Multinational Enterprise MNE
This article aims to discuss and analyze the causes which lead a firm to take its operation internationally and become Multinational Enterprise (MNE). The factors and their theoretical approach to the causes, will be highlighted with examples where required. After World War-II emerged new entities, this shaped the century. That time Multinationals were greeted and it was expected that they will take over the world economy soon. This has been proved by the events happening around today's world. Multinational enterprises became the heart of the economy. Many Multinational enterprises (MNE) were making sales which were greater than the budget of most American states. (mult enterprise)
Three main attitudes were defined by Perlmutter in structuring a Multinational Enterprise: Ethnocentric or home country oriented, polycentric or host country oriented and geocentric or world oriented. He was of the view that the organizational structure evolve around these attitudes as the firm becomes multinational. Studying these attitudes also take in account the decision making, flow of information, incentives, standards for evaluation and control and staffing procedures.
A further explanation of attitudes defined by Perlmuter would be categorized in four different ways which being basic in nature, a firm has to follow if wants to expand its business internationally or other word becomes MNE. The firm can start by just simply exporting, like China is penetrating its product in the market. The second option would be if it has a good understanding of the business by Licensing or Franchising which companies like Pizza Hut, KFC, and Warid (Telecom from Dubai) has done in Pakistan. The third option would be joint venture with the local firm the way Swiss and German Publisher embark on it. The final option would be through foreign Direct Investment (FDI), which was at its peak in US before the financial crisis hit. Before any of these options are considered, evaluation of these should be done on the grounds of the commitment in terms of resources, the risk of return, maximizing the success factor and the learning it can get by exploring the new markets.
MNE exits because economic conditions and administrator advantages are feasible and gives them an edge to make maximum profit out of the goods and services in the host country. The difference between the vertical and horizontal internationalization must be understood because it is important fact which defines the economic principles which underlie the activities of MNEs.
Vertical expansion is a cause of the firm locating new or more feasible material goods or human resources in a foreign country. Vertical expansion takes place where the enterprise fells that material goods or human resources abroad with the aim of ensuring the production of raw materials, components or input (vertical expansion upstream) or distribution and sale of goods or services (before vertical expansion).Conditions are feasible for vertical expansion if the firm sense relative edge in the location of choice. The edge will be of the factors relating to price or productivity like capital, land or labor. For instance Nike choose to move its operations to china due to lower labor costs, but if the firm has to take in account the ethical issues when doing so. Sometimes the mere existence of comparative edge in the host country does not mean that the firm should be favoring the vertical expansion, lower costs or higher production may not be favorable. The comparative advantage could be attained by getting hold of the supplier from the local production units.
Sufficient conditions are justification of investment abroad refers to the vertical expansion. Possible reasons for companies to encourage negotiation with foreign production are to do outsourcing, rather than relying on itself.The two main reasons are uncertainty about the delivery and ownership specificity.If uncertainty is high, the company rather upstream integration with the foreign institutions ensures that the supply chain function slides, and delivery deadlines met.Property specification is high when the company and foreign suppliers develop a common interest. The delivery must take placeto prevent the hold-up problems. Uncertainty and properties ensure that, say, a foreign national distributor energy to take things into their own hands and invest in areas abroad to ensure that the goods or services from the buyer to achieve due and reasonable costs.
Horizontal expansion occurs when the firm sets up a plant or service delivery facility in a foreign location with the goal of selling in that market, and without abandoning production of the good or service in the home country. The decision to engage in horizontal expansion is driven by forces different than those for vertical expansion. Production of a good or service in a foreign market is desirable in the presence of protectionist barriers, high transportation costs, unfavorable currency exchange rate shifts, or requirements for local adaptation to the peculiarities of local demand that make exporting from the home country unfeasible or unprofitable. As in the case of vertical expansion, these obstacles are a necessary condition for horizontal expansion, but not a sufficient one. The firm should ponder the relative merits of licensing a local producer in the foreign market or establishing an alliance against those of committing to a foreign investment.
Scholars in the field of international management have also acknowledged that firms in possession of the requisite competitive advantages do not become MNEs overnight, but in a gradual way, following different stages. According to the framework originally proposed by researchers at the University of Uppsala in Sweden (Johanson & Vahlne, 1977; Johanson & Wiedersheim-Paul, 1975), firms expand abroad on a country-by-country basis, starting with those more similar in terms of sociocultural distance. They also argued that in each foreign country firms typically followed a sequence of steps: on-and-off exports, exporting through local agents, sales subsidiary, and production and marketing subsidiary. A similar set of explanations and predictions were proposed by Vernon (1966, 1979) in his application of the product life cycle to the location of production. According to these perspectives, the firm commits resources to foreign markets as it accumulates knowledge and experience, managing the risks of expansion and coping with the liability of foreignness. An important corollary is that the firm expands abroad only as fast as its experience and knowledge allow.
Dunning (1993) have structured these characteristics in groups. First would be referred to the case of MNE having a product or production process in the foreign market which gives it the Ownership advantage. Second would be advantage of location like Nike did when entering the Asian market, to get the competitive edge over local producers. Finally internalization advantage which gives MNE reason to explore the ownership benefit. The firm specific advantages are often active in knowledge-based industries to encourage invest abroad.Empirical data consistently show that multinationals potentially important for the industry with the subsequent traits: elevated intensity of R & D relative to trade, a good deal of the qualified and technical workers in their labor force, new and / or the characteristics of technically complex goods, and a elevated degree of manufactured goods segregation and promotion (Markusen 1995).
Firm structuring to MNE has to take in account its contribution towards the economic, social and environmental factors which will be responsible for attaining prolonged development process. Must follow the human rights law of the host country, which is growing concern for any MNE operating today. Involvement with the local authorities can be a positive edge, like in case of Ford motors. The MNE attracts human capital and is one of the major causes for the host country to allow this activity. It brings employment opportunities and also facilities people by providing training. Disciplinary or discriminatory actions against the work force should be refrained and even from the management view point, like the illegal practice which was done in an oil company of Germany or the case of railways where only white were selected. Avoid involvement in the improper activities of political nature.
The articles argue that multinational enterprises (MNEs) are not the sole objective of reducing transaction costs, but also try to transaction values when interacting with local companies in foreign markets to maximize.MNE has brought innovation through the spread of resources and products to the developing countries. There are few numbers of MNE operating which means that there are restrictions which applies to these expansions. It can be transmitted to the host, and the complexity of the institution or branch mentality working in developed countries restricts the government to set national policy.Developing countries also tend to develop high-paying enclave, while the vast majority of the population is without any benefit from the MNE. The current crisis has shown that if some entities have the extreme power they can bring some devastating results. There should be a balance for these MNE operating and an eye should be kept on these all the time.
Dunning, JH. (1993). Multinational enterprises and the global economy. Addison-Wesley Publishing Company. Reading, MA.
Markusen, J.R. (1995). The boundaries of multinational enterprises and the theory of international trade. Journal of Economic Perspective 9(2), pp.169-189.
Mathews, J. A. (2006). Dragon multinationals. Asia Pacific Journal of Management, 23, pp.5-27.
Perlmutter H. (1969). The Tortuous Evolution of the Multinational Corporation. Columbia Journal of World Business, 5(1): pp.9-18.