M02 rugm 6563_05_ppw_ch02

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Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009

The Multinational enterprise (MNE)

Chapter 2

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• Objectives• The nature of multinational enterprises• Strategic management and multinational

enterprises• A framework for global strategies: the FSA/CSA

matrix.• It’s regional, not flat.

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Objectives

• Describe the characteristics of MNEs.• Explain the internationalization process.• Explain why firms become MNEs.• Discuss the strategic philosophy of these firms.• Introduce a country/firm framework for examining

a firm’s competitiveness.

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• A company headquartered in one country but with operations in one or more other countries.

• MNEs often downplay the fact that they are foreign-held.

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The nature of MNEs

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Table 2.1 The world’s largest 500 multinational enterprises, 2007Source: Authors’ calculations and adapted from Fortune, The Global 500, July 23, 2007

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Characteristics of MNES

• Affiliates must be responsive to a number of important environmental forces, including competitors, customers, suppliers, financial institutions, and government.

• Draw on a common pool of resources, including assets, patents, trademarks, information, and human resources.

• Affiliates and business partners are linked together by a common strategic vision.

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Figure 2.1 The multinational enterprise and its environment

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The internationalization process

• Internationalization: The process by which a company enters a foreign market.

• Not all international business is done by MNEs. Indeed, setting up a wholly-owned subsidiary is usually the last stage of doing business abroad.

• Why do businesses wait to set up wholly-owned subsidiaries?

– Foreign markets are risky.

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A typical internationalization process

• Initially, the firm might license patents, trademarks or technology to a foreign company in exchange for a fee or royalty.

• The firm sees a potential for extra sales by exporting and uses a local agent or distributor to enter a foreign market.

• The firm may use exporting as a “vent” for its surplus production and might have no long-term commitment to the international market.

• As exports become more important, the MNE will set up an office for its sales representative or a sales subsidiary.

• The firm might set up local packaging and/or assembly operations.

• Finally, the firm will set up a wholly-owned subsidiary (FDI).

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Figure 2.2 Entry into foreign markets: the internationalization process

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Why do firms become MNEs?

• to diversify themselves against the risks and uncertainties of the domestic business cycle;

• to tap the growing world market for goods and services;

• in response to foreign competition; • to reduce costs;• to overcome barriers to entry into foreign markets;• to take advantage of technological expertise by

manufacturing goods directly.

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The strategic philosophy of MNEs

• MNEs make decisions based on what is best for the overall company, even if this means transferring jobs to other countries and cutting back the local workforce.

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Table 2.2 The international expansion of four MNEsSource: United Nations, World Investment Report 2001 (Geneva: United Nations Conference on Trade and Development, 2001)

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Strategic management and MNEs

• The strategic management process involves four major functions: strategy formulation, strategy implementation, evaluation, and the control of operations.

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Figure 2.3 The strategic management process in action

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Basic mission

• The following questions must be answered to determine the firm’s basic mission:– What is the firm’s business?– What is the reason for its existence?

For example,• Royal Dutch/Shell; BP Amoco and Texaco are in the

energy business, not the oil business.

• AT&T, Sprint and MCI are in the communications business, not the telephone business.

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Analysis of the external andinternal environment

• The goal of external environmental analysis is to identify opportunities and threats that will need to be addressed.

• The purpose of an internal environmental analysis is to evaluate the company’s financial and personnel strengths and weaknesses.

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Formulation of objectivesand overall plan

• Internal and external analyses will help identify long-term (2–5 years) and short-term (< 2 years) goals.

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The implementation process

• Once goals have been established, the plan is then broken into major parts and each affiliate and department is assigned goals and responsibilities.

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Evaluation and control of operations

• Progress is periodically evaluated and changes are made in the plan to accommodate changing circumstances and new information.

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Framework for global strategies:the FSA/CSA matrix

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Building blocks in our international business

• There are two basic building blocks in an international business course.– Firm-specific advantages (FSAs): a unique

capability proprietary to the organization It may be built upon product or process technology,

marketing or distributional skills.

– Country-specific advantages (CSAs): country factors Natural resource endowments (minerals, energy

and forests), the labour force and associated cultural factors, etc.

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Figure 2.4 The basic components of international business

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Figure 2.5 The FSA-CSA matrix

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The competitive advantage matrix

• Quadrant 1: resource-based and/or mature, globally-oriented firms producing a commodity-type product cost leadership (Improving FSA can make them move to quadrant 3.)

• Quadrant 2: inefficient, floundering firms no alternative but to exit or to restructure

• Quadrant 3: follow any of the generic strategies both cost leadership & differentiation

• Quadrant 4: differentiated firms with strong FSAs in marketing and customization differentiation (the CSA is not relevant)

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Dunning’s “eclectic” theory of MNEs: OLI framework

• Ownership factors (O): FSAs• Location factors (L): CSAs• Internalization factors (I): FSAs

• O and I, in practice, are integrated features of FSA management within the MNE that cannot be decoupled in strategic decision making.

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It’s regional, not flat

• The world is flat by Thomas Friedman, the New York Times journalist.

–Today, a large proportion of international business

takes place through offshoring leading to globalization.

• The world is not flat!–There remain strong barriers as a business attempts

to cross the boundaries of triad regions. –The liability of inter-regional foreignness.