Chapter 4: The Multinational Enterprise Chapter 4 The Multinational Enterprise International Business Oded Shenkar and Yadong Luo

Chapter 4: The Multinational Enterprise

Chapter 4

The Multinational Enterprise

International Business

Oded Shenkar and Yadong Luo


Do You Know?

• Who are the players in the international business arena?

• How can you tell the degree of a firms internationalization?

• Will a higher degree of internationalization lead to higher corporate performance?

• What advantages and disadvantages do MNEs have when they operate overseas compared to local firms?


Do You Know?

• What are the typical features of developing country MNEs?

• How do they differ from developed country MNEs?


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.



• 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.



• 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


The Degree of Internationalization

Exhibit 4-1: Average transnationality of the world’s 100 largest MNEs 1990-1998


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 today’s

MNEs:– Tariffs– Nationalistic opposition to foreign trade and

investment– Using competitive advantage and market

power


The World’s 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.



Exhibit 4-3: Home country of the world’s largest 100 MNEs by TNI and foreign assets



Exhibit 4-4: The largest 10 U.S. MNEs (at the end of 1999)


The Industry Composition of MNEs

Exhibit 4-5: Industry composition of the largest 100 MNEs

Dominated by a limited number of industries.


The Industry Composition of MNEs

Exhibit 4-6: The largest 5 MNEs in each industry


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.



Exhibit 4-7: The world’s top 20 banks 2001 (based on total assets)

Note the U.S.



Exhibit 4-8: The world’s top airlines, 2001


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.


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.


MNE’s 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


MNE’s Capabilities

• Capability Deployment– MNE’s 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


The Largest Developing Country MNEs

• DMNE Scale– Median DFI holding for a top 50 DMNE in

1998 was $1.5 billion, versus $14 billion for a global 100.

• DMNE Industries– Largest group consists of diversified firms– Electronics, petroleum, and food/beverage

• The National Affiliation of DMNEs– Dominated by South, Southeast, and East

Asia



Exhibit 4-10: Global expansion of Cemex SA 2001



Exhibit 4-11: Industry composition of the largest 50 MNEs from developing countries



Exhibit 4-12: Country composition of the largest 50 MNEs from developing economies


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.


What is an SMIE?

Exhibit 4-14: Small companies can be international


Obstacles to SMIE Internationalization

• Scale and Transaction Constraints

• Access to Capital

• Lack of Knowledge

• Lack of Market Power

• Vulnerability to Intellectual Property Violations


Obstacles to SMIE Internationalization

Exhibit 4-15: Entry barriers to international trade for Minnesota SMIEs


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



• 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



• 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


Born International

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

Documents

Chapter 4: The Multinational Enterprise Chapter 4 The Multinational Enterprise International Business Oded Shenkar and Yadong Luo