A multinational enterprise is defined by being a company headquartered in one country, but with operations in more than one country. Globalisation is the growing independence of locations and economic actors across countries and regions. Many multinationals have established national subsidiaries in 40 to 50 countries and conduct some type of business in over 100 national territories (Leontiades,1987). Additionally, multinational enterprises are capable of taking advantage of three factors: warrant access on preferential terms to the available resources and a good bargaining position, the ability to shift rare factors and the ability to make the first move in the strategic game (Wilson, 1974). This essay will question why different firms decide to become multinational enterprises by using examples to explain and contrast what motivates them to partake in international business and how they initially internationalise. The examples used will be The Volkswagen Group and Lamborghini. With an ongoing global expansion of multinational enterprises, many frameworks and theories have been published to address the internationalisation of firms. Therefore, this essay will review and discuss the Uppsala Internationalisation Model in order to gain an insight into what motivates firms to engage in international business and how the internationalisation process occurs.
What motivates organisations to engage in international business?
As with many topics in business; profit is the most important factor in motivating organisations to become multinational enterprises and it underlies all other motives. This is because the purpose of the firm is first and foremost the generation of a greater return on its investment.
Becoming a multinational enterprise can reduce risks and uncertainties when compared to the domestic business cycle. This is because markets are unpredictable and can change, so by operating in multiple countries it spreads the risk. For example, the Volkswagen Group operates in 153 different countries across the globe. This spread of risk allows the Volkswagen Group to continue operations even if they were to lose profits in a whole country.
Another reason to become a multinational enterprise could also be to respond to foreign competition. This could be in the form of entering into a competitor’s market, or to enter into a market away from competition.
Economies of scale are one of the biggest advantages of becoming a multinational enterprise. Exploiting economies of scale allows organisations to possibly reduce costs significantly. For example, the Volkswagen group requires resources for all 12 of their brands that they own; including Volkswagen Passenger Cars, Audi, SEAT, ŠKODA, Bentley, Bugatti, Lamborghini, Porsche, Ducati, Volkswagen Commercial Vehicles, Scania and MAN. They are capable of acquiring cheaper resources from suppliers who wish to sell a higher quantity to these multiple brands.
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If an organisation was to move their production into a foreign market, it would allow them to overcome some barriers to entry, such as tariffs. Furthermore, it could also allow them to take advantage of technological expertise. For example, Volkswagen Group has 122 production plants across 5 continents and 31 countries (Volkswagen 2019). With this incredibly vast and diverse number or production plants allows them to take advantage of technological expertise across most of the globe.
Finally, becoming a multinational enterprise simply allows for them to access new markets. This could be a necessary step for a large organisation that aims to grow even larger. Also, as there is a growing market for goods and services. Becoming a multinational enterprise could potentially allow an organisation to enter into these new markets and take advantage of the opportunity. For Koenigsegg, they must be a multinational enterprise in order to sell their extremely exclusive ‘hypercars’ as there is not a large enough market is Sweden alone to support an organisation with such a niche product built for not only those who are wealthy, but for those who are also ‘hypercar’ enthusiasts.
How they internationalise?
The three main ways that organisations can internationalise can be seen in the The Build, Borrow, Buy Framework (Capron & Mitchell, 2012). This states that organisations can build on existing resources though organic development. Organisations can also borrow from other firms via basic contacting or forming alliances. Or finally, they can buy resources from other firms through mergers & acquisitions. The process can be manifested in a number of different ways. For example, an establishment of foreign subsidiaries, international joint ventures, licensing agreements, international advertising campaign, international trade, exhibitions and a multitude of other events and actions (Jonahnson, 1990).
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The two cheaper and easier ways to internationalise include licencing and using a local distributor, which is also known as indirect exports. Licensing is a business arrangement in which one organisation gives another organisation permission to manufacture its product in exchange for a fee or royalty. This can cover patents, trademarks or technology to a foreign organisation. Using a local distributor is when an organisation sees a potential for extra sales by exporting and uses a local agent or distributor to enter a foreign market. This is very good for smaller businesses who only operate in one country, as it enables organisations to gain access to foreign markets very quickly, it does not require them to gain local knowledge, and they may be able to help the organisation with regulatory issues. However, indirect exporting results in the organisation losing direct control over pricing and marketing; all whilst taking a margin (NSTE, 2017).
Other more advanced approaches to internationalisation would include local packaging and assembly, where operations are done in the country of consumption, rather than like direct exports where operations will be done before being exported. Another approach could be export processing zones (EPZs), which are zones which encourage trade and usually contain lower tariffs. Furthermore, a sales representative or sales subsidiary office could be set up to negotiate and sell locally, but produce goods in another country, or alternatively could set up a fully owned subsidiary overseas by buying or creating a new subsidiary that manages its own operations, supply, production, exports, management.
The work of the Uppsala School has been one of the most influential in studying the process of internationalisation. The Uppsala model is an incremental approach to understanding the internationalisation process of organisations. The model focuses on the gradual acquisition, integration and use of knowledge about foreign markets and operations, and on the incrementally increasing commitments to foreign markets. In particular, attention is concentrated on the increasing involvement in the individual foreign country (Johanson & Vahlne, 1977). The Uppsala model shows the stages of internationalisation, starting at indirect and direct exports, whilst making its way through licensing/ franchising, shared ownership mode, and finally full ownership mode.
How firms internationalise and their reasons for doing so often differ between each organisation. As shown, certain organisations benefit from different business strategies depending on many factors, such as the size and the objectives of the organisation. Whilst the Volkswagen Group owns many other companies and operates on a practically global scale, the type of international operations they take part in are very different to the small Swedish ‘hypercar’ manufacturer Koenigsegg. Whilst the Volkswagen Group is a multinational enterprise for the increased profits and development of their vehicles and takes advantage of every possible way to internationalise, Koenigsegg only operates in foreign markets when directly exporting their vehicles to their customers. The difference between a mass production organisation and an extremely expensive and niche organisation makes a large impact on how they operate in foreign markets. Koenigsegg would not have the exclusivity and therefore demand if they were to expand how the Volkswagen Group has.Nevertheless, for organisations such as the Volkswagen Group, the positive aspects of entering a foreign market overweight the negative aspects. Therefore, it is suggestable that in the nearest future, more firms will strive to become multinational and engage in international business to expand themselves globally and enjoy growth in profits.
- Collinson, S. Narula, R. and Rugman, A.M. (2017). International Business, 7th Edition, FT/Prentice Hall.
- Hinings, CR. (2010). An organizational model for understanding internationalization processes. Journal of International Business Studies, 41(2), pp.330–349.
- Johanson, J. and Vahlne, J.E. (1977). The internationalization process of the firm—a model of knowledge development and increasing foreign market commitments. Journal of international business studies, 8(1), pp.23-32.
Nzte.govt.nz. (2020). Direct and indirect exporting. [online] Available at: https://www.nzte.govt.nz/common/direct-and-indirect-exporting [Accessed 9 Jan. 2020].
Volkswagenag.com. (2020). Brands & Models of the Volkswagen Group. [online] Available at: https://www.volkswagenag.com/en/brands-and-models.html [Accessed 9 Jan. 2020].
Koenigsegg. (2020). Koenigsegg - The Company - Koenigsegg. [online] Available at: https://www.koenigsegg.com/koenigsegg-the-company/ [Accessed 9 Jan. 2020].
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