Multi-national Companies (MNCs) Lecture 5

Importance • • • •

Lie at heart of globalisation Base business model on international production Most are based in the triad of states At present, there are 65,000 MNCs with 850,000 affiliates in foreign countries. • MNCs’ total sales amount to almost $19 trillion.

Geographic Spread

• One third of multinational companies’ trade is accounted for by intra-firm activities. • Two-thirds of world trade in goods and services is controlled by multinational companies. • Of the 100 largest economies in the world, 51 are corporations.

Three types •

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Horizontally integrated multinational corporations manage production establishments located in different countries to produce the same or similar products. (example: McDonalds) Vertically integrated multinational corporations manage production establishment in certain country/countries to produce products that serve as input to its production establishments in other country/countries. (example: Adidas) Diversified multinational corporations manage production establishments located in different countries that are neither horizontally or vertically integrated. (example: Microsoft

An MNC • • • •

The MNC is a differentiated network of businesses. Each businesses is differentiated by own niche It is a learning forum. Classic trans-national

MNCs controversies • Good - Spread wealth, - Technology transfer - Aid economic development - Spread, aid development of commercial culture Though these based on MNCs accepting social responsibilities

MNCs controversies • -

Bad Agents of globalisation Hold too much political power Seen as exploitative Repatriate profits Lack of commitment to host Sovereignty issues Unethical practices

Multinationals defined • -

What they are not ! Not domestically focussed Not limited international risk Though firms of all sizes will be exposed to some degree of international risk - e.g. oil prices

Multinationals defined • • • •

It is firm investing in value adding activities abroad Increasingly operate outside home market Increased exposure Focus on international resource base

Definitions • `an enterprise that controls and manages production establishments locate din at least two states’ Caves (1996) • `enterprises which own or control production or service facilities outside the country in which they are based’ UN • There are many others

But importantly • There is no notion of the size, an MNC need not be large enterprise • Control is as important as ownership, this also extends scope of MNCs - e.g., may not own production facilities but has a lot of control over them

• Any definition of an MNC is loosely defined as cannot capture the true diversity of the nature of these businesses This diversity is true over the motives for firms seeking to engage in FDI These motives are of 4 types

1. Resource seeking investment • • • • •

Acquire resource available in another state Especially primary products (oil etc) Cheap, unskilled labour Software. IT in Mumbai Often key aspect is resources are immobile so have to enter state to utilise

2. Market seeking investment • Not for export but to supply goods and services to it • Locate production within target market Aim: - Greater proximity to customer - Continuation of relationship with major customers - Government policy - Maintain physical presence

3. Efficiency seeking investment • Rationalise value chains • Seek to locate different parts of value chain to maximise benefits from each location • International division of labour • Exploit difference in factor endowments • Example of labour intensive activities in developing states

• Also common within regional integration markets • Case of the EU - exploit freedoms to achieve greater efficiency

4. Strategic asset investment • Link FDI to long term objectives • Make purchase to make life difficult for rival or reduce intensity of competition • Spread risk across states

Other motives • Escape tight domestic legislation • To overcome limited growth prospects in domestic markets • To avoid exclusion form markets • To prevent competitors gaining upper hand in a market

How Multinational are multinationals • • • • •

Expect to see MNCs divorced from home state However true global firm is rare Firms still long term link to home state Reflected in culture, management practices etc.. Focus is still on adapting products to local markets

• Production and related activities tend to be most global • Some is market seeking • Some engage in specialist production for large integrated markets • Most global form of production - vertical integration across borders • Different parts of process occur in different locations

• In this case little link between host state and MNC, • MNC simply using facilities, little attempt at sales

Structure and Strategy in the MNC The coordination issue

Need for Coordination in an MNC • Greater need than domestic companies • Companies unable to gain strategic control of their worldwide operations and manage them in a globally coordinated manner will not succeed in the emerging international economy • Resources are widely distributed

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Need for Coordination in an MNC (cont.) • Improvements in information technology and methodology have made global coordination somewhat easier • Still, coordination is big challenge

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Advantages of Coordination in an MNC • Flexibility in responding to competitors • Ability to respond in one country to a change in another • Ability to keep abreast of market needs around the world • Ability to transfer knowledge between units in different countries

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Advantages of Coordination in an MNC (cont.) • Reduced overall costs of operation • Increased efficiency and effectiveness Ability to achieve and maintain diversity in firm’s products, their production, and distribution

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Multinational Strategy Loose controls; strategic decisions remote

HQ

Financial reporting flows 4-29

Global Strategy

Tight controls; centrally driven strategy

HQ One-way flows, goods, information, and resources 4-30

Transnational Strategy Complex controls; high coordination skills,coordinated strategic decision process

Heavy flows; materials, people information, technology

HQ Distributed capabilities, resources and decision making 4-31

Multi-national Companies Explaining Activity

International Production Theory • The how and why of internationalise • Emerged in past war era as MNCs rose in importance • Before then theory was based on neo-classical trade theory • 1960 - Hymer - differentiate between FDI and portfolio investment - these differ over control

• Emphasise firm specific advantages (FSA) as key to FDI and its motives • MNCs need these FSAs if to challenge incumbents • Thus MNCs must have advantage over incumbents in FDI to work • Thus markets work imperfectly

Internalization • MNE internalises international transactions to overcome imperfections • Transaction cost theory • Thus MNCs do things internally as cheaper than in market place • E,g, buy oil resources rather than deal through third company

• Offers benefits through economies of scale and scope • Offers control over FSAs • Can use by licensing and franchising - control value of brand

Eclectic paradigm • A synthesis of different views • Based on belief there can be on single theory to explain MNCs • Uses three sets of factors to explain MNCs 1) Ownership factors - needs advantages over firms in places where it is considering locating - FSAs, core competences, etc…

2. Location factors - advantages to specific state but are available to all firms 3. Internalisation factors - relates to ownership and control, where firm internalises key functions to overcome market failure

According to Dunning MNEs degree of foreign value added activities depends on the following: 1.

Ownership advantages over other firms

2. Degree to which firm believes in own advantage to exploit these FSAs rather than sell them

3. Degree to which location specific advantages raise value of these FSAs 4. Degree to which internationalisation is consistent with long term strategy of firm

OLI Location Advantage: Location Specific factor. These are external, to the firm including factor endowment, transportation cost, government regulation, Infrastructure factors

OLI Internalization: Ownership Advantage: Firm specific factors including technology, , patent, process, name recognition, and other core competencies

Cost advantage from vertical and horizontal integration, due to transaction cost caused by market failure

Network/Alliance Capitalism • Firms seeking to reduce internal costs of doing business overseas • Use of alliances/networks • Use of outsourcing of key activities • MNC acts as coordinator of a series of relationships • Seek efficiency

Increasingly common as: 1. 2. 3. 4.

High cost of technological development Exploit FSA of each firm Clustering benefits Changes in technology

Result is that boundaries are blurring

Resource based view • A firm’s ability to attain and keep profitable market positions depends on its ability to gain and defend advantageous positions with regard to relevant resources important to the firm (Conner 1991). • Importance of intangible knowledge

Resource based view Process of internationalisation is characterised by two factors: 1. resource availability 2. interest in capability development

• internationalisation is "rational" process, since it assumes that the firm-specific resources determine the strategic choices available to a firm concerning strategy, products, markets, organisation, etc., with both resources and strategic choices combining to form the basis of any competitive advantage enjoyed by the firm

Knowledge based View of MNC • • • • •

Link to RBV Knowledge flows within MNC Between HQ and subsidiaries Knowledge created in different parts of MNC network Shared and mutually exploited for commercial advantage.