INTERNATIONAL BUSINESSAn Introduction

CHAPTER 3Multinational Enterprises (MNEs)

LEARNING OBJECTIVES

At the end of this chapter, the reader should be able to:• Describe several terms of MNEs• Explain Traditional MNEs• Discuss DMNEs advantages and constraints• Discuss motivations for SMIES to internationalize• Describe International Direct Venture Firm

Basic Concepts and Definition

Multinational enterprises (MNEs)

Large company with plants or other direct investment in one or more foreign countries, international sales and a multinational mix of managers and owners

e.g. Ford, Toyota, GE, IBM, Intel, and Sony with headquarters both in New York and Tokyo.

Terms describing a company with significant international operations and presence

include:

Multidomestic firm A company with several international subsidiaries that is independent from each other. It sees customers as being unique. A multidomestic company modifies a product to accommodate the wants/needs of the

market e.g. a Coca Cola sold in China has a different taste from those sold in the U.S. Global firm

Has integrated international subsidiaries controlled by headquarters Usually operates beyond national borders and in more than one country sees the globe as

one single market without borders, and earns profits in a global basis. Integrated activities on a worldwide scale Relative price as if the whole world or large areas are single ones. They sell the commodity the same way everywhere that is a standardized

commodity.e.g. General Electric (GE), Texas Instruments

Terms describing a company with significant international operations and presence

include: cont. Transnational firm

This type of company normally has subsidiaries that fulfill a variety of strategic roles typically performed by HQ.

The overseas components are integrated into the overall corporate structure across several dimensions, and each of the components is empowered to become a source of specialized innovation.

It is a management approach in which an organization integrates its global business activities through close cooperation and interdependence among its headquarters, operations, and international subsidiaries, and its use of appropriate global information technologies.

Transnational firms have higher degrees of coordination with low control dispersed throughout the organization.

The five implementation tactics used for implementing the transnational model are: Mass customization-synergies through global research and development e.g. American Express, Time

Warner, Frito-Lay, MCI Global sourcing and logistics e.g. Benetton, Citicorp Global intelligence and information resources e.g. Andersen Consulting, McKinsey Consulting Global customer service e.g. American Express Global alliances e.g. British Airways and US Air; KLM and Northwest

Terms describing a company with significant international operations and presence

include: cont.Multinational firm

Another common name for this term is multinational corporation (MNC) and this term has been used interchangeably with multinational enterprise.

This type of company generally engages in Foreign Direct Investment (FDI) and owns or controls value adding activities in more than one country.

Multinational firm usually has facilities in several countries and obtain a large portion of revenues from its foreign operations.

Multinational firm also has subsidiaries which posses a common strategic vision and usually deals with expatriates.

Traditional Multinational Enterprises (MNEs)

The traditional MNE is a large company with plants or other direct investment in one or more foreign countries, international sales and a multinational mix of managers and owners. It is mostly located on developed countries and in almost every part of the world e.g. Johnson & Johnson, Procter & Gamble and BP.

Advantages: MNEs provide knowledge, capital, technology, expertise, global affiliations,

contributions to national productivity and exports, innovation, employment, and societal change.

Global spread provides MNEs with diversification so they can compensate for SBU low performance and uncertainty and helps them overcome entry barriers and high start up costs.

Global spread also allowing them to overcome entry barriers in the form of high start up costs and uncertainty of returns especially when becoming the first movers in emerging economies.

Dynamic capabilities such as technological assets, patents, trademarks, designs, products, and process innovation to ensure its survival in international market e.g. Body Shop’s franchising skills and IBM voice recognitions technology.

Superior managerial skills e.g. Google approaches in managing its talent have enable the companies to retain and attract the right candidate and helps to improved its performance.

International experience.

Criticized for:Creating false needs in consumers and have had a long

history of interference in the policies of sovereign nation states.

The critics also claimed that MNEs like to employ invasive and aggressive advertising tactics on billboards, television ads, adware, spam, and telemarketing, to advertise its products.

MNES is perceived to be prone to scandalous issues such as corporate corruption with the examples of high profile cases like Martha Stewart and Enron.

MNEs is also said to answer only to shareholders; while ignoring pleas for human rights and other issues.

MNEs from Developing and Emerging Economies(DMNEs)

Multinational enterprises from developed nations or emerging markets typically dominate the global business transactions today. Samsung from South Korea now has been aggressively

marketing and selling their electronics products in United States and Europe. The Samsung brand is almost as popular as the Sony brand from Japan in global consumer electronic markets.

Advantages:

Home government supportLower production scale of DMNEs permits flexibility

and adaptationDMNEs are often newly formed, thus have less

investment sunk in older plants and technologies and can leapfrog into cutting-edge technologies

Constraints of DMNEs

Lack of capital investmentLack of reputation and brand recognition. Lack of knowledge and management

experience in foreign operations. DMNES also have been sheltered in their

domestic market for a long time.

Features of DMNEsFocus on developing and gaining ownership advantages and skill

advantages on the host countries. DMNEs usually serve as intermediaries in the flow of technology

from industrialized to developing countries.DMNEs also have to internationalize to overcome import quotas in

developed markets. DMNEs usually try to reduce risk via diversification. DMNEs normally rely on third party. DMNEs are focusing more in manufacturing. DMNEs is said to be lacking in bargaining power in host country DMNEs generally have high tendency in competing on lower price

than on product differentiation.

Small and Medium Sized International Enterprises

(SMIEs)

SMIEs do not qualify as MNEs because they only engage in international business activities, but they do not have substantial Foreign Direct Investment (FDI) presence abroad through the acquisition of profitable assets such as opening branches in various countries.

Advantages:

More innovativeCreativeHave high entrepreneurial spiritHave lower overhead costsHave the ability to move fast to take advantage of new opportunitiesHave the ability to leapfrog technologically

Constraints:

Small scale and limited reach of the SMIEs constraints its production and services delivery option and costs.

Lack of knowledge and track record in exporting and foreign investment.

Lack of market power

What motivate SMIEs to go International?

Find low cost countries Compensate with the decline in domestic demand. Pull factors - higher market growth rate, more

incentives and lower production costs.Managerial commitment and resources devoted to

international activity Unforeseen circumstances that create

internationalization opportunities

International Direct Venture Firm (IDVF)

Launch international business activities right from their initial start-up.

It can also be defined as business organizations that went abroad right from the point of inceptions.

For example one of Malaysia’s successful restaurant franchise called “Jom Makan” launched its first venture in a competitive food business directly in overseas market in London without ever having a presence in Malaysian market.

Advantage Capability in leveraging its knowledge and

innovativeness to achieve considerable market success early in their phases of evolution.

Constraint Lacking in capital, and tangible resources that

characterize most of new business ventures.