The development of international company has been seen as a significant feature of the twentieth century. "By the end of nineteenth century, many of Britain's leading firms had spread her tentacles over large parts of overseas empire" (Daniela, 2008). Multinational enterprises (MNEs) as the dominant vehicles of internationalization have played an important role in global economy. In this article, we tend to analyse the formation of MNEs from two aspects: the motivations which lead the company to expand abroad and the means of company to become MNE.
Before start the text, it is necessary to introduce the definition firstly. MNEs are the companies which "have substantial direct investment in foreign countries and actively manage those operations and regard those operations as integral parts of the company both strategically and organizationally" (Bartlett and Ghoshal, 1992). The enterprises pursue the expansion path of international operation is because the potential market opportunities that existed in the world market. It can be elaborated from the following motivations.
Professor Raymond Vernon (1966) developed a representative theory that if a company launches a new production in its home country (especially in developed countries, such as the United States) while other countries may also have the similar demand for it. As a result, the company starts to produce the production massively and export it to meet the needs of other countries and regions. When the needs of foreign markets increase to a certain extent, even the competitors probably begin to produce such kind of product to meet the growing requirement, then the company will invest in foreign markets directly to set up facilities for production of the product. With the standardization of the product, the company may move production to a lower cost developing country to make the operation more standardize and rationalize. Therefore, Professor Vernon thought the purpose for the company to expand abroad is extending the product cycle.
Another motivation is ensuring the company has adequate resource. In some industries, resources are either limited or be available at higher cost in the home countries, particularly the agricultural goods, minerals and energy resources. Oil company need to exploit a new field in the Middle East; coffee producers want to ensure their coffee bean import from Brazil continually. In order to coordinate the resource and demand, more and more companies choose to implement internationalization to secure their key supplies.
It is similar with last motivation; another important reason is low-cost factors of production which can be classified both of them to "resource-seeking motive". The production factors include capital, technology, land, labor, etc. It is widely applied in manufacturing and service MNEs. For example, in automotive industry, technology drives the company to expand international, so that the cost can be reduced to the lowest level of economies of scale. Accordingly, the recent example of lower labour cost seeking is the demand of information communications after product sales pushes more and more companies to establish call centers in India and other developing countries. This behaviour can make the company more profitable and be at a competitive advantage in the market it serves.
Besides, the desire of wider market-seeking also stimulates the company to expand constantly, which means the geographic dispersion of company's activity. The limited requirements or volume-intensive manufacturing process in domestic can not meet the need for a company to exploit economies of scale and scope. In order to gain more opportunities to greater proximity to the customer, increase the sales value, seize larger market shares; even to keep the physical presence in a foreign market competed by other rivals, the fastest and most efficient way is to penetrate their operations into international market to maintain the competitive advantage. "One scholar (Nicholas, 1986) found that no less than 94% of the UK MNEs with foreign manufacturing investments in 1939, first supplied the countries in which they then produced by exports".
It is also discussed that MNEs have their motivation in efficiency seeking investment. On a global scale, the companies attempt to rationalize their value chain in different locations to maximize the profits by taking advantage of different factor endowments, cultures, economic policies and market structure, etc. It well explains the labour and resource intensive activities concentrate in developing countries, with capital and technology intensive activities in developed countries. On the other hand, if investment happens in countries with similar economic structure and income level and be designed to exploit economies of scale and scope to serve the markets, the efficiency-seeking investment could play an important role in produce competences, coordinated communication, the characteristics of the local competition, incentive structures.
Of course, companies also engage in international economic activity to achieve their long-term strategic objectives; or in some countries, companies want to escape from strict laws made by local government. Combination of above motivations and economic situation, MNE may be the inevitable trend of global economic development. Therefore, it is necessary to deeply understand the means of being a multinational enterprise.
Nowadays in 21st century, the most serious problem company facing is the increasing competition. The emerging of new competition pattern pushes the company to adjust the strategy to achieve long-term objectives.
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International Business Assignment
Either: Explain why and how firms become multinational enterprises.
1500 words
submission date: Friday 26 March 2010, MBA office
Stapled; no plastic covers
WHY: 1ã€the company can spread risks 2ã€compete with larger companies 3ã€to receive economies of scale
HOW:
Foreign-owned MNEs employ one worker in every five in European manufacturing and one in every seven in US manufacturing; they sell one euro in every four of manufactured goods in Europe and one dollar in every five in the US (OECD 2001b).
