Topic: "Explain why and how firms become multinational enterprises"
A multinational enterprise according to Brooke and Remmers (1978, p.6) is a company that is present in more than one country, the "home country" and the "host country", and provides valuable activities in a service or manufacturing area (Dunning, 1993, p.3). The concept of multinational business trace its roots to the very ancient years, starting from Greece and Egypt through the commerce activities, and spread in all over the world during the following centuries (Bartlett, Ghoshal and Beamish, 2006). Nowadays, due to "globalization", becoming a multinational enterprise is not an unachievable accomplishment but a common business practice. The most important aspects of globalization that act as drivers, are the open economies in the direction of liberating trade, the rising prosperity and development in all over the world and the strong interconnection among the world countries and economies (Tayeb, 2000). However, when a company decides to expand in the international market there are more than one ways to do it (Kay, 2005). This essay will explain why firms become multinational enterprises and in the second place will explain how companies can serve a multinational market.
Why firms become multinational enterprises
A variety of reasons and motives why firms desire to become multinational enterprises exists. First of all, the management style and goals are playing a major role in this decision (Tayeb, 2000). Furthermore, according to Dunning (1993) there are four main types of Multinational corporations' motives. The first of this, the "recourse seekers" aim to operate abroad in order to access precious recourses that are rare or in higher cost at the home country. One kind of these is the natural resources like raw materials, oil and metals. Manufacturing companies are typically those who are interested in this type of resources. In addition, some service provider companies go international in order to gain a location advantage. Another kind of resources is the unskilled and semi-skilled workforce that is available at lower wages, especially in emerging manufacturing countries (Dunning, 1993). The last motive why corporations seek resources is the intention to access already established proficiencies, experiences and competences in different fields like technology (Brooke and Remmers, 1978). The second category the "market seekers" aim, to get into new markets in order to promote their products or services especially for market expansion but also for four main other reasons ( Tayeb, 2000). One of these reasons is to go after their customers and suppliers if those have been enter the international market (Brooke and Remmers, 1978). Apart from these, a company may be market seeker in order to have the opportunity to customise its products according to the local customer's preferences. Through this it will be harmless to compete with the existing local companies. Furthermore, in some cases is much cheaper to produce in the host country than to export the products there from the home country. This is becoming more essential if there are trade barriers and other relating subversive government laws. The last but not least reason for market seeking investment is due to the necessity to follow the competitors when they moved in international markets, in order to remain competitive. Nevertheless, none of the reasons than have been mentioned before can be realised if the host government doesn't show the green light by promoting that investments and through lack of barriers (Dunning, 1993).
Apart from resource seeking firms and market seekers, the third category, the "efficiency seekers" according to Dunning (1993) are the firms that aim to enter international markets in order to benefit from the opportunity to create "economies of scale" and to manage their investing portfolio in such a way that will lead to lower risk because of the investment in the specific country. Moreover, those companies seek to benefit from the differences in cultures as well as from favourable economic markets and regulations and increased local demand. The last category the "strategic asset seekers" are companies that look for suitable international business to acquire in order to sustain its long term competitive position. This can become a reality in many ways. For example one company may acquire a main supplier in order to have exclusive access to an essential raw material, or might acquire a business so as to prevent another company from doing it. However, except the four main types of multinational activity motives there are some other reasons that drive the firms to become multinational enterprises. One of these is the desire of some companies to get away of their home country's strict laws and rules that stop their expansion or do not allow them to work in a cost efficient manner. One other is to "support investments" especially investments that are related to trade and finance, as well as other organizational actions (Dunning, 1993). Finally, we can not exclude the non-tangible motives that drive companies to become multinational corporations like the need for worldwide recognition in order to become familiar and trustworthy to people and foreign governments (Brooke and Remmers 1978, p. 162-174).
How firms become multinational enterprises
Accessing the global market it constitutes a challenge for the businesses due to the existing variety of choices. So it is essential for the companies to find out which is the most suitable way for their situation in order to serve the new market successfully (Tayeb, 2000). Specifically, there are four main entry modes to the international market: exporting, licensing and franchising, joint ventures and foreign direct investment. The first option, exporting, occurs when products or services that had been produced in the home country, transferred in different countries for sale (Laughton, 1995). Licensing can be described as the process where the licensor, who owns the knowledge, the technology or a trademark, permits the licensee in another country, to use it under conditions, usually for financial return. Franchising is another type of licensing that involves the franchisor that owns an already establish product or service to give permission for its use and vital knowledge to the franchisee for predefined time, place, charge and under quality conditions (Laughton, 1995). Furthermore, joint ventures occur when two or more companies, usually from different backgrounds and countries come together in a "strategic alliance" in order to share knowledge and resources. These companies may have been competitors, but are now moving towards a mutual and constructive relationship (Laughton, 1995). Foreign Direct Investment is the investment of assets and knowledge by a public or private company in another company that has its base in a foreign country (Wetherly & Otter, 2008). For some companies Foreign Direct Investment is their only choice due to the high tariff quotas for export activities and the strict laws of the host government. (Laughton, 1995). In short, companies that wish to go international must carefully evaluate each one of the choices mentioned above according to their risk, cost, control and potential returns and select the one that matched with their own situation target and resources (Tayeb, 2000).
In addition to this there are four models proposed by Whitelock (2002) discussing about what the firms should take into account while planning to internationalize and decide the correct mode of entry. Uppsala model talks about the experiential knowledge that a firm must possess in order to decide in which country it should expand its business. It says that expansion of a firm is directly proportional to its experiential knowledge, that is, as the experience increases; companies tend to cover distant countries as well (Johanson and Vahlne 1977). Turnbull (1987) argued that FDI is not always the final goal of a firm that has already internationalized its business and it may also be wrong to assume that a firm with significant experience may always tend to enter into a new market only via export but it may select the option that it considers most appropriate. For example, capital intensive firms may use licensing as the mode of entry for internationalization (Root 1987); while according to Johanson and Vahlne (1990), companies will take bigger internationalization steps if it has got huge amount of resources. Eclectic paradigm theory put forward by Dunning (1988) mentions about the transaction cost analysis, that is, the firm must compare the costs associated with each mode of entry and evaluate it on the basis of benefits that it will reap and then choose the one that it can afford. The prime assumption of this approach is that there are large numbers of distributors available at a firm's service and the market is very competitive. Industrial network approach considers the competitors, buyers and the firm's suppliers and also evaluates the relations of its rivals with its target customers, suppliers and distributors (Johanson and Mattsson 1986; Turnbull 1986; Cunningham 1986). Business strategic approach asks to take into account the history of the firm, its size, and its objectives in deciding the structure of the firm and market related factors such as its "attractiveness, psychic distance and accessibility and informal barriers" (Turnbull and Ellwood 1986).
To sum up, it is true to say that nowadays companies are interested in becoming multinational enterprises (Tayeb, 2000). As discussed above many reasons exist why firms want to go international for instance due to the increasing need to access less expensive or precious resources, for market expansion, following customers and suppliers or to compete successfully with its rivals that have already become international companies (Brooke & Remmers 1978). Furthermore among the choices that a company has about becoming multinational are exporting, licensing and franchising, joint ventures and the foreign direct investment which totally depends on its capabilities and potential and also the various factors discussed with the context of the four theories mentioned above. Multinational corporations have repeatedly proved to be beneficial to the host country, to the home country and also its ultimate consumers who look forward for better quality products of international standard and their availability at reasonable price (Navaretti et. al. 2004).
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