2-The Multinational Enterprise Chapter # 2(International Business)

Dr Zain Yusufzai

The Multinational Enterprise

Chapter # 2 (page35-65).

Introduction How MNEs affect economies of host countries Multinationals down play the fact that they are foreign held Example: - Bayer, (drug company) German owned. Nestle (chocolate Manufacturer) Swiss owned. Northern Telecom. (Communication) Canadian Banks in California, 25% are Japanese owned. The nature of multinational enterprise: In US over 60,000 MNEs; but only 500 largest accounts for 80% of all Foreign Direct Investment (FDI): Majority owned by triad 430 companies; Triad basic unit of analysis for MNEs strategy Total annual sales of these 500 firms in excess of $12.5 trillion Collectively employ 43 million people These firms engage in wide variety of operations Autos, computers, chemicals, consumer goods, financial services, industrial equipment, and oil and steel production Large MNEs have a significant impact on international business and the world economy Characteristics of multi national enterprises The environment they operate in; MNEs have two major area of concern 1. the home country of its head quarters; 2. host countries in which it does business Characteristic:1. affiliates responsive to a number of important environmental forces, including competitors, customers, suppliers, financial institutions, and government 2. It draws on common pool resources, including assets, patents, trademarks, information, and human resources. 3. links together the affiliates and business partners with common strategic vision;

International business Alan M. Rugman, Richard M. Hodgetts

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Dr Zain Yusufzai

The Multinational Enterprise

Chapter # 2 (page35-65).

Means: - all firms with whom the MNE works fit into the company’s overall plan of what it wants to do and how it intends to go about implementing this strategy. Internationalization process: A process by which a company enters a foreign market: Firm produce a standardized product will seek to involve itself in foreign markets:  Foreign markets regarded as risky, due to the fact unknown territory’  Faces export marketing costs Some methods to avoid foreign risk and costs License: a contractual arrangement in which one firm (the licensor) provides access to some of its patents. , trademarks, or technology to another firm in exchange for a fee or royalty; Licensor: - a company that provides access to some of its patents trademarks, or technology to another firm in exchange for a fee or royalty Licensee: - a firm has given access to some of the patents, Trademarks, or technology of another firm in exchange for a fee or royalty: Major types of foreign entry for a firm are as follow 1. Firm sees potential extra sales by exporting and uses local agent or distributors to enter particular market. Often firm use exporting as a vent for its surplus, production. 2. If successful abroad some firms set up local sales representative or marketing subsidy. 3. Exports represent a larger share of sales firm sets up an export department to manage foreign sales and production for such markets, (design, and production process). 4. Firms compatible with foreign environment starts local production (engage in local assembly and packaging). 5. Firm involved in Host countries: - Factor Market, must deal with such variables as, wage rates, cultural International business Alan M. Rugman, Richard M. Hodgetts

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Dr Zain Yusufzai

The Multinational Enterprise

Chapter # 2 (page35-65).

attitudes and worker expectations in its new labor force. 6. Final stage:i. Firm generated sufficient knowledge about Host country environment. ii. Consider a foreign direct investment activity. iii. Production and sales in Host country. iv. Cost of production low: re-export back to Home country. Why firms become multinational enterprises: (Reasons). 1. To diversify against the risks and uncertainties of domestic business cycle (prosperity, recession, depression, and recovery). 2. Tap into the growing world market for goods and services. A process of growth in an integrated world market called “Globalization”. 3. Firms become MNEs in response to increased foreign competition and a desire to protect their home market share by using “follow the competitor”, strategy. This approach serves dual purpose. • Takes away business from their competitions by offering customers other choices. • Lets competitors know if they attack they MNEs home market, the response will be similar. 4. reduce costs:- setting operations close to foreign customers , these firms, • eliminate transportation cost , • avoid overhead associated with middle men, • Respond more rapidly and accurately to customer needs and take advantage of local resources. This process is known as “internationalization” of control within the MNEs. 5. overcome protective devices such as tariff and non tariff barriers, • NAFTA for example eliminated tariff between Canada, Mexico and US. 6. Take advantage of technological expertise by manufacturing goods, directly by FDI, rather than International business Alan M. Rugman, Richard M. Hodgetts

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Dr Zain Yusufzai

The Multinational Enterprise

Chapter # 2 (page35-65).

allowing others on license. Quality and progress easily monitored. The strategic Philosophy of Multinational Enterprise: • • • • •

MNEs are different from local operators who confine activities to domestic markets MNEs decisions based on what best for overall company It will transfer jobs abroad, cut back on local workforce Train and develop local managers to handle overseas operations Hire workers in large numbers in overseas countries

Multinationals in action 1. Cemex sa 2. Solectron 3. BMW 4. Levi Strauss 5. Canon Strategic management of MNEs: (an introduction:) Involves four major functions: 1. strategy formulation 2. strategy implementation 3. evaluation 4. control of operations These four major functions encompasses wide range of activities beginning with environmental analysis of external and internal conditions and evaluation of organizational strengths and weaknesses

Steps in the strategic management process: Basic mission: The reason that a firm is in existence. Step one:- Strategic planning begins with review of the company’s Basic Mission, is determine by answering these questions: • What is the firm’s business? • What is the reason for existence? International business Alan M. Rugman, Richard M. Hodgetts

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Dr Zain Yusufzai

The Multinational Enterprise

Chapter # 2 (page35-65).

When these questions are answered a firm can decide in which direction to proceed. Example: • Shell, Amoco, Exxon are in the energy business not in the oil business: • AT&T, sprint, and MCI are in the communication business not in the telephone business. • Coca cola, PepsiCo see themselves in the food business not in the soft drink business. This focus helps them with they long range thinking. Step two: - after mission determined, an MNE will evaluate the external and internal environment: • Goal of external environmental analysis is to identify opportunities and threats that need to be addressed • Internal environment analysis is to evaluate the company’s financial and personnel strengths and weaknesses. What it can do in terms of expansion and capital investment. By evaluating its personnel, an MNE will be able to determine how well it current workforce can meet the challenges of the future and what types of people will have to hired or fired. • Internal and external analysis helps the MNE to identify both long range goals (two or five year) and short range goals (less than two years). Step three: - The plan is broken down into major parts, and affiliate and department assigned goals and responsibilities Step four: - This begins the implementation process, Step five: - Progress periodically evaluated and changes are make in the plan Strategic management in action:

Identification of the firm’s basic mission

Analysis of the external and internal environment

International business Alan M. Rugman, Richard M. Hodgetts

Formulation of objectives and overall plan

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Implementation of the plan

Evalua and control operati