MULTINATIONAL
ENTERPRISE
• A multinational enterprise is a firm that has productive
capacity in a number of countries. The profit and income
flows that they generate are part of the foreign capital
flows moving between countries.
• As local markets throughout the world are being
deregulated and liberalized foreign firms are looking to
locate part of the production process in other countries
where there are cost advantages. These might be
cheaper sources of labour, raw materials and
components or have preferential government regulation.
Although LDCs may present high levels of risk they also
present the potential for higher levels of profit. Many
LDCs with growing economies and increasing incomes
may provide future growth markets.
Continuum of International
Involvement
High Involvement LEVEL 4
Transnational
Organizations
LEVEL 3
Multinational
Organizations
LEVEL 2
International
Organizations
LEVEL 1
Domestic
No or Low Involvement Organizations
Six Stages of Multinationalization
Stage 6. Multinationalizes ownership of
corporate stock
Stage 5. Multinationalizes management from
top to bottom
Stage 4. Establishes foreign manufacturing
facilities
Stage 3. Licenses use of its patterns and know-how to
foreign firms that make and sell its products
Stage 2. Establishes sales organizations abroad
Stage 1. Exports its products to foreign countries
Multinational enterprises do many
things in many places. Why?
• Ford has manufacturing operations in six continents -
in Europe alone there are around thirty-five sites in
nine separate countries. These include assembly
plants, stamping plants, engine plants, and casting,
forging and aluminum plants.
• Henry Ford owned his own steel mill and glass factory.
He also owned a rubber tree plantation in Brazil, an
iron mine in Minnesota, and railroads and ships used
to transport the inputs. Starting from this hypothetical
point we may later consider the determinants of what
activities to do in-house and what products to source
from other firms, i.e. the extent of vertical integration,
or ``boundary" of the firm.
• Nike sells its sportswear in 82 countries (63% of sales
are in US). It operates 61 retail outlets. It has
administrative offices in Austria, Canada, Hong Kong,
the Netherlands, and the US. The shoes are
manufactured at 40 different locations, mostly in East
Asia. Since the 1970s, Nike's manufacturing locations
have gradually been changed, from Japan in the early
years, to Korea, and Taiwan (80% in the 1980s), to
China and Indonesia which currently make 62% of Nike's
shoes. All product development and marketing are
carried out at headquarters in Beaverton, Oregon. That
is also where Nike makes the little air bags that cushion
the heels of its shoes.
Nestle makes infant formula, powdered milk,
instant coffee, chocolates and other food
products which are sold in over 100 countries. It
has factories in 74 nations, almost 500 factories.
Nestle engages in manufacturing and wholesale
distribution but it is not vertically integrated into
farming or retail. Although about half its sales
come from Europe, only 2% come from
Switzerland. It has 12 factories in Canada, the
same number as in Switzerland. In Africa,it has
offices in 17 countries and factories in 12
(including 12 factories in South Africa).
The Benefits of MNC’S
• A MNE investing in an area may result in a
significant injection into the local economy.
This may provide jobs directly or through
the growth of local ancillary businesses
such as banks and insurance.
• It might initiate a multiplier process
generating more income as newly
employed workers spend their wages on
consumption.
The Benefits of MNC’S
• MNEs may provide training and education for
employees thus creating a higher skilled labour
force. These skills may be transferred to other
areas of the host country. Often management
and entrepreneurial skills learned from MNEs
are an important source of human capital.
• MNEs will contribute tax revenue to the
government and other revenues if they purchase
existing national assets through the privatization
process.
The Benefits of MNC’S
• Domestic companies can make use of
R&D outcomes of MNC’s.
• MNC’s break protectionism, create
competition among domestic companies
and hence enhance their competitiveness.
• The host country’s imports get reduced
and export increase.
The Problems of MNC’s
• The MNE may employ largely expatriate
managers ensuring that incomes
generated are maintained within a
relatively small group of people. The
attraction for the MNE may be the large
supply of cheap manual labour who they
can employ at low wages. This may
contribute to a widening of the income
distribution. It will also not lead to the
transfer of management skills.
The Problems of Multinational
Enterprises
• MNE investment in LDCs often involves the use
of capital intensive production methods. Given
that many LDCs are often endowed with
potentially large low wage labour forces and
have high level of unemployment this might be
considered inappropriate technology. More
labour intensive production methods might be a
more appropriate option for alleviating poverty
and aiding development. Any resulting growth
might be considered anti-developmental.
The Problems of Multinational
Enterprises
• MNEs engage in transfer pricing where they shift
production between countries so as to benefit
from lower tax arrangements in certain
countries. By doing this they can minimize their
tax burden and the tax revenue of national
governments.
• As many MNEs are very large and have
considerable power they can exert influence on
governments to gain preferential tax
concessions and subsidies and grants
• MNC’s may kill the domestic industry by
monopolizing the host country’s market.
• MNC’s may exploit all the natural resources of a
host country and hence it is criticized in many
parts of the world.
• For the home country too, an MNC may be
harmful as it transfers capital out of the country,
reduce the chances of opportunity, neglects the
home country’s economic development.
Why the drive to MNCs?
• For many companies, the following might be
some or all of the reasons to expand into
different countries:
• Reduce transport and distribution costs
• Avoid trade barriers
• Expansion of market territory.
• Meet different rules and regulations (avoid non-
tariff barriers)
• Secure supplies of raw materials or markets
• Cost advantages - for example low labour costs
3 Primary Strategies
• National Strategy
• Everything is produced in one place -the home country.
Foreign markets are served by exporting.
• Multi Domestic Strategy
• Each subsidiary of the MNE is a self – sufficient entity. It
manufactures its own inputs and provides all its own
supporting services. (Each subsidiary is self sufficient )
• Integrative Strategy
• Each subsidiary specializes in a particular stage of the
production stream or in a particular support service. This
makes it interdependent with all of the other subsidiaries,
from whom it imports goods and services. The use of this
term follows from the dictionary definition of integrated as
"having all parts blended into a harmonious whole."
Costs
• How to choose between strategies? Focus on
three categories of costs.
• Plant-specific fixed costs
• The larger are the fixed cost of operating a BU,
the greater the gains from using that BU to serve
multiple markets. That is, fixed cost generate
economies of scale. Replication of a given
activity in multiple locations leads to much higher
average costs of production.
Locational cost differences
• The difference between costs of two plants
operated by the same MNE at the same
scale (output level) in two different
countries. Costs differ across location
because of variation in input prices
(wages, land rents, materials, power) and
also because of variation in input
productivities (due to skill differences,
motivation, education, and agglomeration).
Distance and border costs
• Transporting goods to a foreign country involves
costs that are increasing in the distance
involved. Beyond shipping costs, which we
expect to be an increasing function of distance,
there are an array of border costs (the most
important of which was traditionally tariffs).
Knowledge-intensive services can also be
provided to overseas users, but they are subject
to communication costs, those costs related to
the movement of information from one location
to another.
Choose a national strategy
when…
• Fixed costs are large.
• Communication costs are high.
• Distance and border costs on the final
product are relatively low.
• The home base is also the major market
even in the long run.
Choose an multi-domestic
strategy when…
• Distance and border costs (including
shipping and communication) are high at
all stages of production.
• Fixed costs are not very large relative to
the sizes of markets.
Choose a integrated strategy
when…
• Unit production costs vary greatly across
countries according to the stage of
production and the type of supporting
service.
• All forms of distance and border cost are
low.
• Fixed costs are large.
Organizational Structure
• Organizational structure
– The way that an organization formally
arranges its domestic and international units
and activities, and the relationships among
these various organizational components
Organization Design
• Organization design for international
– how an international business is organized in order to
ensure worldwide business activities are able to be
integrated efficiently and effectively
• Structures and systems must be consistent with each other
and with the environmental context
• Size and complexity of the organization must be considered
• Structure must be able to evolve over time in order to
respond to change
The relationship among International
Environment, Competitive Strategy,
and Organizational Structure
Design Concerns
• Find the most effective way to
departmentalize to take advantage of
efficiencies gained from specialization of
labor
• Coordinate the activities of those
departments to enable the firm to meet its
overall objectives
Design Dimensions
• Product and technical expertise regarding the
businesses
• Geographic expertise regarding the countries
and regions
• Customer expertise regarding the client
groups, industries, market segments, or
population groups
• Functional expertise regarding the value
chain activities
Evolution of the International
Company
• International Division
– A division in the organization that is at the same level
as the domestic division and is responsible for all non-
home country activities
• Worldwide organizations were established, as a
result of growth
– Product
– Function
– Region
– Customer classes
Evolution of the International
Company
Global Corporate Form
Product
Geographic
Global Corporate Form
• Function
• Hybrid Forms
Global Corporate Form
• Matrix Organizations
– Matrix overlay
• An organization in which top-level divisions are required to
heed input from a staff composed of experts of another
organizational dimension in an attempt to avoid the double
reporting difficulty of a matrix organization but still mesh two
or more dimensions
