How Firms Become Multinational Enterprises

A multinational enterprise according to Brooke and Remmers is a company that is present in more than one country, the home country” and the host country and provides valuable activities in a service or manufacturing area (Dunning, 1993, p.3). Though Maurice Bye 1958 began to see and recognize multinational enterprises by the definition Multi-territorial firm indicating that a MNE was purely given the name by the amount of countries a company occupied”(Maurice Bye 1958). Academics see the multinationals in great depth and definitions are slightly different, J.Dunning defines a Multinational enterprise as an enterprise that engages in foreign direct investment (FDI) and owns or controls value adding activities in more than one country (J.Dunning 1992). MNEs therefore, control a package of resources, which they move across national borders, and continue to control over those borders. This transfer is often conceived solely in financial terms, but in practical terms the role of MNEs in transferring capital between countries is one of their less important functions. The critical resources, which multinationals transfer across borders, are the areas of technology and organisation, entrepreneurship and culture. MNEs are imperative because they have the capacity to move technologies and ideas around the world. This gives the firms the potential to serve as engines of growth. This essay will explain why and how firms become multinational enterprise.

The subsistence of MNEs might seem apparent, in the sense that firms in the capitalist system exist to make profits, and investing in foreign countries could be seen as a coherent way of making more wealth than staying in one country. In spite of that not all firms in the world are multinational. In addition to this, according to Jack Behrman there are four main types of Multinational corporations motives (Jack Behrman 1972). The first motive, the resource seekers” the enterprises, to obtain particular and specific resources at lower real cost that cannot be obtained in their home country aim to invest abroad. One kind of these is the physical resources like, raw materials, minerals, agricultural product and location advantage, which generally involves substantial capital expenditure. Another kind of resources is semi-skilled and unskilled labour that is available at lower costs, in countries developing in advanced industrialization like, Mexico, Taiwan, China and like Primark outsourcing from India. One more motive why firms seeking FDI in resources is to obtain technological skill, management and organizational skills already accessed there.

The second motive – the market seekers” enterprises, aim to prolong or protect existing market or to promote in new markets. Thereby, there are four main reasons – firstly, to cope-up with the suppliers and customers who have set up foreign producing facilities. Secondly, to hunt the market, the product needs to be modifying according to the local customers preferences. Thirdly, sometimes it is a lot cheaper to produce in the host country than to export from home country. This is becoming more necessary if there are trade barriers and restrictive government laws. Furthermore, the last reason for market seeking investment is that enterprise wants to have physical presence in the foremost markets served by its competitors. Therefore, companies like Nestle, Bayer and Ford expanded internationally in search of new markets. The third motive the efficiency seekers” enterprises want to obtain from the common governance of geographically scattered activities and to have benefit of economies of scale and of risk diversification. Therefore, enterprises wants to compete on the basis of the product it offers and its ability to diversify its assets and capabilities by exploiting the benefits of producing in several countries. The fourth motive the strategic asset seeker” enterprises to sustain their international competitiveness acquire the assets of foreign corporations. Like one company might acquire a business so as to thwart competitor from doing so or another might merge with its foreign rivals or one might acquire suppliers to corner the market for raw materials. Enterprises seeking strategic FDI are trying to protect or advance their long-term competitive position. Apart from these four motives other motives like escape investments, support investments, passive investments also play a big role why firms want to go international (Dunning 1992).

Therefore, these motives were and will be the main driving force behind the expansion of MNCs. The ways in which these motives have mainly pushed firms from United States to become MNCs are based on product cycle theory” developed by Professor Raymond Vernon”. This theory suggests that the starting point for the internationalization process is typically an innovation that a company creates in its home country (Raymond Vernon 1966, p.190-207). Then after the product is launched it is gaining success in its domestic market and finally the product becomes highly standardized and company has gained recognition thereby, the competitors enter the same business. Market now focuses on price so the company has to move its production to low-wage developing countries so as to be above the competition and later has to develop market share in other countries, which they have lost in home country. For example Nokia started as domestic company in Finland but its success at home country led its production and sale to foreign markets. This way firms should analyse their role of management, motives of the organisation and their success at home country and should think of entering foreign market but question here arises how will firms do that. This can be explained on the basis of theories of Internationalisation.

The Eclectic paradigm sets out to explain “the extent, form and pattern of international production” and is founded on “the juxtaposition of the ownership- specific advantages of firms contemplating foreign production, the propensity to internalize the cross-border markets for these, and the attractions of a foreign market for the production” (Dunning, 1988). The eclectic paradigm, with its emphasis on TCA, i.e. Transaction cost analysis tells how firms and especially MNCs evaluate whether or not to establish a manufacturing subsidiary in a market abroad (Erramilli and Rao, 1993). This information is cost-based, requiring the costs of running a system to be calculated so that the firms can make any evaluation. Thereafter, industrial network approach (Johanson and Mattsson, 1986) and the business strategy approach (Welford and Prescott, 1994) present detailed models incorporating a number of factors which impact upon market entry and the selection of a market entry method. By doing so, it seems clear that information on these factors is a pre-requisite of a firms decision.

However the Uppsala model” is unique in seeing information about a market, specifically that based on experiential knowledge, as the crucial indicator of market entry and, particularly, market entry mode selection. (Jan Johanson et al. 1977) So, the firms should make an initial commitment of resources to the foreign market, and through this investment it gains local market knowledge. On the basis of this, the company will be able to evaluate its current activities and opportunities for additional investment.

Thereby, companies should accumulate their time of entry on the basis of its level of commitment in the foreign market and level of control over foreign activities. This all depends on the nature, form of the firm whether the firm is going to only sell its product or the firm is producing and selling goods and services. At the first stage this can be done by the indirect exporting, licensing/ franchising and then at second stage by direct exporting, direct sales operations in host country, joint ventures and FDI. Firms can potentially enter into international business at any of these stages and decide to prolong at that stage but can go to other stage and choose another option in starting or later period of business. Like, some companies internationalize gradually by moving up the scale from exporting through joint venturing to direct foreign investment.

With exceeding industrial period of globalisation firms have shown mounting interest in going abroad because of the increasing need to go international, pressure to procure cheapest inputs, efficiency seeking, the opening up of new markets, considerable changes in location costs and benefits and a strive to strike a balance between globalisation and localisation. Therefore, firms should choose appropriate business options to enter and service the host market on the basis of above discussed Multinational corporations motives and then decide which stages firm will go ahead so that firms corporate objectives are achieved efficiently and effectively. Then domestic firms can face challenge as cross border mergers and acquisitions, MNCs have been constantly increasing and MNCs account for over 40 percent of the worlds manufacturing output and almost a quarter of world trade. So firms should analyse their business prospective on the basis of above discussed Uppsala model, eclectic theory and other theories and then go ahead. However, international business has taken a quantum leap and is now considered strategically important both by firms and governments.