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International BusinessRakesh Mohan Joshi
Professor & Chairperson, IIFT New Delhi
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MULTINATIONALENTERPRISES
Chapter 13
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L earn ing Object ives
To explain the concept of an MultinationalEnterprises (MNEs)To discuss various types of MNEs
To examine the impact of MNEs on hosteconomiesTo explore various techniques to measureMNEs internationalization
To assess emerging MNEs from rapidlydeveloping economies
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Sig nif icanc e of MNEs
MNEs are considered powerful drivers of globalization. They account for about two-
third of world trade and about one-third of the total world trade is intra-firm trade. Theuniverse of MNEs is considered to be large,
diverse, and expanding. This makes thestudy of multinationals imperative for
international managers .
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Mult inat io n al En terp r ise
A firm that operates in more than one, that is,multiple countries. For a firm to be an MNE, thefollowing criteria need to be fulfilled:
Should own or control operations in multiplecountries.
Should generate a substantial portion of itsrevenues by its foreign operations.
Should employ workforce from multiplecountries.
Should have a strategic managementperspective and a vision of multinationaloperations.
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Typ es o f Mul t ination als
On the basis of Investment
Associates : An enterprise in which anon-resident investor owns between 10 to50 per cent
Subsidiaries : An enterprise in which anon-resident investor owns more than 50percent
Branches: Unincorporated enterpriseswholly or jointly owned by a non-resident
investor
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On th e B as is o f Operat ions Horizontally integrated multinationals have manufacturing
operations located in different countriesto produce same or similar products. Vertically integrated multinationals have manufacturing operations incertain countries to produce productsthat serve as inputs to its production inother country/countries.
Diversified multinationals havemanufacturing operations located indifferent countries that are eitherhorizontally or vertically integrated.
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On th e Bas is o f Managem ent Or ientat ion
Ethnocentric firms The headquarters of the parent company,located in the home country, exert high
level of control over the subsidiaries throughcentralized decision-making
Polycentric firms
Highly oriented to overseas markets whereinsubsidiaries have autonomy in decision-making.
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Regiocentric firms
Foreign affiliates consolidate their
decision-making and organization onregional basis and the level of integrationis high within the regions but not across the regions.Geocentric firms
Organization of geocentric firms isrelatively more complex and inter-
dependent than that of the other types.The firm follows a collaborative approachto decision-making between headquartersand subsidiaries.
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Pos i t ive Effects o f MNEs
Bring in FDI
Transfer of technology
Promote competitionPromote research and development
Benefit customers
Promote exports in the host economies
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Neg at ive Effects of MNEs Influencing host-country government decisions
Transfer of inappropriate technologyCultural imperialismExploitation of host country resourcesPerceived as agents of neo-colonialismPromotes unhealthy market competitionPromotes hostile mergers & acquisitionsCrowding out domestic entrepreneurshipLimited benefits to host countriesCircumventing host countries regulatoryframework
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Measuring the Extent of MNEsInternationalizat ion
Size : It is generally believed that firm size
has a positive influence on its
internationalization, though not accepted
universally. Major criteria used for
determining the size of a firm include salesrevenue, profits, market value, return of
equity, etc.
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Structure: Structure implies the number
of countries an MNE operates in and the
citizenship of its top managers and
corporate owners influence the level of its
internationalization.
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Performance: The extent of
commitment of the firms resources toforeign operations and the reward from
these commitments. Various performance
based parameters, such as foreign sales,
profits, assets, etc., may be used to
gauge the extent of a firms internationalization.
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Chapter 13: MultinationalEnterprises
Man agem ent Orien tat ion
Attitude and behaviour of top management
towards internationalization, though
abstract, are crucial factors in determining
the extent of a firms internationalization.
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Chapter 13: MultinationalEnterprises
Ethnocentrism : A predisposition whereall strategic decisions are guided by thevalues and interests of the parent firmPolycentrism : A predisposition wherestrategic decisions are made to suit thecountries of the firms operations Regiocentrism : A predisposition thattries to blend the interest of the parentfirm with that of subsidiaries on aregional basisGeocentrism : A predisposition thatseeks to integrate diverse subsidiariesthrough a global systems approach todecision-making.
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Chapter 13: MultinationalEnterprises
Ind ices fo r Measu r ing the Extent of MNEs Internationalization
Transnationality Index (TNI) : Theaverage of the ratios of foreign assets to
total assets; foreign sales to total sales;foreign employment to total employment
Internationalization Index (II) : The
ratio of the number of foreign affiliates tothe total number of affiliates in the firm
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Chapter 13: MultinationalEnterprises
Em ergin g MNEs f ro m Rapid ly Develop ing Eco no m ies
Companies from rapidly developing economies (RDEs) areon the fast track to become major multinationals. Thesefirms are fast gaining global market share, makingworldwide acquisitions and emerging as importantcustomers, business partners, and competitors for theworlds largest companies, which include:
Bharat Forge (India)
Ranbaxy Pharmaceuticals (India) Wipro (India)
ONGC (India)
Infosys (India)
Johnson Electric (China) Pearl River Piano Group (China)
Techtronic Industries Company (China)
Cemex (Mexico)
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Chapter 13: MultinationalEnterprises
A dv ent of Ind ian Mul t ina t ion als
Consequent to economic liberalization
Indian companies are fast expanding
overseas to become multinationals eg.
Hindalco industries, Infosys technologies,
Larsen & Toubro, ONGC, Ranbaxy, Reliance,
Tata steels, Videocon, Wipro etc.