Lecture 2Internationalization Process

&Competitive Advantages of MNEs

DR. VICTOR Z. CHEN

UNC CHARLOTTE

What do we do tonight?

Four fundamental questions about Internationalization & Multinational Enterprises (MNEs): Who are they?

What do they do?

Why do firms internationalize?

Under what conditions are they prepared for internationalization?

Where do (or should) firms locate their foreign direct investment (FDI)?

Multinational Enterprise

Multinational enterprise (MNE) Multinational corporation (MNC) Transnational corporation (TNC)

It defines a company headquartered in one country but with operations (through ownership) in one or more other countries.

MNE activity

Most MNE activity can be classified into two major categories: (1) Trade (exports and imports): More than 50% of all trade is made by the world’s largest 500 MNEs.

(2) Foreign direct investment (FDI): 80% of all FDI is made by the world’s largest 500 MNEs.

Trade and investment

Trade consists of exports and imports:

Exports: goods and services produced in one country and then sold to another country.

Imports: goods and services produced in one country and bought in another country.

Foreign Direct Investment: consists of companies investing funds to start or improve operations in another country (influence, even control.)

Different from portfolio investment –buying less than 10% outstanding stocks of a foreign company through stock exchanges, without pursuing any influence through, for instance, board membership.

FDI is the defining line between MNEs and non-MNEs.

Influential parent/shareholder >10% Voting Rights

Nominating/selecting board of directors, who in turn by law monitors/appoints/replaces the president/CEO

File a shareholder proposal against CEO decisions

Informal/social pressure through investor-CEO interactions

Provision (or refusal to provide) unique resources and expertise

Why internationalize?

Pecuniary benefits (Profit)

= (Price per unit – Cost per unit)*(Quantity sold)

Why FDI?

Example 1:

Apple Inc outsourced its assembly and packaging business to a Taiwanese-owned company Foxconn, whose major manufacturing operations are based in mainland China.

Why FDI?

Example 2:

On Jan 23, 2012, Porsche Centre Abu Dhabi opened a US$6 million, state-of-the-art Porsche Center that features the world’s largest Porsche service center.

Why do firms become MNEs?

Among other rational motivations:

to diversify themselves against the risks and uncertainties of the domestic business cycle;

to tap the growing world market for goods and services;

to reduce costs;

in response to foreign competition;

to overcome barriers to entry into foreign markets;

to take advantage of technological expertise by manufacturing goods directly.

to acquirer brand, technology, and legitimacy

Any other?

Non-pecuniary benefits

Managers: CEO hubris for over-sized empires

Family/individual shareholders: Socioemotional Wealth

Government shareholders: Sociopolitical/diplomatic/public interests

Business group shareholders: Strategic reasons, e.g., rent seeking, etc

Why do firms become MNEs?Market Num of deals Num of deals

with an individual or

family blockholder

Num of deals with a

pressure-sensitive financial

institutional blockholder

Num of deals with a

pressure-resistant financial

institutional blockholder

Num of deals with a

government blockholder

Num of firms

Argentina 5 1 0 0 0 3Australia 639 128 168 2 334 389Austria 83 7 9 16 46 65Barbados 3 0 0 0 1 2Belgium 78 1 15 13 19 55Belize 9 0 1 0 2 5Brazil 46 4 16 0 19 30Canada 831 165 106 1 388 533Chile 16 1 4 0 3 12China* 194 23 7 4 70 121Colombia 8 0 3 0 3 3Croatia 3 1 0 0 0 3Czech Republic 14 0 2 0 8 11Denmark 133 13 16 0 75 91Egypt 14 4 1 0 3 6Estonia 13 1 2 0 10 12Finland 213 29 71 18 117 111France 394 57 112 1 177 220Germany 332 61 67 9 162 209Greece 47 15 9 1 24 28Hong Kong SAR* 112 12 12 1 33 64Hungary 18 2 7 0 6 12Iceland 51 0 13 0 24 22India 348 80 86 6 183 222Indonesia 13 1 2 0 1 7Israel 190 35 74 7 82 101Italy 166 36 14 0 71 109Japan 390 21 216 6 55 225Kazakhstan 12 2 1 0 7 8Korea, Republic of 99 25 21 2 63 76Luxembourg 140 16 23 0 51 71Malaysia 78 12 1 0 42 50Malta 4 0 0 0 3 3Mexico 36 9 8 0 3 22Netherlands 408 16 56 18 180 254New Zealand 55 10 12 0 36 33Norway 203 11 39 1 168 108Panama 17 0 0 0 1 11Peru 5 0 1 0 2 2Philippines 16 1 2 0 6 13Poland 62 14 23 0 50 47Portugal 27 5 0 0 19 21Qatar 23 0 0 0 14 10Romania 4 0 0 0 2 4Russian Federation 152 21 28 0 82 90Samoa 20 0 0 0 3 10Saudi Arabia 27 4 2 0 13 17Singapore 205 20 15 1 72 119Slovakia 4 0 1 0 4 4Slovenia 6 0 4 0 6 5South Africa 80 9 21 1 56 54Spain 220 47 38 0 119 135Sweden 457 95 166 35 294 210Switzerland 236 47 54 14 68 134Taiwan* 41 10 3 1 16 33Thailand 20 2 0 0 5 16Turkey 22 4 5 0 9 16Ukraine 4 0 0 0 2 4United Arab Emirates 91 2 1 0 33 41United Kingdom 2037 271 726 14 1169 999United States of America 3590 557 1225 20 717 1891Venezuela 2 0 0 0 1 2

Total 12766 1908 3509 192 5232 7184

Internationalization Process:From domestic to multinational enterprises (MNEs)

The internationalization process

Internationalization: The process by which a company enters a foreign market.

Not all international business is done by MNEs. Indeed, setting up a wholly-owned subsidiary is usually the last stage of doing business abroad.

Why do businesses wait to set up wholly-owned subsidiaries?

– Foreign markets are risky.

– Ownership (residual claim) is more risky than, for instance, franchise (a fixed pay upon contracts) or trade.

Figure 2.2 Entry into foreign markets: the internationalization process

Entry into foreign markets: the internationalization process

Exposure to local/foreign risks

Capabilities of handling these risks