The world has become a global village due to integration of trade, economies, political, cultural and technological advancements and exchanges between countries, organizations and people, have brought the countries closer. Elimination of trade barriers and liberalization has led to creation of global markets with access to standardized products and services possible anywhere in the world (Amal and Awuah.2009). This has led to the creation of MNEs.
Multinational Corporations (MNC) or Enterprises (MNE) are firms that have headquarters in one country and operations in more than one country. Dunnig and Lundan (2008) explain, MNEs engage in FDI and owns or has control over some value added services in more than one country (multiple economic activity in more than one country). Foreign Direct Investment means partial or full control of a firm in host country by a firm in home country (Needle,2004). The reasons for the emergence of MNEs are access to large market, cheap and skilled labour, raw materials, economies of scale, tariff barriers, legal issue, exchange rates, currency translation adjustments during disposition and accounting methods. According to OECD (2008), in developing countries, companies operate not only in primary production but also in manufacturing, domestic market development and services. Ford is a US based MNE, Volvo is Swedish, Siemens is German, Samsung is Korean, Lenovo is Chinese, Nokia is Finnish. MNEs invest in rapidly growing economies like BRIC (Brazil, Russia, India, China), Malaysia, Singapore and stable economies like Latin America and Japan.
According to lecture (Artisien, P Lecture,8th March 2011) there are two types of MNEs one is Horizontal integrated MNC where same products are produced in different countries and the other is Vertical integrated MNC a company integrates backward up the supply chain or forward down the market. Nestle, set up its own marketing and distribution in Europe and America perceived the market no longer responded to its need, so it integrated forward to search for new markets.
Reasons for international expansion
According to lecture (Artisien, P Lecture, 15th March 2011) motives behind which MNEs investment in foreign market are resource seeking, strategic asset seeking that invest in FDI through acquisitions of the assets of foreign corporate, market seeking (horizontally organized firms search for larger market when their local market gets saturated) and efficiency seeking.
Reasons for international expansion are stated by few theories
Theory of Comparative advantage: According to Madura (2008), some countries produce or specialize in some products. So even if a country is relatively less efficient in producing a product, can trade with a country which produces more efficient products. Japan and USA are technologically advanced countries so they are large producers of Computer components, India has Cheap and skilled labour which attracts companies to offshore outsource for operating call centers. According to Lenovo, Lenovo's ThinkPad customer research takes place in USA, hardware designs from Japan and ThinkPad products are built and tested in China.
Imperfect market theory: Artisien explained concepts of Hymer (1970) and Kindleberger (1960) (Artisien, P Lecture, 8th March 2011), MNE succeeds if there are imperfections in goods and services. Imperfect competition gives superior access to technology, superior knowledge, better access to market, skilled management, and higher levels of research. However, in perfect competition, a company would not be able to exploit the advantages as there are many buyers, sellers, homogenous products, no control over cost, information is readily available to all. According to,
Product cycle theory: Madura (2008) explained Vernon's theory, every product has a limited life and goes through various stages (Introduction, Growth, Maturity, Saturation and Decline).
Products are first produced in home country and exported to foreign lands. Then in order to gain competitive advantage, the product is manufactured in foreign countries to reduce costs. The competition might increase and so product is then differentiated to sustain in the market. Also when the markets mature, firms search for potential markets to avail opportunity and advantage over competitors.
OLI theory: Needle (2004), explained Dunning's 'Eclectic Paradigm' that a firm would enter a market considering the Ownership factors, Location factors, Internalization factors. The firms should have some benefit over local firms like better access to finance knowledge, technology and management. Western firms would be in a better position to borrow money from stock market of less developed countries than local companies. Location factors are cheap labour, low rates of taxation and import tariffs. Internalization factors are based on transaction costs. A subsidiary could be set to exploit technology and due to location specific advantages due to which companies get easy access to resources, however, some firms might create a wholly owned subsidy and control all the activities. According to Dash K.C.(2010) et al. General Electronics is offshore outsources in India in manufacturing as well as knowledge based services. GE instead of relying on third party, created its own Greenfield and around 50 percent of GE's software is developed in India.
Modes of Entry As explained by Root (1994) in Osland (2001) et al. selecting the right mode of entry is one of the most crucial strategic decisions to be made as a well chosen mode can help a company in reaping benefits whereas a wrong decision is difficult to change when long term commitments are made, its technology can be copied by competitors and certain laws in a country can prevent a company to take full advantage of the opportunities in the market. According to Wall Street Journal (2010), Japanese and US firms agreed to build trains for China and thought they would get access to a potential new market, however, Chinese companies adapted their technology and became their competitors.
According to Osland (2001) et al. Exporting is mostly the initial stages of internalization where a product or part of it is manufactured outside the home country and then transferred to it. Exporting can be done indirectly with the use of a middleman in home country who would market the product in host country or can be done directly by using an intermediary in target country. Boeing is one of the largest direct exporters, manufactures most of its aircraft in USA but sells most of them in other countries. However, there can be problems related to tariffs, government intervention and costs. A Pharmaceutical firm wanted to export its drugs to China; however, China wanted it to produce the drugs in China in collaboration with a local Chinese firm. Thus technology transfer was needed by the country to enter it. So, the firm decided to go with Joint venture.
According to FIDIC (1991), in Turnkey contracts, a developer (contractor) is hired for execution and completion of project without owner's input. Final price and date completion of project is decided in advance and there is fair amount of risk sharing between contractor and employer. This contract is generally used in Building or construction business. Where FDI'S were restricted, Turnkey contracts were used to enter the market.
According to Needle (2004), Licensing allows a firm in overseas market to enter a contractual mode with one or more local partners which allow the foreign firm to use its technology, patents, company name and methods of running the business for a fee paid to the local firm. Licensing also gives some part of profit to other parties. Example: iphone.
According to Madura (2008), Franchising makes a firm to provide specified sales, strategy and may be initial investment as well for periodic fees. It allows a foreign firm to market its product through a contract. Examples, service industries like McD and KFC. The initial costs are low and setting up subsidiary is cheaper than buying land, training etc. Like Licensing, it gives some share of profit to other parties. However, the company is not in full control of the technology. For example, in China, protecting copyrights is an issue. As explained in lecture (Artisien, P Lecture, 22nd February 2011), in Strategic Alliance, two companies agree to share some facilities, they enter strategic alliance. Examples: Nokia, Boeing (777) alliance with Japanese consortium.
According to Osland (2001) et al, Joint venture basically means setting up a firm in target country, sharing management and risks by two or more firms. Competitors work jointly with their competitors to deal with completion, technology transfer and enter new market. However, there can be problems related to ownership control, commitment and government policies. Matsushita is in a joint venture with Philips in Belgium to manufacture batteries.
Wholly- owned subsidiary are subsidiaries operated in another country and is completely owned by parent company. Japanese automobile companies used to enter US market through this mode of entry in 1980s. Toyota has established a (Greenfield) site in Indiana to manufacture four -wheel vehicles. (Osland et al.2001)
According to Foster and Foster (2006), Offshore outsourcing means that an organization hires another firm in another country to perform an activity or part of process for easy access to resources, to gain competitive advantage, developing countries are attracting companies from developed nations as they provide quality and cheap services and manpower, infrastructure facilities and round the clock operations due to time zone difference. Citibank, Lehman Brothers, JP Morgan have outsourced overseas their information and research services. Libraries offshore outsource some basic functions secondary research information, press cutting, editing etc.
Globalization has led to the growth of MNEs which bring benefit to the firm, host country as well as home country by creating jobs, economies of scale, access to resources, technology and labour. Customers get standardized products and services globally. Selection of the right mode of entry is very critical for the firm as each mode offers different benefits and restrictions, in terms of amount of resources required, technology risk and legal issues. So, managers need to take sensible decisions in order to grab opportunities and reap benefits.