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Understanding Multinationals and Joint Ventures in Global Markets

Explore the characteristics of multinational companies, the reasons for their development, types of multinational operations, and modes of entry into international markets. Discover the theories behind multinational growth and the importance of inter-firm alliances.

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Understanding Multinationals and Joint Ventures in Global Markets

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  1. 2A.0 MULTINATIONALS AND JOINT VENTURES Characteristics of multinationals Why multinationals have developed Types of multinational Modes of entry into overseas markets Strategic alliances and joint ventures

  2. 2A.1 TERMS USED A multinational company can be referred to as: • A multinational corporation (MNC) or • A multinational enterprise (MNE) or • A transnational corporation or enterprise (TNC or TNE) Some see this as a special form of multinational – see slides 2A.9 and 2A.10

  3. 2A.2 CHARACTERISTICS OF THE MULTINATIONAL I • HQ and operations in one country and operations in another • FDI with ownership and operations • Management presence in another country • Large pool of shared resources • Operations linked by centrally coordinated global strategy • Diffusion of ideas, technology, policies and practices

  4. 2A.3 CHARACTERISTICS OF THE MULTINATIONAL II UNCTAD has devised the ‘Transnationality Index’, an unweighted average of three factors. • % of foreign to total assets • % of foreign to total sales • % of foreign to total employment

  5. 2A.4 CHARACTERISTICS OF THE MULTINATIONAL III Cantwell, Dunning and Lundan (2010) offered an updated definition of a multinational. “…an MNE is not defined by the extent of its foreign production facilities it owns but by the sum total of its value creating activities over which it has significant influence.” A multinational can therefore embrace: • Wholly owned subsidiaries overseas • International joint ventures • Contracting outsourcing offshore

  6. 2A.5 WHY DID MULTINATIONALS DEVELOP? • Protection against downturn in national economies • Access supply of raw materials • Access new markets • Protection against competition • Growth by acquisition or joint venture • Exploit economies of scale • Reduce costs • Overcome import controls The process has been assisted by: • The creation of the multinational company • Developments in transport and information and communications technology

  7. 2A.6 THEORIES OF MULTINATIONALS Theories have tended to focus on; Economies of scale Economies of scope The Uppsala School theory of psychic distance Dunning’s ‘eclectic paradigm’ which pulled together existing theories related to:

  8. 2A.7 THE UPPSALA SCHOOL Based on an analysis of Swedish firms by members of Uppsala University in the 1970s. • Going international was an incremental process from exporting moving to wholly owned subsidiaries. • The most favourable locations initially are those with greatest similarity of language, culture and business practices. • The similarities and differences of language, culture and business practices are measured as ‘psychic distance’. However not all firms follow this incremental route. ‘Born globals’ are firms with rapid overseas expansion to a number of different countries at the same time.

  9. 2A.8 DUNNING’S ECLECTIC PARADIGM The development and growth of multinationals is a function of: Ownership factors: growth through the distinctive ownership of such as technology, brand, patents etc. Location factors: access to lower cost resources, taxation, labour etc. Internalization: the reduction of transaction costs by doing it yourself rather than going to the market.

  10. 2A.9 TYPES OF MULTINATIONAL • International: home market focus with export – not strictly a MNC • Multi-domestic: operations established in international locations focusing generally on local products • Global: standardized products and processes and centralized global strategy focusing on cost reduction • Transnational: -standardization and flexible response -growth of cross-border operations and alliances -variety of strategies -diffusion of technology and R&D -corporate rather than national culture

  11. 2A.10 TYPES OF MULTINATIONAL II

  12. 2A.11 MODES OF ENTRY INTO AN INTERNATIONAL MARKET • Exporting • Licensing • Franchising • Off-shore outsourcing • Wholly owned subsidiary • Joint venture

  13. 2A.12 WHAT DETERMINES THE MODE OF ENTRY? • The key decision is between contract and equity modes of entry. • A contract mode includes licensing, franchising and contract outsourcing. The is comparatively low cost but the lead firm has less control with a greater risk of under-performance. • An equity mode is based on asset ownership as with a wholly owned subsidiary. Here control is total and risks are minimized, but it can be expensive and take time. • A joint venture involves equity that is shared, usually with a local partner. By the late 1980s joint ventures outnumbered wholly owned subsidiaries 4:1 (Beamish and Banks 1987).

  14. 2A.13 INTER-FIRM ALLIANCES - REASONS FOR THE GROWTH • Achieve strategically significant goals that are mutually beneficial • Survival and growth in the face of increasing global competition • Market entry and market growth • Access local contacts • Technology transfer • Access to specific core competencies • Synergy • Cost reduction • Reduced risk • Increased control of supply chain • Create tailored local solutions

  15. 2A.14 TYPOLOGY OF REASONS • Asset augmenting – access synergistic or knowledge based assets, learning or organization capabilities e.g. technology, R&D capability. • Asset exploiting – to increase efficiency e.g. cheap labour, economies of scale, market entry.

  16. 2A.15 A CHANGING RATIONALE • 1970-80s - focus on control of markets, resources and supply chain. • Classic model - multinational from an advanced economy forms a joint venture with a local firm in an emerging market with technology transfer in exchange for market entry. • 1990s on - collaboration rather than control as part of a global strategy • Does the classic model still predominate in transitional markets?

  17. 2A.16 TYPES OF STRATEGIC ALLIANCE Examples of cooperative ventures • Licensing agreement. • Market alliance sharing distribution channels e.g. Nestlé and Coca Cola. • Operations and logistics alliance e.g. airlines. Classic joint venture • Company A in country X and company B in country Y set up and have shared ownership of company C in country Y. e.g. Beijing Jeep. • More than two companies can be involved in more than two countries e.g. EADS/Airbus. • Ownership and control can be minority, majority or joint.

  18. 2A.17 JOINT VENTURES - PROBLEMS AND ISSUES • Creation of complex and costly organization structures • The key importance of strategic fit • Protecting intellectual property • Capability - skills, competencies and quality issues • Compatibility - personal, cultural, products, processes and systems • Commitment • Control – ownership arrangements, degrees of autonomy and flexibility • Problems of IJVs between firms of differing strength • Measuring performance outcomes

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