Multinational Enterprises Expanding Abroad Economics Essay

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). In this article, we tend to analyse the formation of multinational enterprises (MNEs) from two aspects: the motivations and the modes for company to expand abroad.

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.

Several motivations of enterprises for expanding abroad

Extending the product cycle motivation

Professor Raymond Vernon (1966) developed a representative theory that if a company launches a new production in its home country, meanwhile other countries may also have the similar demand for it. Then 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.

Resource-seeking motivation

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.

Low-cost factors motivation

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.

Market-seeking motivation

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”.

Efficiency-seeking motivation

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.

How to become multinational enterprises

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 which restrain their development. Combined with above motivations and economic situation, MNEs might be the inevitable trend of global economic development. Therefore, it is necessary to deeply understand how to become a multinational enterprise.

The “Uppsala Model” (1975) is a typical process for multinational. It is generally underpinned by the assumption that “moving through the different phases of development depends on the acquisition of the expertise and knowledge that enables the firm to move onto the next internationalization stage” (Johnson and Turner, 2003). Of course, it is just a framework and no denying the fact that not all the companies completely follow the Uppsala process to operating their business. Whatever processes they choose, there have a wide range of modes for companies to enter international business flexibility. Each option has its own advantages and disadvantage. Generally, it is useful to consider the different modes in terms of exporting (direct and indirect export), licensing or franchising, joint venture and foreign direct investment (FDI). In some cases, different options could be adopted gradually from exporting to FDI. In other cases, process only operates in several modes, but not all. They are usually analysed in terms of two factors: the level of market commitment and control over foreign activities. According to the different company situation or marketing environment, some companies choose to expand gradually from low-commitment-low-control to high-commitment-high-control level, while others prefer to be multinational directly to the high level.

Huawei Technologies Co., Ltd (Huawei) is a successful example for expanding from China to international through direct exporting to joint ventures to FDI. Huawei is a leading telecom solutions provider, set up as a sales agent for a Hong Kong company which producing Private Branch Exchange switches. In 1999, it established R&D centre in Bangalore, India. And from then on, it made great headway in Singapore, Malaysia, and other Asia markets. The sales of overseas market reached $100 million in 2001. It also cooperated with European agent to take action with developed countries, the business expand to Germany, Britain and France. The scope of expansion continued to spread; it established joint venture with 3Com, Siemens, Global Marine and Symantec, to develop different scheme solutions and was selected as a preferred 21Century Network (21CN) supplier by British Telecom (BT). In 2005, its international contract orders firstly exceed domestic sales. And it has been voted one of the world’s most influential companies by BusinessWeek. Based on the shift from local market to international market, as well as the formation of the joint ventures, it has become a best interpretation of the process of internationalization.

Thus, company who wants to enter the international market should choose the most appropriate and feasible entry modes. The final decision should integrate the result of competition, local conditions, government regulations, as well as companies’ unique resources, capabilities and core competitiveness.

Conclusion

The motivations and entry modes for multinationals are diversity. Nowadays, with the continuous emergence of new technologies, especially the widely application of cooperative networks in the area of both produce and sales, it puts forward new requirements for the survival and development of a company and makes companies face more intense competition. In order to adapt with the new situation, companies should be improved from global market perspective, set higher level of target positioning, maintain product and technology innovation, communicate with customers more efficiently and make strategies in more detail to create more market resources and development spaces. Nothing could hinder companies to become multinationals as long as they keep pace with business development and have more stable competitive advantages.

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