IB Chapter 2

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International Business

Prof.Dr. Habiballah Al-Torkistani



THE MULTINATIONALENTERPR ISE

Chapter 2

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What is Multinational Enterprises (MNEs).

MNE are firms that are headquarteredin one country but have operations inone or more other countries.

Some of them you know by namebecause you have used their products

or seen their advertising.

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� Sometime it is difficult to know if a firm is an MNEbecause multinationals often downplay the fact thatthey are foreign held.

�For example, many people are unaware that Bayer,the drug company, is German owned; Nestlé, thechocolate manufacturer, is a Swiss company.

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� Similarly, approximately 25% of banks inCalifornia are Japanese owned, but this isoften not evident from their names.

� Simply put, many large MNEs have worldholdings far beyond that what is known to

the casual observer.

� A closer look at the MNEs will reveal

the impact they have on internationalbusiness and the world economy.

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The Nature of Multinational Enterprises

The United States has identified over 60,.000 MNEs,but the largest 500 accounts for 80% of the world'sforeign direct investment.

Table 2.1 shows the distribution of the world¶s largest

500 MNEs.Of these, 424 are from the ³triad´.

There are; 189 from the United States, 153 from theEU, and 82 from Japan.

The fact that over 80% of the world¶s largest MNEs arefrom the core triad is highly significant.

It means that the triad is the basic unit of analysis for MNE strategy.

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Country Number of MNEs

United States 189

European Union 153

Japan 82

China 15

Canada 13Switzerland 12

South Korea 11

Australia 7

India 4

Brazil 3

Russia 3

Norway 2

Venezuela 1

Mexica 1

Taiwan 1

Thailand 1

Singapore 1

Malaysia 1

Total 500

Table 2.1 The world¶s largest 500 multinationalenterprises, 2003

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The Nature of Multinational Enterprises

Also, about 80-85% of the wor ld¶s top MNEs have beenfrom the triad for the last 20-30 years.

Total annual sales of these 500 firms are in excess of

$14

.9 trill

ion.These firms are engaged in a wide variety of operationsincluding: autos,

chemicals,

computers,consumer goods,

financial services,

industrial equipment, and

oil and steel production.

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MNEs grossed more than $100 billion in 2003.

1.Wal-Mart (US)2. BP (Britain)

3. ExxonMobile (US)

4. Royal Dutch/Shell Group (Britain/Nether lands)

5. GeneralMotors (US)

6. Ford (US)

7. DaimlerChrysler (Germany)

8.Toyota (Japan)

9. General Electric (US)

10. Total (France)11. Allianz (Germany)

12. ChevronTexaco (US)

13. AXA (France)

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Where are they came from?

Each of these companies comes fromone of three geographic locales:

United States, (Six Companies).

-EU. (Six Companies)

-Japan, ( One Company)

- We call this the core ³Triad´.

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What MNE are doing?

Most of their activity could be classifiedinto two major categories.

1.Export and Import

2.Foreign Direct Investment.

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The International Process

- Not all international business is done by MNEs.- Indeed, setting up a wholly-owned subsidiary isusually the last stage of doing business abroad, asit is shown in Figure 2.2.

- Figure 2.2 outlines the typical process by which afirm producing a standardized product will seek toinvolve itself in a foreign market.

This, however, is a generalization as firmsultimately make decisions depending on their particular circumstances.

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Figure 2.2 Entry into foreign markets:The internationalization process

epth of

in ol ement

in foreign

markets

F

icense

E port ia agent or istri utor

E port through o n sales

representati e or sales su si iary

ocal packaging an /or

assem ly

Time

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Internationalization, the process by which acompany enters a foreign market.

License, a contractual arrangement in whichone firm (the licensor) provides access to someof its patents, trademarks, or technology toanother firm in exchange for a fee or royalty.

Licensor, a company that provides access to

some of its patents, trademarks, or technology toanother firm in exchange for a fee or royalty.

Licensee, a firm given access to some of thepatents, trade marks, or technology to another

firm in exchange for a fee or royalty. 14chapter 2



Why firms become multinational enterprises?

Companies becomeMNEs for a number of reasons.1. Is to diversify themselves against the risk and uncertainties of

the domestic business cycle.

2. Is to tap the growing wor ld market for goods and services.

3. To increase foreign competition and a desire to protect their

home market share.4. Is to reduce price.

5. Is to overcome protective devices such as tariff and non-tariff barriers by serving a foreign market from within.

6. Is to take advantage of technological expertise by

manufacturing goods directly (by FDI) rather than allowingothers to do it under a license.

Firms become multinational enterprises for the same reasonsthey engage in FDI.

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Theory of MNEs

Three conditions that must be met if a firm is toengage in foreign operations. Firm-specificadvantage (FS As),country-specific advantages(CS As) and internationalization advantage.

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Figure 2.4 The basic components of internationalbusiness

Firm FS s Countr FS s

Strateg

What changes

StructureWhat a justment

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The competitive advantage matrix

To help formulate the strategic options of theMNE, it is useful to identify the relative strengthand weaknesses of the CS As and FS As theyprocess.

Figure 2.5, the competitive advantage matrix,provides a useful framework for discussionof these issues.

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Figure 2.5 The competitive advantage matrix

Strong

Weak

Weak StrongFirm peci ic

advanta e

o u n t r

p e c i i c

a d v a n t a g e

2

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Successful MNEs rely on strategic managementProcess

It has five major phases1. Identification of firms mission

2. External and internal environment

analysis

3. Formulation of objectives and overall plan

4. Implementation of these plans5. Evaluation and control of operations

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Home work

What is the source of firm-specificadvantage and country- specificadvantage, when they engage in FDI?

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