Objectives
By the end of this, you should be able to:
i.
To Identify the chief
characteristics of Multinational Enterprises (MNES) and the scope of their
activities
ii.
To determine the significance
of MNEs for the development of International business
iii.
To analyse the contribution of theoretical
explanations of the activities of MNEs
iv.
To evaluate the impact of
(MNEs) on the host countries in which they operate
v.
To discuss the role of MNEs in
the process of globalization.
INTRODUCTION
Multinational enterprises (MNEs) are the key features of
international business. They dominate
the world’s trade and investment activities by producing most of the well-known
products we consume and undertaking significant amounts of foreign direct
investment (FDI) in host countries. The
World’s most famous brands, such as coca-cola, Microsoft, Nike, Gillette and
Levi are the standard names for the products they represent in markets
throughout the world.
The size and range of their operations, significantly influence the
development and growth of the world economy.
They are often viewed as agents responsible for the changing world
economic, political and social order. It
is this aspect of MNEs that provides the most compelling rationale for studying
their nature.
The definition of MNEs and
scope of their activities:-
There is no generally accepted definition of an MNE. This is due to largely differences in the
interpretation and the use of the word “multinational” and also in the
evaluation of the characteristics of MNEs as international and global firms,
the nature of their operations, types of ownership, structure of management and
geographical diversification.
Although many scholars have attempted to grapple with a definition
that captures the true richness of this organizational form, previous writings
abound with conflicting, and sometimes competing interpretations.
Different scholars have used different attributes to characterize
the MNE. Such attributes include the
geographic scope of the rim’s value chain (that is, the sequence of
value-adding activities or functions within the firm), management styles,
ownership of productive assets, commonality of strategy formulation and
implementation worldwide, and organizational structure:
·
A distinction is made between
“global” and “multi-domestic” MNEs, based on coordination and geographic
configuration of the firm’s value chain.
MNEs with high coordination among and concentrated configuration of the
different parts of the value chain are called “global”, while those with low
coordination among and dispersed configuration of the different parts of the
value chain are called “multi-domestic.”
·
A distinction is made on the
basis of management styles in the MNE – geocentric (world oriented),
polycentric (host-country oriented), or ethnocentric (home-country oriented). A firm’s true degree of multi-nationality is
measured by the extent to which its top executives think geocentrically.
·
The MNE is defined as an
organization that owns productive assets in different countries, and has common
strategy formulation and implementation across borders.
·
The MNE is defined as any firm
that “owns” outputs of goods and services originating in more than one country.
·
A distinction is made based on
organizational structure: “global” (tightly controlled with a centralized hub
structure), “multinational” (decentralized federations), and “transnational”
(structures that permit retaining local flexibility while simultaneously
achieving global integration).
As we examine these definitions, two observations can be made. One, they revolve around an organizing
framework that suggest three “forms” of the MNE; tow, there are certain
underlying features of the MNE that appear to cut across the different
forms. This latter observation will
provide us the foundation from which a general definition of the MNE can be
derived.
At one extreme are MNEs that are “global”, which are primarily
national corporations with tightly controlled foreign operations, characterized
by ethnocentric management styles, high coordination among (and concentrated
configuration of) the various elements of the firm’s value chain,
organizational structures like a centralized hub, and a common set of
strategies worldwide. At the other
extreme are MNEs that are “multi-domestic”.
They are characterized by polycentric management styles, low
coordination among and dispersed configuration of the various elements of the
value chain, decentralized organizational structures that operate as loose
federations, and a diverse and perhaps uncoordinated set of strategies worldwide.
In between are the more complex MNEs that might be called
“transnational”, which variously combine attributes that characterize the
previous two forms.
Such MNEs might be
characterized as complex global, or networks of subsidiaries performing
different works.
Characteristics of MNEs
As previously stated, MNEs have gone through various stages of
evolution and in this process they have acquired some important common
characteristics. It is difficult to
determine the stage at which a domestic firm becomes an MNE. However, by studying the individual
characteristics of a given MNE, one might be able to discern certain key
developments in history leading to its becoming an MNE. The characteristics of MNEs are divided into
two general categories that is quantitative and qualitative.
1.
Quantitative characteristics of MNEs:-
(a) Size
Not all MNEs are giant firms, with absolute control of over their
activities and strong influence over their rivals. However, quite a number of the world’s MNEs
are large corporate entities with substantial financial and technological
resources which they use to gain power and influence in the markets in which
they operate.
Some MNEs have more resources and generate more income than their
host countries. For example General
Electric, the world’s largest MNE ranked by foreign assets, had total assets of
$272 billion and worldwide sales of $78 billion in 1996.
According to UN, figures, over 500 of the world’s largest MNEs
produce more than one-half of the world’s output and account for 80 per cent of
its FDI by value. The majority of big MNEs are located in the advance
economies, the USA, UK, Germany, France, Japan, Sweden and Italy. An interesting development, however, has been
the recent increase in the number and world rankings of MNEs in developing
countries such as Argentina, Brazil, the countries of south-East-Asia, Israel,
South Africa and Turkey.
b) Geographical diversity
The number of countries in which MNEs operate varies enormously,
depending on the product range, competition, and marketing requirements. Many
academicians believe that an MNE must operate in at least two countries, in
addition to its own, if it is to be classified as an MNE- Harvard Business
School considers six or more to be the norm.
Since the end of world war II, MNEs have become increasingly more
active (and more powerful) in manufacturing and related activities requiring
them to be close not only to raw materials and other inputs but also, more
importantly to their markets. This led
inevitably to further expansion in the number of locations in which they base
their production and marketing operations. Technological advances in
telecommunications, transport and information systems provided a further
impetus for their growth by helping them to create almost a “borderless” world
of business.
a)
Networking
One distinct advantage of geographical diversity is that it enables
MNEs to engage in inter-firm (as opposed to international) trade whereby they
supply components to other manufacturers.
To be able to undertake inter-firm trade, the MNE would have to locate
near its major customers, or at least be at arm’s length, to benefit fully from
the locational advantages. Another advantage is that it provides scope for
intra-firm or intra-group trade which takes place between the MNE’s
subsidiaries or affiliates. In this way,
the parent company is able to create a series of networks to take advantage of
locational opportunities which an arrangement similar to the creation of an
internal market within the firm.
b) Revenue
This characteristic reflects another aspect of an MNE’s geographical
diversity by high-lighting the geographical distribution of its sales and
revenue. There is no consensus of
opinion as to what proportion of the firm’s total revenue should be generated
outside its home country before it can be classified as an MNE. However any percentage above 25 per cent
seems to be the norm. A significant
proportion of foreign earnings results from the activities of MNEs overseas
subsidiaries and affiliates, including the royalties earned through licensing
and franchising agreements.
c)
Ownership
Ownership characteristics are uniquely an important quantitative and
qualitative attribute of MNEs and constitute one of the important means by
which MNEs are distinguished from one another.
The primary aim of ownership is for the firm to acquire the right
exercise control over decision making in key operational areas and proprietary
scrutiny over its firm- specific (or ownership specific) assets in use in
overseas locations.
The amount of control an MNE is able to exercise depends on the mix
of ownership which in form determined by the method of entry. In the case of wholly owned subsidiaries,
which the firm may be either established itself or acquired through
cross-border acquisitions or mergers, the MNE has complete control over all
strategic and operational aspects of its subsidiaries. In a joint venture, the ownership is shared
between the MNE and the local partner on an agreed basis and subject to
periodical review. Japanese firms in
general insist upon majority control in their joint ventures. In an arrangement where the MNE provides most
of the capital in the form of FDI and basic inputs such as technology, one
would expect the MNE to assume the majority of the ownership and control of the
business, subject to any host government rules and regulations governing the
ownership of domestic firms and assets.
Alternatively, the MNE may, want to undertake portfolio or indirect
investment by buying equity shares in a foreign company, perhaps as a prelude
to eventual merger or takeover.
Portfolio investments are an alternative means for the MNE to spread
risks over a range of financial assets (which may include bonds and other
interest-bearing instruments as well as equity shares), providing the firm with
future income, but with no control.
Qualitative
characteristics of MNEs
a)
Management Philosophy:-
The key qualitative distinguishing feature of an MNE is the
management attitude and commitment exemplified by its behaviour. According to Perlmutter, firms’ management
philosophies can be identified as being ethnocentric, polycentric or
geocentric. Ethnocentric MNEs are
oriented towards domestic markets and cannot therefore be regarded as true MNEs
unless their domestic market forms an integral of their worldwide operations. A polycentric MNE is oriented towards foreign
markets which are loosely connected to the firm without an integrative
system. Finally, a geocentric (or
regiocentric) MNE views world markets from a global perspective, that is, it
strives to integrate its world markets and resource acquisitions as part of its
global strategy to serve customers wherever they may be acquiring the
best-quality resources at the lowest cost.
Clearly, the definition given above describes an MNE as a geocentric
enterprise with fully integrated global business system, centralized management
of strategic planning and decision-making, and clearly articulated global
perspective in all its operations.
Differences in management philosophy, vision and practice are also
reflected in the way an MNE develops and maintains its intra-and extra- firm
relationships with its rivals and stakeholders (any who benefits or incurs
costs directly or indirectly from the firm’s actions or inactions, employees,
customers, shareholders, managers and members of the community). It is the quality of its corporate strategy
and, its implementation, along with the ability and speed with the management
deals with a wide range of business environmental factors in different
cultures, which often distinguishes one MNE from another and gives it its
distinct managerial superiority over its rivals.
b)
Operational Structure:
Another chief qualitative characteristic of an MNE is the way in
which it organizes its production activities.Three types of MNE can be
identified, a vertically integrated MNE, a horizontally integrated MNE, and a
diversified MNE (a conglomerate). A
vertically integrated MNE is a multi-plant or multi-facility firm that
organizes successive stages of production in different locations to produce intermediate
inputs for subsidiaries, affiliates, or other firms. In general, vertically integrated MNEs tend
to be industrial firms supplying a variety of manufactured, processed or
assembled goods.
For example, a petroleum firm explores for oil in many parts of the
world, transports it to its refineries where crude oil is processed, and
supplies various petroleum outputs to retail outlets. A horizontally integrated MNE produces the
same or similar products in its worldwide production units. These MNEs are usually found in retail
industries operating retail outlets on high streets or in shopping centres. For
example, Marks & Spencer is highly successful food and clothing retailer
with shops in many different countries.
In the case of a diversified MNE or conglomerate, the firm operates
a chain of production units in many parts of the world which are neither
vertically nor horizontally linked to one another but operate as
semi-independent subsidiaries or affiliates.
These diversified MNEs are basically risk-averters engaging in
different, unrelated business activities in order to spread risks. This diversification can be either
geographical or product-based or both. In either case the firm is seeking to
develop a low-risk portfolio with growth potential. For example, Cadbury
Schweppes is a highly diversified food conglomerate with extensive
international operations in confectionery products and soft drinks.
By integrating their operations, MNEs are able to create economies
of scope (the cost of producing two distinct goods or services within the same
firm is lower, than producing them in two separate firms) and economies of
scale (falling unit costs of common good or service as the volume, or scale of
output increases). Moreover, they are also able to reduce risks by
consolidating production activities (vertical and horizontal integration) and
by spreading risks over a wide range of activities (conglomerates).
THE IMPACT OF MNES OF HOST
COUNTRIES
Throughout their history, MNEs have had what might best be described
as a love-hate relationship with their host governments. They are loved as
agents of much needed change, as channels of FDI with many benefits for the
local economy, and as allies of governments trying to come to terms with the
difficult tasks of economic development.
But at times they are also feared for being selfish and greedy
organizations, too concerned about the size of their profits rather than the
interest of the country in which they operate.
They are admired and in many ways emulated by their rivals for the ease
with which they exercise power and influence, harness worldwide resources, and,
in the process, amass huge amounts of wealth that dwarf the economies of many
of their host countries in the Third World.
They are also admired and envied for the skills and talents they employ
in their operations, for being inventive and innovative, and for the success
they achieve despite all the odds in world markets.
At the theoretical level, most of the criticisms of MNEs stem from
their monopolistic and oligopolistic behaviour which has been one of the most
widely researched and debated topics of our time. Some of these debates have resulted in
outright condemnation of MNEs as agents of ‘modern imperialism’ or
neo-colonialism. Yet others have regarded them at the inevitable outcome of the
development of modern trade and investment activities around the globe, aided
and abetted by government policies and technological advances in all areas of
human endeavour.
The impact of MNEs can be positive or negative or both depending on
the country and industry in which they operate.
The positive impacts may be summarized as follows:
·
Transfer of technology in the
form of technical know-how, managerial skills and marketing techniques result
in externalities or spill over benefits that permeate local firms and even
government departments. Local firms
benefit also from the network of alliances and suppliers of MNEs resulting in
improvements in productivity.
·
In the case of developing
countries, the transfer of technical know-how and managerial skills is
instrumental in improving the quality of indigenous labour, management, and
education and training systems. This improvement enables developing countries
to catch up ultimately with the economic development industrialized countries.
This was particularly important in the rapid development of the economies of
Taiwan, South Korea, and Hong Kong, which are now classified as some of the
fastest-growing newly industrialized countries with huge export capacity.
·
MNEs also bring in much needed
capital into host countries (or raise capital locally if interest rates are
favourable) and, especially in the case of developing countries, usher in
necessary reforms and the modernization of financial services and institutions,
thus helping to increase the productivity of capital.
·
The extension of MNEs’ global
production into host countries often contribute directly to incomes and
employment and indirectly to regional and sectoral development and improvement.
·
One of the most effective ways
to reduce the monopoly power of indigenous firms, stimulate domestic
competition and at the same time encourage the growth of entrepreneurship is to
attract MNEs into the country, provided MNE entry is not through mergers and
acquisitions which may have the opposite effects. This is one of the basic ideas behind the
privatization and deregulation programmes being undertaken by governments
worldwide.
·
Potential entry by MNEs often
prods host governments into liberalizing the trade and investment policies by
lowering or removing barriers to free trade and investment. The resultant increase in trade and
investment enhances world prosperity.
·
MNEs may also make a positive
contribution to the host country’s trade balance by producing goods that used
to be imported (import substitution) and which can even be exported (reversal
of the direction of trade) and, to its capital account through FDI. Consequently, the most country’s balance of
payments improves.
·
Finally, MNEs make important
contributions to the quality of goods produced and consumed locally and, by
producing standard products, MNEs help contribute to the convergence of global
consumer tastes and preferences. This
may be regarded as an advantage in bringing different cultures closer, as well
as helping MNEs to reduce their marketing costs.
The negative impacts of MNEs on host
countries may be summarized as follows:
·
The presence of MNEs is
sometimes regarded as a sinister threat to the sovereignty of the host
country. This is a particularly valid
argument in the case of developing countries which are often seen as being
vulnerable to MNE’s worldwide power and influence. Their economic development
programmes are often dominated by the conditions formulated by MNEs for the
inflow of FDI. MNE subsidiaries are seen
as implementing the decisions made by the headquarters of the parent company
that may bear no relation to the needs and aspirations of the host
country. In this context, they are often
accused of neo-colonialism.
·
The technology transferred by
an MNE may be of an inferior type or ill-suited to the needs of the host
country. For example, production methods
based on modern and sophisticated technology (for which the host country may
not have suitably qualified manpower and supporting industries) may require a
capital-intensive production system which may not create as many jobs as the
host government had hoped. An important
implication of the transfer of modern technology is that the MNE may end up
dominating the industry by using its technological advantage as an effective
barrier to entry by domestic and other international firms.
·
The question of industrial
dominance is particularly relevant in the case of an MNE using its unique
ownership advantages to obtain concessions from the host government. For example, in the early stages of the
development of the computer industry, computer firms would often insist on
exclusive rights to produce or supply only their own brands, and to provide
their own materials and replacement parts.
They also insisted on products being serviced only by their own or
authorized technicians; in other words, they excluded local supply firms. One major concern about this dominance is
that MNEs may use their power and influence to interfere in the host
government’s economic and political policies for their own interest.
·
The cultural impact of an MNE
is a very controversial topic and one that arouses national indignation about
the presence of MNEs and the practices they adopt in host countries. By introducing new technology and work
practices and challenging management philosophies, MNEs transmit cultural
change into the host country.
For example, McDonald’s arrival in
Moscow in the early 1990s heralded a completely new concept in the food
industry, the hitherto unheard-of treatment of Russian consumers with
politeness and professionalism, the complete overhaul of marketing and logistic
systems and, most importantly, it significantly altered the eating habits of
Muscovites.
Whether some or all of these changes are
welcomed only time will tell, but already there seems to be some resentment,
especially by the older generation, of the cultural intrusion by McDonald’s.
·
There is also the danger that
FDI by MNEs may crowd out domestic investment and thus lead to capital outflow
in countries where such outflows may endanger the long-term growth prospects of
the country involved.
·
In some cases, mergers and
acquisitions by MNEs may stifle domestic competition and discourage
entrepreneurship.
·
The positive balance of
payments effects may fail to materialize if the MNE produces for the host
country’s domestic market only.
·
The impact on local suppliers
may sometimes be limited if the firm is vertically integrated, producing most
of the parts and components itself.
·
The transfer of modern
technology may result in technological dependency by the host country, a fall
in R&D and employment, and tied imports.
·
In cases where the MNE employs
its own centralized marketing, employment of local white-collar workers may
fall giving rise to ‘the branch plant syndrome’.
GLOBALIZATION AND MNES
One of the most fundamental developments in the world economy today
is steady progress towards globalization, a dynamic process in which the world
economies are seen to be merging into one immense global economy. Globalization and related issues will be
developed in detail in Chapter 6. In
this section the aim give a brief summary of the role played by MNEs in the
globalization process.
As has been seen, MNEs play a vital role in linking worldwide
markets, sources of raw materials, and components and, in doing so, the
economies of the countries which they operate.
An increasing number of MNEs are now seeing themselves as global firms,
as opposed to being just multinational firms, adding one more distinguishing
feature to their already colourful list of characteristics. The difference between a localized MNE and a
global MNE is the development implementation of a global strategy which aims to
integrate markets and resort acquisition on a global basis. This strategy is usually based on a homogeneous,
standardized marketing strategy. A
global MNE sees itself as operating in any market which the potential for its
product may exist and acquiring resources wherever they may be available. In other words, a global MNE is a truly
geocentric firm.
The following developments have given a further impetus to the
globalization of MNEs’ operations:
·
Worldwide convergence of
consumer tastes and preferences and other patterns has made the production and
marketing of standard products and selling much easier and less costly.
·
The case with which the firm’s
ownership advantages can be spread globally has increased appreciably following
recent trends in the liberalization of trade investment worldwide.
·
Enormous advances in transport
and communication technologies have made it easier for parent companies to
exercise effective control over their subsidiary and affiliates operating
globally.
·
The development of strategies
based on global profit potential by the major MNEs has intensified the search
for global markets and resource acquaintance.
It must be noted that globalization is not limited to consumer
products along includes intermediate and industrial goods and services as well
as supplies materials and components.
SUMMARY
Multinational enterprises (MNEs) may be defined in different ways
but generally they operate in more than two countries, taking advantage of
worldwide opportunities and resources in pursuit of their aims and
objectives. They may be identified by
quantitative characteristics such as size, geographical diversity or inter-firm
trade, or by qualitative characteristics such as their management philosophy or
operational structure. Various
theoretical models have been used to explain the behaviour of MNEs. The main ones are: (a) the profit motives approach, where MNEs are viewed as firms
seeking opportunities for profitable expansion abroad; (b) the market
imperfections/failures approach, where MNEs use their firm specific assets to
differentiate their products from rivals and exploit the monopoly power that
differentiation brings; (c) the
internalization approach, which considers the advantages arising from FDI and
other forms of expansion which ‘internalize’ the benefits within the firm; and
(d) Dunning’s eclectic paradigm, where the growth of MNEs is seen as res
ulting from a combination of ownership-specific advantages,
internalization, and location-specific advantages. MNEs have a variety of effects on their host
countries, some of which are beneficial to their economic development while
others create problems or restrict their development. Whatever their impact on particular
countries, MNEs are major contributors to the process of globalization in the
modern world.
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