Owing to various global economic factors numerous business firms around the globe are intensifying their operations and markets world-wide and hence attaining a status of multinational enterprise (MNE). Expansion and deepening trade relations, along with increased regional integration, have become important globalizing trends in the world economy." (Morrison, 2002 pp.245) This shift is a critical process and is framed and executed in line with the specific requirements of the firm and its trade market. With respect to this kind of shift there are specific advantages as well as disadvantages to economies of host and home countries and thereby to the global economy.
"In a threshold way multinational enterprise (MNE) can be defined as an enterprise that engages in foreign direct investment (FDI) and owns or, in some way, controls value-added activities in more than one country. It can also be said that any enterprise undertaking foreign owned production, and those that have substantial over-seas commitments and/or pursue an integrated managerial and/or organisational strategy towards their foreign and domestic operations." (Dunning, 2008)
Considering why do firms become multinational:
"The main reason why do firms become multinational and engage in international trade is mainly due to a country's absolute and comparative advantage." (Begg, 2009) This is viewed in different angles from the behaviorists, (Simon, 1959.) economists (Nelson, 2005.) and firm's perspective. These reasons are saturated local markets, to maximize the sales and profits, increase market share, to drive competitors out of business, to avoid new competition, to escape from stringent government regulations, to understand risky investments and attain profits, to satisfy expectations of stake holders, create brand awareness and achieve image globally and other related factors.
Pressure has been mounting the firms at a constant pace to provide qualitative goods with a good quantity at a reasonable and affordable price to customers. Market attractiveness, research and development are essential factors to have a cutting edge in the market for any firm. The major issue is to achieve a trade-off between all these most critical factors for success of any firm. Factors such as changing attitudes of countries towards global trade, advancement of technology, changing modality of international commerce, trade liberalization, improved transport facilities, huge support by governments in developing countries, access to sell and make profits in global markets supported the organisations to grow global. These firms then found it necessary to capture these new markets to finance the escalating costs of their R&D and market attractiveness, to earn surplus profits, create a competitive environment and provide opportunities.
The determinants for any firm to become multinational are the advantages such as, ownership specific, internalization and location specific advantages. O-specific advantages include property rights, possess assets in foreign country and generate revenues from it which leads to having superior knowledge and management skills over other firms, i-specific advantages include support from government regulations and laws, compensate for the absence of future markets etc. and l-specific advantages include access to cheap labour, raw materials, technology, infrastructure etc. to carry out business operations smoothly.
"Host country governments have been successful in attracting FDI by offering a wide range of incentives ranging from tax concessions to subsidized labour, capital costs and favorable import quotas" (Dunning, 1993 pp. 59)
In modern era of business practices most of the business firm's focus primarily on long-term profit maximization by foreign direct investment. (Eclectic Paradigm - Dunning 1993) There are four types of wants for which and any business firm's chooses and "Why?" could be one of them to become multinational they are, natural resource seeking, market seeking, efficiency seeking and strategic asset or capability seeking firms.
Natural resource seeking firms invest in foreign countries to get the raw materials at a cheaper cost and higher quality. These are further classified into three types as, firms seeking physical resources (Minerals, fuel, metals etc.), seeking plentiful supplies such as cheap and technically skilled labour (Software outsourcing, IT industry) and resource-seeking FDI to acquire technological and organisational skills. This involves firm's collaboration with high-tech sectors to assist in R&D operations. (Ex: Toyota car's design and model building in Germany).
Market seeking firms will invest in foreign markets when the local markets are saturated. Firms become multinational in this aspect to maintain the firm's growth level when a rivalry firm has moved to foreign market, to satisfy local demand and needs for similar global products. (Ex: McDonalds have customized their menus according to the country of operation)
"Efficiency-seeking FDI is to rationalize the structure of established resource based or market seeking investment in such a way that the investing company can gain from the common governance of geographically dispersed activities." (Dunning, 2008) Efficiency seeking firms include the firms which take advantages of cost, foreign exchange rates, product scope and differences in consumer tastes.
Strategic asset seeking firms invest in assets for the strategic planning and review. These investments are mainly technological and research based for the development of new products and made by large MNE's to achieve long term goals rather than mere profits.
Apart from the advantages which are existent in current global market environment, the nature, ethical values, ownership structure and home country location also plays a vital role for a firm to be motivated and to choose the foreign market. Two types of economies are co-ordinated (Ex: Germany, Japan) and liberal-market (Ex: U.K, U.S.A) economies.
Macro environmental factors like government trade taxation policies, environmental restrictions and labour laws are also robust reasons why the firms move their trade across the borders. G.M motors has shifted its majority of the Ford's production units to Mexico owing to stringent environmental and labour laws in USA.
Analysis on how to firms become multinational:
A firm can attain the status of MNE when a firm's specific activity is undertaken by a subsidiary firm in a foreign country. The traditional retort to how a firm becomes a multinational enterprise is mainly through means of FDI. "FDI refers to an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor." (UNCTAD, 1993)
Horizontal, vertical and diversified are the three types of FDI's. On a horizontal basis FDI means a firm invests funds in same industry segment in which it is operates in the home country but in a foreign market. This means a firm procures a company overseas that delivers same good or service which is being produced at home. Vertical FDI can be classified into two ways as forward and backward FDI. Backward vertical FDI involves procurement of a foreign land or resource where the raw material is obtained for production process. This type of approach is adapted by natural resource seeking firms. On the other hand, forward vertical FDI is the practice where a firm invests in another foreign firm that markets outputs of the home firm's domestic production. This scenario is adapted by market seeking firms.
Unpredictable legal and commercial rules, an undeveloped banking and accounting system to reach international standards, penal taxes, lack of effective skills of top managers to execute professional operations and the fear of technology transfer are the motives for fall of traditional way of implementing FDI. Hence, this led to alternatives approaches which include license agreements, franchising, cooperative joint ventures and cross-border strategic alliances.
Licensing agreements also paves way for internationalization of a firm. A licensing agreement issued by a parent firm gives authority to a child firm to produce a product over a period of time. In return, the parent firm is entitled to a royalty. However, no specific restrictions are laid over how the product can be produced marketed. It is similar to a copyright. This is an advantage to the firm as additional funding is not required generate excess revenue and moreover it is not under the business risk criteria. This is generally practiced by manufacturing firms.
Franchising is a dynamic tool for small and medium scale firm to become a MNE. It is similar to licensing agreement but certain standards and branding values are to be maintained by foreign firms in executing business activities. The franchiser is paid a brand loyalty fee and also a share of the franchisee's turnover, this practice can vary from one firm to other. Significant services are provided by the franchiser in the interest of long term benefit of the franchisee. It is adapted in service and food industry sector. McDonalds, for example has emerged as the largest chain of restaurants due to franchising.
A joint venture involves in executing a venture which is owned jointly by more than one independently acting firm. The risks and benefits are mutually shared in the common interest of home and foreign firm. Joint ventures can be either public-private or private-private.
Strategic alliance is the method by which a firm can enter into a foreign market. Strategic alliance is fairly wide when compared with the joint ventures. It ranges from a simple short-term contract between two firms to work together on producing goods and services in a given market to lobbying by the firms in oligopolistic markets.
CONCLUSION:
"At dusk, it is only by a conscious and determined effort by governments, enterprises and people working together that the critical condition for the success of both foreign and domestic firms can be achieved." (Patrick, 2000)
Thereby, by considering all the circumstances "why" and evaluating the alternatives for "how" a firm becomes a multinational it can be said that the reason why and the way how depends upon firm's ethical values, structure, target market segment, motives and several other critical factors. However an optimum way for a firm to become a multinational is by having set up a fully owned subsidiary. Governed by financial and other considerations by adapting to this scenario the brand name is preserved without any allegations, there is a direct control and no scope of technology transfer.
