Topic

The Multinational Enterprise

ORIGIN Multinational business operation is not a new concept. It emerged from mercantilist philosophy. The British East India Company, Hudsons Bay Corporation, and Royal Africa Company are examples of multinational companies (MNCs) of the mercantilist era. Th e postWorld War II period has, however, witnessed a changing hand in colonialism, and there emerged a new thrust for industrial and technological development, as well as the rise of the United States as the largest industrial power. MEANING MNCs are considered as giant firms, which are engaged in productive activities of a corporate nature, with headquarters located in one definite country and having business operations in different countries.

DEFINITION
There is no universally accepted definition for the term multinational corporation. However, the following definitions by Jacques Maisonrouge, President, IMB World Trade Corporation, describes an MNC as a company that meets five criteria as follows: 1. It operates in many countries at different levels of economic development. 2. Its local subsidiaries are managed by the nationals. 3. It maintains the complete industrial organisation including the research and development (R&D) facilities in several countries. 4. It has a multinational Central management. 5. It has a multinational stock ownership.

What is a Multinational Enterprise

The internationally committed company has at least one plant or joint venture abroad. The internationally leaning company has foreign sales and/or a representative office and/or a licensing agreement abroad. The multidomestic firm has multiple international subsidiaries independent of headquarters.

What is a Multinational Enterprise

The transactional firm has subsidiaries that fulfill a variety of strategic roles typically performed by HQ. The multinational firm engages in FDI and owns or controls value adding activities in more than one country. The global firm has integrated international subsidiaries controlled by headquarters.

What is a Multinational Enterprise

Multinational Enterprise (MNE) a firm with foreign direct investment, service or manufacturing, over which it maintains effective control. International firm a firm engaged in trade activities but without an FDI component. Small and Midsize International Enterprises (SMIE) Most of these firms do not have FDI presence and do not qualify as MNEs

The Degree of Internationalization

Transnationality Index (TNI) the level of MNE internationalization. Calculated as the average of three ratios:
Foreign assets to total assets Foreign sales to total sales Foreign employment to total employment

History of the MNE

MNEs can be traced to the Phoenician, Carthaginian, Greek, and Roman empires Date back to Assyria around 2000 B.C. Faced the same obstacles as todays MNEs:
Tariffs Nationalistic opposition to foreign trade and investment Using competitive advantage and market power

The Worlds Largest MNEs

In 1998, the top 100 non-financial MNEs accounted for
13% of all foreign assets 19% of all foreign sales 18% of all foreign employment.

OBJECTIVES Generally speaking, MNCs consider international investments to accomplish the following objectives: 1. To expand the business beyond the boundaries of the home country, where they were originally established. 2. Minimise the cost of production, especially the labour cost. 3. Capture the lucrative foreign market against international competitors. 4. Avail the competitive advantage internationally. 5. Achieve greater efficiency by producing in local markets and then exporting the products. 6. Make the diversification intentionally effective so that a steady growth of business could be achieved. 7. To safeguard the companys interest in order to get behind the tariff walls. 8. Make the best use of technological advantages by setting up production facilities abroad. 9. Establish an international corporate image. 10. Counter the regulatory measures in the parent country.

REASONS FOR THE GROWTH OF MNCs

The important reasons behind the growth of MNCs include the following: 1. Expansion of the market territory beyond the boundary of the country due to their international image. 2. Marketing superiorities arising out of its up-to-date market information system, market reputation, effective advertisements and sales-promotion techniques, and warehousing facilities. 3. Financial superiorities over national firms. 4. Technological superiority over the national companies of the underdeveloped countries. 5. Effective product innovations due to its superior R&D facilities.

The Growth of Service MNEs

There has been significant growth of MNEs in service areas, due to:
Economic transformation developed nations shifting into service economies Globalization and liberalization of regulatory systems open skies agreements, accounting standards, flexible store hours, etc. Communication advances allow MNEs to coordinate knowledge-intensive operations across borders.

The MNE in the Public Eye

The MNE has been both lauded and vilified for its impact on host and home countries. Among the more positive attributes are:
MNEs provide knowledge, capital, technology, expertise, global affiliations, contributions to national productivity and exports, innovation, employment, and societal change.

FAVOURABLE IMPACT OF MNCs There are a number of arguments in favour of MNCs : 1. MNCs help to increase the investment level and there by, the income and employment in the host country. 2. They become vehicles for transfering technology especially to developing countries. 3. MNCs enable the host countries to increase their exports and decrease their import requirements. 4. They work to equalise the cost of factors of production around the world. 5. MNCs provide an efficient means of integrating national economies. 6. MNCs make commendable contribution to R&D due to their enormous resources. 7. They also stimulate domestic enterprises. To support their own operations, they encourage and assist domestic suppliers.

8. They help to increase competition and break domestic monopolies. 9. MNCs help to improve the standard of living in their host countries. 10. MNCs provide impetus in diversification. 11. They substantially contribute towards professionalisation of management in the host countries. 12. They contribute substantially to improve the balance of payment (BoP) position in the host countries. 13. MNCs contribute towards the national exchequer by way of duties and taxes. 14. MNCs play a vital role in developing the ancillaries in host counties. 15. MNCs are profit-making enterprises which pay high dividends, motivating resource mobilisation among the investors in host countries.

The MNE in the Public Eye

Among the negative attributes are:
the MNE is perceived as a threat to national sovereignty have unfair advantages over local competition exploit government incentives at the expense of taxpayers limit knowledge transfer to developing nations exploit critical national and natural resources move on when their exploitation is finished

The Competitive Advantage of the MNE

The MNE generally has large capital, human, brand, and technological resource base, it can use many countries. Global spread provides MNEs with:
diversification so they can compensate for SBU low performance and uncertainty helps them overcome entry barriers and high start up costs.

MNEs Capabilities
MNE Capabilities
Firm capabilities
Familiarity with national culture, industrial structure, and government requirements Existing relationships with customers, suppliers, regulators

Strategic capabilities
Technological assets (patents, trade secrets, proprietary designs, product development)

Managerial skills International experience

MNEs Capabilities
Capability Deployment
MNEs must transfer critical capabilities unavailable to local players. Technological and financial capabilities are more transferable than organizational skills.

Capability Upgrading
Learning capability the capacity to generate ideas and acquire new knowledge. More transferable than firm resources.

The MNE from Emerging / Developing Economies (DMNE)

MNEs from developed nations typically dominate global business. DMNEs, however, are making inroads. DMNEs face the following constraints and advantages:
Resource constraints. Knowledge, sophistication constraints. Sheltered environment constraints. Home government support. Flexibility

Obstacles Facing MNEs from Developing Economies

Resource Constraints
Capital investment, lack of reputation, brand recognition

Lack of Knowledge
Experience in foreign operations, lack of production, marketing and management skills

Sheltered Environment
Protected by duties, lack of knowledge and expertise from conducting international business

DMNE Advantage in Global Markets

Home Government Support
Impact of the DMNE on the national economy Shields the firm from the marketplace, hampering its capability development

Flexibility
Lower production scale permits flexibility and adaptation Less investment sunk in older plants and technologies

Typical Features of DMNEs

Internationalization Patterns
To develop ownership advantages To serve as intermediaries To overcome import quotas in developed markets To reduce risk via diversification

Focus on Other Developing Markets

More likely to have greater share of FDI in other developing markets.

Reliance on Third Parties

To compensate for resource shortages

Typical Features of DMNEs

Governance
Less likely to be publicly traded, and tightly controlled

Industry Domain
More likely to be in manufacturing

Bargaining Power
Lack bargaining power in the host country

Strategy
More likely to compete on price than on product differentiation

What is an SMIE?
The SMIE is a small to medium sized organization SMIEs account for approximately 94% of all international firms. They often face serious obstacles to internationalization.

Obstacles to SMIE Internationalization

Scale and Transaction Constraints Access to Capital Lack of Knowledge Lack of Market Power Vulnerability to Intellectual Property Violations

SMIE Internationalization Features

International Motivation
Push factors competitive pressures in its domestic market Pull factors make foreign locations more attractive Management factors managerial commitment and resources devoted to international activity Chance factors unforeseen circumstances that create internationalization opportunities

SMIE Internationalization Features

Internationalization Patterns
Often not incremental, often leapfrog into international markets

SMNE Exporter Profile

97% of U.S. exporters are small businesses

Exporter Demographics SMIE Foreign Investment Profile

At present relatively small, but growing

SMIE Internationalization Features

Chance Expansion
SMIEs respond to incidental opportunity

Nature of FDI by SMIEs

Emphasis on Developed Markets
More likely to invest in developed markets

Selective Globalization
Tend to focus on one link in the supply chain and on a selected market

Strategy
Often adopt niche strategies Rely more on cooperative strategies

HARMFUL EFFECTS OF THE OPERATIONS OF MNCs ON INDIAN ECONOMY The operations of MNCs have had some harmful effects on the Indian economy. These include the following: 1. Th e main objective of MNCs is profit maximisation and not the development needs of poor countries; in particular, the employment needs and relative factor scarcities in these countries. 2. Through their power and fl exibility MNCs inflict heavy damage on the host countries through suppression of domestic entrepreneurship, extension of oligopolistic practices, passing on unsuitable technology and unsuitable products, worsening income distribution, and so on. 3. MNCs can have an unfavourable effect on the BoP position of the country through an out- flow of large sums of money in the form of dividends, profits, royalties, interests, technical fees, and so on, leading to an increasing volume of remittance which rose from Rs 72.25 crore in 196970 to Rs 813.5 crore in 1989.

4. MNCs cause distraction of competition and acquire monopoly powers in the long run. 5. The tremendous power of the global corporations may pose a threat to the sovereignty of the nations in which they do their business. 6. MNCs retard the growth of employment in the home country. 7. MNCs interfere directly and indirectly in the internal political affairs and affairs of other sort too, of the host country. 8. They cause harm by faulty technology transfer to capitalintensive nature, affecting the employment in a labour-supply economy. 9. They cause a fast depletion of some of the non-renewable natural resources in the host country. 10. Transfer pricing enables MNCs to avoid taxes by manipulating prices on the intra-company transactions.

LIBERALISATION AND MNCs

The liberalisation movement was started in 1973. Th e process was gradually carried forward to the liberalisation measures initiated in 1991 to attract massive foreign investments. In India, liberalisation measures initiated in 1991 opened up the entry of MNCs. In India, the provision restricting the acquisition or transfer of shares of MRTP undertakings in both MRTP Act and the Companies Act were deleted. India had taken different measures to encourage MNCs, i.e., removal of import restrictions, LERMS, memorandum to IMF, FERA and MRTP relaxation, GATT agreements, etc.

ASSESSMENT The value added by each of the top 10 MNCs would be in excess of $3 bn of the GNP of over 80 countries.

Two-thirds of the total FDI is concentrated in the developed market economies, where as the remaining one-third in the LDCs.
Transfer pricing is one of the methods which MNCs use for carrying over effective transactions for intermediate products and other current inputs imported by their affiliates. Multinationals are able to make any investment for sales promotion and advertising, and hence, can easily penetrate more into the market and capture a major share. There would not be any harm if MNCs operated in India within the framework of legal and statutory control.

FUTURE OF MNCs
1) MNCs make substantial contribution in capital formation and technology development, which are scarce factors in the underdeveloped countries. 2) The host governments policies and approaches to foreign investment, monetary and fiscal policies, manpower availability, industrial climate, etc., are vital issues for MNCs to take an investment decision. 3) RBI provides a single-window clearance, to give liberty to Indian companies, to make investment in other countries. 4) There were 37,000 multinationals is with over 1.7 lakh foreign affiliates functioning in the world in 1992.

Born International
A business organization that from inception seeks competitive advantages from the use of resources and sale of output in multiple countries.