must arise when it possesses some special advantage such as technological superiority or lower costs due to economies of scale. Foreign direct Investment is made by a company which wishes to be international firm, for doing this investment various conditions of the firm need to be measured such as Ownership, Location and Internationalization.

Patents, blueprint or trade secret can be a firm's ownership advantage; it may be a product or a production process to which other firms do not have access to. This brings in valuable market power or advantage on costs for the firm to have sufficient outweigh in doing the business abroad.

Foreign markets offer location advantages that make it profitable to produce the product in the foreign country rather than Manufacturing at home and exporting to the foreign market. Indeed, many multinationals are in service industries (for example, hotels) in which on-site provision of the services are an inherent part of the companies' business.

The multinational enterprise must have an internalization advantage. Foreign subsidiary can be set up in order to produce products abroad, Alternatives like licensing foreign firms and also selling the blueprints to a foreign firm rather than go through the costly and difficult process of setting up a foreign production facility. The product or process is exploited internally within the firm rather than at arm's length through markets.

Other theories like the Resource based theory explains that the firms with generalizable or flexible resources are able to diversify quite widely, while firms with specialized or inflexible resources will follow a rather narrow diversification strategy (Andersen and Suat Kheam, 1998). In contrast to the Uppsala model and Dunning's OLI frame work, The International Marketing and Purchasing (IMP) group says that the industrial system as network of firms engaged in production, distribution and use of goods, services should build lasting business relationships which can be developed and maintained by accounting and evaluating not only by self-positioning in relation to customers within the market, but also the market relation to other actors or competitors (Turnbull, 1986). The "Business Strategy approach is based on the idea of pragmatism" (Welford and Prescott, 1994) with firms making trade-offs between a number of expansion strategies guided by the market opportunities, firm resources and managerial philosophy (Reid, 1983). Turnbull and Ellwood discuss factors which would help define the organizational structures like the trading history, size, export orientation and commitment where Porter also adds in competitors as the key factor.

Finally concluding, firms which aspire to go international depend on many factors which may be internal like resource seeking or external like political pressures. Some companies internationalize by gradually moving up the scale through joint ventures to direct foreign investments but few like Wal-Mart move straight to high commitment high control mode of operations. Integrating the various causal drivers also shows that now a day MNCs have reached the stage of being a transnational company, where part of the company activities are based nationally and a part being international. To be clear none of the methods can work for a company to be international because it depends with the overall strategic intentions and motivations of the MNC.

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