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Chapter 4

International Business Oded Shenkar and Yadong Luo. Chapter 4. The Multinational Enterprise. Do You Know?. Who are the players in the international business arena? How can you tell the degree of a firms internationalization?

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Chapter 4

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  1. International Business Oded Shenkar and Yadong Luo Chapter 4 The Multinational Enterprise Chapter 4: The Multinational Enterprise

  2. Do You Know? • Who are the players in the international business arena? • How can you tell the degree of a firms internationalization? • Will a higher degree of internationalization lead to higher corporate performance? • What advantages and disadvantages do MNEs have when they operate overseas compared to local firms? Chapter 4: The Multinational Enterprise

  3. Do You Know? • What are the typical features of developing country MNEs? • How do they differ from developed country MNEs? Chapter 4: The Multinational Enterprise

  4. What is a Multinational Enterprise • The internationally committed company – has at least one plant or joint venture abroad. • The internationally leaning company – has foreign sales and/or a representative office and/or a licensing agreement abroad. • The multidomestic firm – has multiple international subsidiaries independent of headquarters. Chapter 4: The Multinational Enterprise

  5. What is a Multinational Enterprise • The transactional firm – has subsidiaries that fulfill a variety of strategic roles typically performed by HQ. • The multinational firm – engages in FDI and owns or controls value adding activities in more than one country. • The global firm – has integrated international subsidiaries controlled by headquarters. Chapter 4: The Multinational Enterprise

  6. What is a Multinational Enterprise • Multinational Enterprise (MNE) – a firm with foreign direct investment, service or manufacturing, over which it maintains effective control. • International firm – a firm engaged in trade activities but without an FDI component. • Small and Midsize International Enterprises (SMIE) – Most of these firms do not have FDI presence and do not qualify as MNEs Chapter 4: The Multinational Enterprise

  7. The Degree of Internationalization • Transnationality Index (TNI) – the level of MNE internationalization. • Calculated as the average of three ratios: • Foreign assets to total assets • Foreign sales to total sales • Foreign employment to total employment Chapter 4: The Multinational Enterprise

  8. The Degree of Internationalization Exhibit 4-1: Average transnationality of the world’s 100 largest MNEs 1990-1998 Chapter 4: The Multinational Enterprise

  9. History of the MNE • MNEs can be traced to the Phoenician, Carthaginian, Greek, and Roman empires • Date back to Assyria around 2000 B.C. • Faced the same obstacles as today’s MNEs: • Tariffs • Nationalistic opposition to foreign trade and investment • Using competitive advantage and market power Chapter 4: The Multinational Enterprise

  10. The World’s Largest MNEs • In 1998, the top 100 non-financial MNEs accounted for • 13% of all foreign assets • 19% of all foreign sales • 18% of all foreign employment. Chapter 4: The Multinational Enterprise

  11. The World’s Largest MNEs Exhibit 4-3: Home country of the world’s largest 100 MNEs by TNI and foreign assets Chapter 4: The Multinational Enterprise

  12. The World’s Largest MNEs Exhibit 4-4: The largest 10 U.S. MNEs (at the end of 1999) Chapter 4: The Multinational Enterprise

  13. The Industry Composition of MNEs Exhibit 4-5: Industry composition of the largest 100 MNEs Dominated by a limited number of industries. Chapter 4: The Multinational Enterprise

  14. The Industry Composition of MNEs Exhibit 4-6: The largest 5 MNEs in each industry Chapter 4: The Multinational Enterprise

  15. The Growth of Service MNEs • There has been significant growth of MNEs in service areas, due to: • Economic transformation – developed nations shifting into service economies • Globalization and liberalization of regulatory systems – “open skies” agreements, accounting standards, flexible store hours, etc. • Communication advances – allow MNEs to coordinate knowledge-intensive operations across borders. Chapter 4: The Multinational Enterprise

  16. The Growth of Service MNEs Exhibit 4-7: The world’s top 20 banks 2001 (based on total assets) Note the U.S. Chapter 4: The Multinational Enterprise

  17. The Growth of Service MNEs Exhibit 4-8: The world’s top airlines, 2001 Chapter 4: The Multinational Enterprise

  18. The MNE in the Public Eye • The MNE has been both lauded and vilified for its impact on host and home countries. • Among the more positive attributes are: • MNEs provide knowledge, capital, technology, expertise, global affiliations, contributions to national productivity and exports, innovation, employment, and societal change. Chapter 4: The Multinational Enterprise

  19. The MNE in the Public Eye • Among the negative attributes are: • the MNE is perceived as a threat to national sovereignty • have unfair advantages over local competition • exploit government incentives at the expense of taxpayers • limit knowledge transfer to developing nations • exploit critical national and natural resources • move on when their exploitation is finished Chapter 4: The Multinational Enterprise

  20. The Competitive Advantage of the MNE • The MNE generally has large capital, human, brand, and technological resource base, it can use many countries. • Global spread provides MNEs with: • diversification so they can compensate for SBU low performance and uncertainty • helps them overcome entry barriers and high start up costs. Chapter 4: The Multinational Enterprise

  21. MNE’s Capabilities • MNE Capabilities • Firm capabilities • Familiarity with national culture, industrial structure, and government requirements • Existing relationships with customers, suppliers, regulators • Strategic capabilities • Technological assets (patents, trade secrets, proprietary designs, product development) • Managerial skills • International experience Chapter 4: The Multinational Enterprise

  22. MNE’s Capabilities • Capability Deployment • MNE’s must transfer critical capabilities unavailable to local players. • Technological and financial capabilities are more transferable than organizational skills. • Capability Upgrading • Learning capability – the capacity to generate ideas and acquire new knowledge. • More transferable than firm resources. Chapter 4: The Multinational Enterprise

  23. The MNE from Emerging / Developing Economies (DMNE) • MNEs from developed nations typically dominate global business. • DMNEs, however, are making inroads. • DMNEs face the following constraints and advantages: • Resource constraints. • Knowledge, sophistication constraints. • Sheltered environment constraints. • Home government support. • Flexibility Chapter 4: The Multinational Enterprise

  24. The Largest Developing Country MNEs • DMNE Scale • Median DFI holding for a top 50 DMNE in 1998 was $1.5 billion, versus $14 billion for a global 100. • DMNE Industries • Largest group consists of diversified firms • Electronics, petroleum, and food/beverage • The National Affiliation of DMNEs • Dominated by South, Southeast, and East Asia Chapter 4: The Multinational Enterprise

  25. The Largest Developing Country MNEs Exhibit 4-10: Global expansion of Cemex SA 2001 Chapter 4: The Multinational Enterprise

  26. The Largest Developing Country MNEs Exhibit 4-11: Industry composition of the largest 50 MNEs from developing countries Chapter 4: The Multinational Enterprise

  27. The Largest Developing Country MNEs Exhibit 4-12: Country composition of the largest 50 MNEs from developing economies Chapter 4: The Multinational Enterprise

  28. Obstacles Facing MNEs from Developing Economies • Resource Constraints • Capital investment, lack of reputation, brand recognition • Lack of Knowledge • Experience in foreign operations, lack of production, marketing and management skills • Sheltered Environment • Protected by duties, lack of knowledge and expertise from conducting international business Chapter 4: The Multinational Enterprise

  29. DMNE Advantage in Global Markets • Home Government Support • Impact of the DMNE on the national economy • Shields the firm from the marketplace, hampering its capability development • Flexibility • Lower production scale permits flexibility and adaptation • Less investment sunk in older plants and technologies Chapter 4: The Multinational Enterprise

  30. Typical Features of DMNEs • Internationalization Patterns • To develop ownership advantages • To serve as intermediaries • To overcome import quotas in developed markets • To reduce risk via diversification • Focus on Other Developing Markets • More likely to have greater share of FDI in other developing markets. • Reliance on Third Parties • To compensate for resource shortages Chapter 4: The Multinational Enterprise

  31. Typical Features of DMNEs • Governance • Less likely to be publicly traded, and tightly controlled • Industry Domain • More likely to be in manufacturing • Bargaining Power • Lack bargaining power in the host country • Strategy • More likely to compete on price than on product differentiation Chapter 4: The Multinational Enterprise

  32. What is an SMIE? • The SMIE is a “small to medium sized organization” • SMIEs account for approximately 94% of all international firms. • They often face serious obstacles to internationalization. Chapter 4: The Multinational Enterprise

  33. What is an SMIE? Exhibit 4-14: Small companies can be international Chapter 4: The Multinational Enterprise

  34. Obstacles to SMIE Internationalization • Scale and Transaction Constraints • Access to Capital • Lack of Knowledge • Lack of Market Power • Vulnerability to Intellectual Property Violations Chapter 4: The Multinational Enterprise

  35. Obstacles to SMIE Internationalization Exhibit 4-15: Entry barriers to international trade for Minnesota SMIEs Chapter 4: The Multinational Enterprise

  36. SMIE Internationalization Features • International Motivation • Push factors – competitive pressures in its domestic market • Pull factors – make foreign locations more attractive • Management factors – managerial commitment and resources devoted to international activity • Chance factors – unforeseen circumstances that create internationalization opportunities Chapter 4: The Multinational Enterprise

  37. SMIE Internationalization Features • Internationalization Patterns • Often not incremental, often “leapfrog” into international markets • SMNE Exporter Profile • 97% of U.S. exporters are small businesses • Exporter Demographics • SMIE Foreign Investment Profile • At present relatively small, but growing Chapter 4: The Multinational Enterprise

  38. SMIE Internationalization Features • Chance Expansion • SMIEs respond to incidental opportunity • Nature of FDI by SMIEs • Emphasis on Developed Markets • More likely to invest in developed markets • Selective Globalization • Tend to focus on one link in the supply chain and on a selected market • Strategy • Often adopt niche strategies • Rely more on cooperative strategies Chapter 4: The Multinational Enterprise

  39. Born International • A business organization that from inception seeks competitive advantages from the use of resources and sale of output in multiple countries. Chapter 4: The Multinational Enterprise

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